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.
FEEDBACK
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.