Above the kink, demand is relatively elastic because all other firms' prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Therefore, the best option for the oligopolist is to produce at point E which is the equilibrium point and the kink point. This is a theoretical model proposed in 1947, which has failed to receive conclusive evidence for support. (Photo credit: Wikipedia)
Those of you who have studied economics will have run up against the strange word ‘oligopoly’. It means ‘competition among the few’ and textbooks are full of the potentially dire outcomes of price wars.
You can now see oligopoly in action as Google, Apple, Facebook and Amazon start to slug it out. This excellent Economist article gives an idea of the intensity of competition among these big players.
But don’t just read this and think ‘how interesting’. Try to envisage how things will turn out in a year or two from now and make a note in your diary to check on what actually happened.