Kinked Demand Curve
- Firms in an oligopoly face a kinked demand curve
- If they raise price above P* the demand curve is relatively elastic as people will switch to buying substitute products from competitors
- If they drop price below P* they face an inelastic demand curve as other firms will also cut prices so few gains in quantity demanded occur
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Game Theory
Game theory looks at the players in a game or firms in a market In making decisions each player has a number of choices.
- Each player is influenced by their own actions and the actions of other players.
- Game theory can be used to illustrate the interdependence of firms in an oligopoly
