Kinked Demand Curve Model and Oligopoly

Subject: Case Studies
Pages: 2
Words: 381
Reading time:
2 min

At zero price elasticity of demand, we have sticky goods. In this case, there is no association between a rise in the demand for a product and the consequent rise in the price of the same. On the other hand, when a few sellers dominate a given market, this is referred to as oligopoly. In an oligopoly market, the actions of one seller are known by his/her fellow sellers. In this case, the demand curve becomes kinked in nature since oligopolistic industries are reluctant to increase the price of their products as a slight increase in the price of such products may lead to increased loss of customers. In contrast, when the price of a product is drastically reduced, only a few customers are gained due to the resultant price war.

Shortcomings of the kinked demand curve model. The analysis on kinked demand only attempts to offer an explanation to the reason behind sticky prices of a product with no description of how the kind comes about or even how best to reform such a kink following changes in price.

Oligopoly firms tend to be well aware of actions that their competitors are likely to take. This means that an increase in price is likely to be met with another increase, while the opposite is true. When we assume that firms will act independently, it means that they will make decisions on their own without looking at what their competitors are doing. In our case, there will be an increase in costs and prices. An increase in costs will push the firm’s expenses up. This, therefore, means that for them to be able to cover these increased expenses, they have to charge high prices. Though it will not imply that they have to follow what others are doing, common business sense dictates that in a wave of increased production costs, they have to increase prices to remain competitive. As a matter of fact, there will be a common outcome amongst these firms as they will all increase their prices up to cover for increased costs of production. This is necessitated by the need of being into the operation of which the contrary will spell doom to the firms.