Oligopoly – Features & Price Rigidity (Kinked Demand Curve)
Oligopoly is very common in modern industries – mobile networks, airlines, cement, steel, automobiles.
1. Meaning and Features of Oligopoly
Oligopoly is a market structure with few large firms selling either homogeneous or differentiated products, where each firm is interdependent in decision-making.
Features:
- Few large firms dominate market.
- Products may be homogeneous (cement, steel) or differentiated (cars, soaps).
- High entry barriers.
- Mutual interdependence – each firm considers rivals’ reactions.
- Possibility of price rigidity.
Examples
Telecom services, airline industry, cement industry, car manufacturers.
2. Price Rigidity – Kinked Demand Curve Model
According to this model:
- If one firm raises price, others do not follow → firm loses many customers → demand above current price is elastic.
- If one firm reduces price, others also reduce → firm gains few customers → demand below current price is inelastic.
This creates a kinked demand curve at prevailing price P₀.
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Result: Price rigidity – price tends to remain sticky at P₀ even if costs change within a range.
3. Non-price Competition
Oligopolistic firms often compete using non-price methods:
- Advertising and sales promotion.
- Product variation and improvement.
- After-sales service, warranties.
4. Quick Revision Points
- Oligopoly: few firms, interdependence, possible price rigidity.
- Kinked demand curve explains sticky prices.
- Above kink: demand elastic; below kink: demand inelastic.
- Strong role of non-price competition.
5. Quiz Time 🎯
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