Kinked Demand Curve in Oligopoly Market

Assume pricing interdependence among the firms in the oligopoly. (“price wars”)

The most common pricing strategy assumption in these price war markets: competitors will match a price reduction and ignore a price increase.

Given a prevailing price, the price elasticity of demand will be much greater if the price is increased and less if the price is decreased.

The kinked demand curve analysis does help explain why stable prices have been observed in oligopoly markets.

Because it cannot determine the original prevailing price, it is considered an incomplete pricing analysis.