The Kinked Demand Curve Model of Oligopoly Pricing

In our previous lesson on oligopoly, we showed how payoff matrices and game theory could be used to analyze the strategic, interdependent behavior of two firms when deciding the price they would charge. In this lesson we take a graphical approach to oligopoly, and seek to explain why prices tend not to fluctuate up or down in oligopolistic markets.
We will look at two firms, Swisscom and Orange, which provide cell service to customers in Switzerland. Why does Swisscom have very little incentive to decrease its prices, and also a strong incentive not to raise its prices? The answer requires us to make assumptions about how the competitor, Orange, would respond to a change in Swisscom's prices.
What emerges is a kinked demand curve, highly elastic at prices above the current equilibrium and highly inelastic at prices below the current equilibrium. Along with this kinked demand curve comes a kinked marginal revenue curve, with a vertical section. The implication is that even as an oligopolist's costs rise and fall in the short-run, its level of output and price tends to remain stable.
Want to learn more about economics, or just be ready for an upcoming quiz, test or end of year exam? Jason Welker is available for tutoring, IB internal assessment and extended essay support, and other services to support economics students and teachers. Learn more here! econclassroom.com/?page_id=5870

[@shak521]

I have wasted four hours in class to understand this. and u made this happen within these minutes. thank you so much. appreciate it. keep on the good work. gooday mate.

[@thelstan8562]

+Md shakil Ibrahim i know right?

[@thelstan8562]

hope my economic teacher watch your video, great job!!!

[@aidaaljahdhami7422]

Your explanations are THE BEST!

[@dansmith5560]

Brilliant video, thank you so much!

[@yamax1]

Thanks Jason. I have been reading by Microeconomy and couldn't get this kinked curve. Until I watched your video-).

[@XAUGEEK]

I cant find the previous lesson on oligopoly....where is it? Can jason or somebody respond with the link

[@cemwind]

Great example, thank you.

[@diasgoncalo]

Great video!

[@ainatitieaz]

This video help me much for my presentation in this topic.. Big thanks For ya Jason.. ^_^

[@medhagupta8417]

great job!!

[@emilylowman9088]

Thanks for the video! Covered a lot that will be on my final exam.

[@quarantinelifegaming]

Good evening to the best economics teacher in the world, I had a question. So in a normal demand and supply diagram, the PED varies along the demand curve, with above equilibrium being relatively elastic, right? Then why do we need a kinked demand curve that also represents the same thing (or does it), with above equilibrium being elastic. Also in a normal demand and supply diagram, it is said that firms tend to produce at the elastic portion of the demand curve where TR increases, but in this kinked graph, it is said the TR decreases in the elastic portion of the curve. Thank you.

[@deepak_chahal_w]

Great 💐

[@SIMZALO]

Fantastic!!!

[@kellymthethwa]

This reminds of Business management and economics (elasticity and demand) hahaha!

[@kellymthethwa]

This reminds of Business management and economics (elasticity and demand) hahaha!

[@SIMZALO]

Yeah it is economics

[@piratassarajevo4293]

so....the high availability of substitute goods (when Swisscom raised price unilaterally) makes the demand curve ELASTIC above the central point. Customers would just switch to other service providers, thus reducing the quantity demand for Swisscom drastically. Meanwhile, under the central point, all firms in the oligopoly set price in the same pattern. Swisscom reducing price at the same time with other firms wouldn't drastically affect the quantity demand of any firms, since they all have the same price lower than before.

[@MrBish435]

Question how do the AVC and ATC fit into this diagram?

[@philchen9393]

good question

[@DWongxp]

why would the MC for oligopoly increases rapidly in the short run?

[@avgvangelderen4677]

i guess because they can´t build more plants (economies of scale)

[@MrBish435]

Because it's of the intensive capital needed to start the businesses. E.g. in mines you need investment into machinery fixed cost more than labour. It's only many months later do you get to the mineral whether it be gold or even oil. In telecoms it's the infrastructure investment because you even sell phone plans to cover the cost.

[@miguelramos6583]

hello there

[@1universe151]

Jason can you please tell why does MR SLOPES TWICE AS FASTER??