Final answer:
In an oligopoly market, firms face a kinked demand curve as they agree to match price cuts but not price increases, which disciplines firms to maintain agreed-upon prices and quantities.
Step-by-step explanation:
Given an equilibrium level of output in an oligopoly market, the kinked demand curve concept arises because firms in such markets tend to react differently to price increases and price cuts by a competing firm. Specifically, in an oligopoly, each firm may face a kinked demand curve because the firms implicitly agree to match price cuts but not price increases.
For instance, consider an oligopoly airline that is part of a cartel which has an agreement to offer 10,000 seats on a specific route at a price of $500. This price and quantity represent the 'kink' in the firm's perceived demand curve. If this airline attempts to reduce its price to sell more seats, other cartel members will also cut their prices, which means that a lower price by the oligopoly will result in a very slightly increased quantity sold, if at all. Conversely, if the oligopoly raises its price, other firms will not follow, resulting in a significant loss of sales for the firm that increased its price.