Kinked Demand Curve:

The oligopolistic firm believes rivals will match price cuts but not per unit. If price is raised above P1 , the quantity sold i.e. demand will decrease by a greater proportion (demand is price elastic) because rivals will not raise their prices. A price reduction, however, would be matched by rivals, and the quantity sold would not increase proportionally (demand is price inelastic). Hence, the oligopolist's demand curve is kinked at A, which in turn, produces a discontinuity in the MR curve between B and C.

The general presumption is that firms in an oligopoly market tend to charge higher prices and produce a smaller total industry output than do firms in perfectly or monopolistic competitive industries due to the existence of substantial barriers to entry by new firms. In social welfare terms, this implies that there is underproduction and inefficient allocation of resources.

Similarly, following the same assumption of barriers preventing new firms from entering the market, the firms in an oligopoly are also able to earn economic profit in the long-run.