Lesson 6 of 8 · 14 min
Oligopoly: kinked demand, Cournot, Stackelberg and price leadership
In an oligopoly each firm's best price and output depend on how it expects rivals to react, so different assumptions about rivals (kinked demand, Cournot, Stackelberg, dominant firm) give different outcomes.
In short
- Oligopoly: few sellers, close substitutes (branded or homogeneous), high entry barriers, substantial pricing power, heavy non-price competition. Decisions are interdependent.
- Kinked demand: rivals match price cuts but ignore price increases. Demand is elastic above the prevailing price and inelastic below it, creating a gap in MR that explains sticky prices.
- Cournot: each firm chooses output assuming rivals' output stays fixed. The equilibrium lies between monopoly and perfect competition and approaches the competitive outcome as firms are added.
- Stackelberg: the leader chooses output first, the follower reacts. The leader gains a first-mover advantage.
- Dominant firm: a low-cost leader (typically 40%+ share) sets price where its MR = MC; followers supply the rest.
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