Q.
What is 'kinked' demand in a oligopoly?
A.
Oligopoly is characterized by a market structure with a few large sellers, where any price movement would have effects on the preference of buyers to switch sellers as products are not very differentiated and can be substituted.
At any price position, the quantity demanded is at equilibrium with the few brands of almost similar substitutes. They are sold at almost the same price. The demand curve would be elastic when price increases because buyers choose to go with the lower price sellers. This means when any one seller increases price, its buyers would turn away from it and go to other sellers.
However, if there is a reduction of price from any seller, everyone would rush to that seller, triggering a series of price reduction from the other sellers to retain buyers. Thus, the price reduction effect does not necessarily increase quantity sold for any single seller, hence quantity is inelastic of price. Thus effect is called 'kinked' demand curve.
