oligopoly- kinked demand curve

• What does the term "oligopoly" mean in economics?

  Few firms dominate market
• In an oligopoly, a high concentration ratio typically indicates that no more than seven firms control around 70% of the market share
• Firms in an oligopoly produce identical goods.

  False
• Interdependence in an oligopoly means firms make decisions based on the actions and reactions of rival firms
• What are some major barriers to entry in an oligopolistic market?

  Startup costs, economies of scale
• Interdependence is a defining feature of oligopoly.
• Why is price rigidity often observed in oligopolistic markets?

  Firms avoid price wars
• Non-price competition in oligopoly includes branding, advertising, and product quality
• What is the primary objective of firms in an oligopoly if profit maximization is not the sole goal?

  Increase market share
• Steps to understand the kinked demand curve model

  1️⃣ Identify the current market price (P1)

  2️⃣ Note the differing elasticities of demand above and below P1

  3️⃣ Analyze why firms don't want to change their price

  4️⃣ Consider the marginal revenue curve with its vertical gap
• Match the industry with an example of oligopoly:

  Global soft drink industry ↔️ Coca-Cola and Pepsi

  UK energy industry ↔️ Major energy providers

  Global car industry ↔️ Major automobile manufacturers
• Reducing price below P1 in the kinked demand curve model leads to a proportional increase in demand.

  False
• What type of demand is observed above the current market price in the kinked demand curve model?

  Price elastic
• If a firm raises its price above P1, other firms will likely keep their prices at P1 to gain market share
• What happens to total revenue if a firm reduces its price and demand is price inelastic?

  Total revenue decreases
• The marginal revenue curve in the kinked demand curve model has a vertical gap
• Why does the marginal revenue curve have a vertical gap in the kinked demand curve model?

  Differing demand elasticities
• As long as costs change within the vertical gap of the marginal revenue curve, firms will maintain the same price.
• Non-price competition in oligopoly includes branding, advertising, and product quality
• What is the primary conclusion of the kinked demand curve model regarding price rigidity?

  Firms avoid price changes
• What is the temptation for firms in an oligopoly to avoid interdependence?

  Collude and fix prices