Often prices appear to be relatively stable in oligopolistic markets. This is explained through the use of kinked curve structure.The Kinked demand curve suggests firms have little incentive to increase or decrease prices. This is because of the following reasons:
If a firm increases the price, they become uncompetitive and see a big fall in demand; therefore demand is price elastic for a higher price. This means increasing price would lead to a fall in revenue.
However, if firm decreases price, they would gain market share. It is assumed in this situation other firms don’t want to lose market share and so, therefore, they cut prices too. Therefore, for a price cut, demand is price inelastic. Because every firm is cutting prices so they receive no increase in market share.
The model of the kinked demand curve suggests prices will be stable.
Firms don’t want to increase prices because they will see a sharp fall in demand.
Firms don’t want to cut prices because they will start a price war, where they don’t gain market share, but do get lower prices and lower revenue.
Therefore, in theory, the kinked demand curve suggests an explanation for why prices are stable.
omondijacob answered the question on September 29, 2018 at 08:31
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