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Oligopolies,
The Kinked Demand Curve
A2 Economics
Aims and Objectives
Aim
 To fully understand kinked demand curve theory.
Objectives
 Define perfect oligopoly and an imperfect oligopoly.
 Explain the features of a competitive oligopoly.
 Identify the barriers to entry in an oligopolistic market.
 Describe and Explain the Kinked Demand Curve Theory.
 Evaluate the Kinked Demand Curve Theory.
 Analyse the oligopolistic car market.
Starter: Oligopo..recap
 Define a perfect oligopoly.
 Define an imperfect oligopoly.
 Explain what a competitive oligopoly is.
 Identify the barriers to entry in an oligopolistic market.
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Kinked Demand Curve Theory
Team Teach!
In groups, produce on large paper your plan to teach the theory of the
Kinked Demand Curve to your peers.
 It should include:
 Diagram number 1
 An explanation of the diagram and firm behaviour in the market,
explaining why prices are stable in an oligopolistic market.
Or
 Diagram number 2
 An explanation of the diagram and reasoning as to how an increase
or decrease in marginal costs in an oligopolistic market may not
affect prices.
TEACH!
Criticism 1 of Kinked Demand Curve
Theory
1) No explanation of how and why a firm
chooses in the first place to be at point x.
Criticism 2 of Kinked Demand Curve
Theory
2) Theory only explains price competition, and not nonprice competition.
However we know oligopolists compete in a non-price
manor, as this is a barrier to entry to an oligopolistic
market.
Does the model reflect reality?
Criticism 3 of Kinked Demand Curve
Theory
 Model assumes that oligopolists will react in a certain manner
and this is often not the case in reality.
 More realistic that firms ‘test the market’.
 By raising or lowering their selling price to see if rivals react in
the expected manner.
 If rivals do not react in a similar way….
 The oligopolist must rethink its estimate of the demand curve.
Criticism 4 of Kinked Demand Curve
Theory
 Under some circumstances firms may feel that they wish to
compete on price, reckoning that it is the strongest firm in the
market.
 Examples?
 Tesco 31% share of oligopolistic market.
 Generally its actions are imitated, including price changes.
 Price of milk across all supermarkets.
Reigning In Big Businesses
Three Oligopolistic Markets.
 Car Industry
Supermarkets
Banking
Car Industry Points for Discussion
 What was the effect of the barriers to entry in the Car industry
for British consumers?
 How was the main barrier to entry achieved?
 What were the effects of the EC reducing the effects of the
barrier to entry?
 What has happened to prices across the EU markets?
 What has been the overall effect on the UK industry?
 What effects could the 2008/9 recession have on the future of
the UK car industry?
Homework
 Read through the Supermarket case
study and come to the lesson with points
to discuss on Friday 26th of November.
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