Final answer:
Oligopolists react to each other's pricing, output, and quality changes by closely monitoring competitors and reacting strategically to ensure market stability. The kinked demand curve represents this behavior as firms match price cuts but not increases, maintaining a competitive balance without drastically altering market shares.
Step-by-step explanation:
The manner in which one oligopolist reacts to a change in price, output, or quality made by another oligopolist in the industry is a dynamic and strategic interaction characteristic of oligopolistic markets.
In such a market structure, firms are highly interdependent and closely monitor each other's actions. Because oligopolists cannot enforce a legally binding agreement to act as a monopoly, they often adopt strategies that exert mutual pressure to maintain a certain quantity of output and price consistency.
An example of the interaction between oligopolists is the concept of a kinked demand curve, where firms commit to match price cuts but not price increases.
For instance, if an oligopoly airline decides to reduce its price and increase output, other firms in the cartel are likely to match the price cuts, which leads to very little increase in the quantity sold. This results from the understanding that competing firms will follow suit in order to remain competitive, which means that a lower price does not lead to significantly higher sales, as all firms adjust their prices accordingly.
This strategic behavior maintains a stable but competitive environment within oligopolistic industries, where firms cannot solely act based on their individual interests without considering the potential reactions of their competitors.