competing oligopoly firms commit to match price cuts, but not price increases. Figure 10.5 shows this

situation. Say that an oligopoly airline has agreed with the rest of a cartel to provide a quantity of 10,000 seats

on the New York to Los Angeles route, at a price of $500. This choice defines the kink in the firm’s perceived

demand curve. The reason that the firm faces a kink in its demand curve is because of how the other

oligopolists react to changes in the firm’s price. If the oligopoly decides to produce more and cut its price, the

other members of the cartel will immediately match any price cuts—and therefore, a lower price brings very

little increase in quantity sold.

If one firm cuts its price to $300, it will be able to sell only 11,000 seats. However, if the airline seeks to raise

prices, the other oligopolists will not raise their prices, and so the firm that raised prices will lose a
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