Editing Oligopoly (section)

=== Kinked demand curve model ===
{{Main|Kinked demand}}
In an oligopoly, firms operate under [[imperfect competition]]. The fierce price competitiveness, created by a [[Sticky (economics)|sticky-upward]] [[demand curve]], causes firms to use [[non-price competition]] in order to accrue greater revenue and market share.

"Kinked" demand curves appear similar to traditional demand curves but are distinguished by a hypothesised{{Clarify|date=July 2023|reason=what does this mean?}} convex bend with a discontinuity at the bend–"kink". Thus, the first [[derivative]] at that point is undefined and leads to a jump discontinuity in the [[marginal revenue|marginal revenue curve]]. Because of this jump discontinuity in the marginal revenue curve, [[marginal cost]] could change without necessarily changing the price or quantity. The motivation behind the kink is that in an oligopolistic or monopolistic competitive market, firms will not raise their prices because even a small price increase will lose many customers. However, even a large price decrease will gain only a few customers because such an action will begin a [[price war]] with other firms. The curve is, therefore, more [[Elasticity (economics)|price-elastic]] for price increases and less so for price decreases. This model predicts that more firms will enter the industry in the long run, since market price for oligopolists is more stable.<ref name=":2" />

The kinked demand curve for a joint profit-maximizing oligopoly industry can model the behaviors of oligopolists' pricing decisions other than that of the price leader.[[File:Kinked demand.JPG|thumb|Above the kink, demand is relatively elastic because all other firms' prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a [[price war]]. Therefore, the best option for the oligopolist is to produce at point <math>\text{E}</math> which is the equilibrium point and the kink point. This is a theoretical model proposed in 1947, which has failed to receive conclusive evidence for support.<ref name=":2">{{cite journal | doi=10.2307/1911701 | jstor=1911701 | title=A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles | last1=Maskin | first1=Eric | last2=Tirole | first2=Jean | journal=Econometrica | year=1988 | volume=56 | issue=3 | pages=571–599 }}</ref>]]

==== ''Assumptions'' ====
According to the kinked-demand model, each firm faces a demand curve kinked at the existing price.<ref name="Pindyck_446">Pindyck, R. & Rubinfeld, D. ''Microeconomics'' 5th ed. page 446. Prentice-Hall 2001.</ref> The assumptions of the model are:
* If a firm raises its price above the current existing price, competitors will not follow and the acting firm will lose market share.
* If a firm lowers prices below the existing price, their competitors will follow to retain their market share and the firm's output will increase only marginally.<ref>Simply stated the rule is that competitors will ignore price increases and follow price decreases. Negbennebor, A: Microeconomics, The Freedom to Choose page 299. CAT 2001</ref><ref>{{Citation |last1=Kalai |first1=Ehud |title=The Kinked Demand Curve, Facilitating Practices, and Oligopolistic Coordination |date=1994 |url=http://link.springer.com/10.1007/978-94-011-1370-0_2 |work=Imperfections and Behavior in Economic Organizations |volume=11 |pages=15–38 |editor-last=Gilles |editor-first=Robert P. |access-date=25 April 2021 |place=Dordrecht |publisher=Springer Netherlands |doi=10.1007/978-94-011-1370-0_2 |isbn=978-94-010-4599-5 |last2=Satterthwaite |first2=Mark A. |series=Theory and Decision Library |editor2-last=Ruys |editor2-first=Pieter H. M.}}</ref>

If the assumptions hold, then:
* The firm's marginal revenue curve is discontinuous and not differentiable, having a gap at the kink.<ref name="Pindyck_446" />
* For prices above the prevailing price, the curve is relatively elastic.<ref name="Negbennebor_299">Negbennebor, A. ''Microeconomics: The Freedom to Choose''. page 299. CAT 2001</ref>
* For prices below the point, the curve is relatively inelastic.<ref name="Negbennebor_299" />

The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity<ref name="Pindyck_446" /> Thus, prices tend to be rigid.