Introduction and Meaning

of Kinked Demand Curve

The kinked demand curve model suggests that in an oligopoly, firms face
a situation where their competitors will match price decreases but not
price increases. This results in a relatively inelastic demand curve above
the current price, leading to a kink in the demand curve at the prevailing
price level.
Assumptions of Kinked Demand Curve

Market Stability
One of the central assumptions of the kinked demand curve model is that firms in an
oligopolistic market face a stable demand curve. This implies that rivals are unlikely to
match price changes, leading to a gap or "kink" in the demand curve at the current price
level.
Rigid Price Leadership
Leadership in Setting Prices
The model often assumes that there exists a dominant firm or a set of firms in the
industry that establish a price leadership role. This dominant firm(s) sets a price that
competitors are hesitant to deviate from, leading to the perceived kink in the demand
curve.
Price Stickiness
Resistance to Price Changes
Another assumption is that rival firms are quick to match price decreases but hesitant
to match price increases by the price leader. This asymmetric response to price
changes contributes to the kink in the demand curve.
Non-Price Competition
Competing on Quality and Service
In the presence of a kinked demand curve, firms may focus more on
non-price competition to gain market share since changes in price
may not significantly alter demand. This could include advertising,
product differentiation, or improving quality and services.
Profit Stability
Maintaining Consistent Profits
The model suggests that firms operating under the kinked demand curve assumption
may experience relatively stable profits in the short run due to the rigidity of the
demand curve. This stability can arise from the fact that demand is relatively inelastic
around the current price level.
Uncertainty and Long-Run Dynamics
Adaptation in the Long Run
There is often an assumption of uncertainty surrounding the reactions of rival firms to
price changes.Long-term adjustments such as entry or exit of firms, technological
changes, or shifts in consumer preferences may challenge the stability assumed in the
model.