Interdependence in Oligopolies

Quick revise
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

kinked demand curve

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