Kinked Demand Curve

Hi there! I would like to explain the kinked demand curve in this article today. It is a curve model used in economics to explain the behaviour of firms in an oligopolistic market.

The theory suggests that firms are mutually interdependent and take into account the actions of their competitors when making pricing decisions.

The kinked demand curve model predicts that if a firm raises its price, its competitors will not follow suit, and the firm will experience a significant decrease in demand for its products.

On the other hand, if a firm lowers its price, its competitors are likely to follow suit, and the firm will experience only a small increase in demand.

This asymmetry in the demand curve creates a "kink" at the current market price, where the demand is relatively inelastic above the price and relatively elastic below it.

This curve suggests that firms in an oligopoly market may have the incentive to maintain their prices at the current market price, as any deviation may lead to a significant loss of market share and revenue.

The kinked demand curve model has several applications in real-world situations. For example, the model can help explain the behaviour of firms in the airline industry, where a small number of large firms dominate the market.

Airlines are known to keep their prices stable, despite changes in fuel prices or other input costs, to avoid triggering price wars with their competitors.

Another example of the kinked demand curve in action is in the market for smartphones. In this market, a small number of large firms dominate, and each firm offers a similar product at a similar price point. Where it suggests that if one firm were to raise its prices significantly, its competitors would not follow suit, and the firm would experience a significant decrease in demand.

The kinked demand curve model has been the subject of much debate among economists. Some critics argue that the model oversimplifies the complexities of oligopolistic markets and does not take into account other factors that may influence firm behaviour, such as advertising or product differentiation.

Others argue that the model provides a useful framework for understanding the behaviour of firms in oligopolistic markets.

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@shahriar33

Reference book:
Economics by Paul Krugman and Robin Wells.