An oligopoly is a market structure characterized by a small number of firms that dominate the market and have significant market power. The kinked curve is a model used to explain the behavior of firms in an oligopoly.
According to the kinked curve model, firms in an oligopoly face a trade-off between raising and lowering their prices. If one firm raises its price, it risks losing market share to its competitors, who can attract customers by keeping their prices low. However, if a firm lowers its price, it risks triggering a price war, in which all firms in the market lower their prices in an attempt to win market share.
To avoid this trade-off, firms in an oligopoly are assumed to have a "kink" in their demand curve, which reflects their reluctance to either raise or lower prices. This kink is often depicted as a sharp change in the slope of the demand curve at the current market price.
According to the kinked curve model, firms in an oligopoly will tend to keep their prices close to the current market price, rather than deviating significantly from it. This is because if one firm raises its price, it will lose market share to its competitors, while if it lowers its price, it will trigger a price war. Thus, the kinked curve model suggests that oligopoly firms have a strong incentive to maintain price stability and avoid significant price changes.
However, the kinked curve model has been criticized for its simplicity and assumptions, and it has been challenged by more recent models that offer a more nuanced view of oligopoly behavior. Despite this, the kinked curve remains a useful tool for understanding the basic behavior of firms in an oligopoly and the trade-offs they face in setting prices.
In summary, the kinked curve is a model that explains the price behavior of firms in an oligopoly. It suggests that oligopoly firms have a strong incentive to maintain price stability and avoid significant price changes in order to avoid losing market share or triggering a price war. While the model has been challenged by more recent approaches, it remains a useful tool for understanding oligopoly behavior.
