Kinked Demand Curve is a Characteristic of
By BYJU'S Exam Prep
Updated on: November 9th, 2023
A Kinked Demand Curve is Characteristic of an Oligopoly market. Oligopoly is the market condition in which the markers are dominated by a hand full of suppliers. There is no particular point where MR intersects MC. It explains that prices are sticky due to differences in the demand elasticities and the no effect of changing cost structures on price and output.
Table of content
Kinked Demand Curve
A kinked demand indicates price and output rigidity. The demand is more elastic above the kink and less elastic below it. It does not explain which kinks out of many kinks will be the equilibrium. Thus, it is not a theory of pricing but explains that the price, once determined, will remain fixed.
In the above figure, kink is observed at point D. An elastic demand curve is observed above linked at D. An inelastic one has observed below D. It happens because when a firm increases the price, other firms may not follow. Still, a decrease in price by one firm makes the other firms decrease their prices too. It depicts the real cutthroat competition in the business world.
Kinked Demand Curve as a Characteristic
Candidates can check the important information regarding the kinked demand curve to help them understand more about it.
- In an oligopoly, the prices are rigid, and firms have to face the heat if they increase or decrease the prices.
- Increasing prices will impact the revenue as the fall in demand is greater than the price rise.
- If one firm decreases the price, other firms will do the same to maintain the market share. It will lead to a fall in overall margins.
- Competition keeps the price stable per the demand for the product in the oligopoly market.
Related Questions:
