In non-collusive oligopoly markets, strategic interdependence creates a Prisoner's Dilemma where firms face rigid pricing due to asymmetric rival reactions: competitors follow price cuts but ignore price hikes. This behavior generates the Kinked Demand Curve hypothesis, which dictates that demand is more elastic above the current equilibrium price and less elastic below it. The resulting discontinuity in the Marginal Revenue curve allows profit maximization at a constant price even when Marginal Costs shift significantly, theoretically explaining observed market stagnation and prioritizing non-price competition to avoid destructive price wars within industrial organization economics.
In non-collusive oligopoly markets, strategic interdependence creates a Prisoner's Dilemma where firms face rigid pricing due to asymmetric rival reactions: competitors follow price cuts but ignore p…