Describe the essential features of the kinked-demand model of oligopoly pricing.

The kinked-demand model of oligopoly pricing is a theory in economics that explains why oligopolies might maintain stable prices even without cooperation or collusion. Here are the essential features of this model:

1. Interdependent Decision Making: In an oligopoly, a few large firms dominate the market. Each firm's pricing decision affects the other firms in the market. Therefore, each firm must consider the potential reactions of its competitors when making pricing decisions.

2. Kinked Demand Curve: The demand curve in this model is kinked at the current price level. The upper segment of the demand curve is relatively elastic because if a firm raises its price, the other firms will not follow, and the firm will lose a significant market share. The lower segment of the demand curve is relatively inelastic because if a firm lowers its price, other firms will match the price decrease, and the firm will not gain much market share.

3. Price Rigidity: The kinked-demand curve leads to price rigidity or stability. Firms have no incentive to change the price because whether they increase or decrease the price, the outcome will be unfavorable. Therefore, prices tend to be sticky at the kink.

4. Non-Price Competition: Because price competition is unfavorable, firms often compete in non-price factors, such as product differentiation, advertising, and service.

5. Uncertainty and Limited Information: Firms operate under conditions of uncertainty and have limited information about the cost and demand conditions of their rivals. This uncertainty further contributes to price rigidity.

6. Role of Marginal Cost: Changes in marginal cost within a certain range do not affect the price or output under the kinked demand model. Only substantial changes in marginal cost that push it outside the vertical segment of the marginal cost curve will lead to a new equilibrium price and output.