A non-collusive oligopoly is when the few firms in an oligopoly do not agree upon the same price for their products. This means that each firm has to be aware of the reactions of other firms when making price decisions, since every move made by one of the rival firms, has a large affect on the demand of the other firms. This means if a firm raises its price the competitors would not raise follow. The firm whose price is now higher than the others loses market share to competitors, and faces a big decrease in quantity demanded. On the other hand, if a firm lowers its price the competitors would undercut the price, resulting in a “price-war”, which adversely affects the marginal revenue, causing losses for all firms. Firms have little incentive to higher or lower their price, which is why prices remain stable in a non-collusive oligopoly.
Demand above the current price is highly elastic, meaning that a even a small increase in price will cause a large decrease in quantity demanded. Firms in a non-collusive oligopolistic market will not want to raise price, since it will be ignored by other firms, causing a substantial decline in demand. On the other hand, demand under the current price is highly inelastic, meaning that a decrease in price will only cause a small increase in quantity demanded. This is why the demand curve is kinked, the firms, who are seeking to maximize profit, do not have incentive to change their price.
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