kinked demand curve

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Fig. 106 Kinked demand curve.

kinked demand curve

a curve that explains why the PRICES charged by competing oligopolists (see OLIGOPOLY), once established, tend to be stable. In Fig. 106, DD is the DEMAND CURVE if all firms charge the same price. Starting from point K, if one firm felt that if it were to charge a higher (unmatched) price than its rivals, it would lose sales to these rivals, then its relevant perceived demand curve becomes DHK. On the other hand, the firm may feel that if it were to charge a lower price, it would not gain sales from rivals because rivals would not let this happen - they would match price cuts along DD. Both price increases and decreases are thus seen to be self-defeating, and this produces a ‘kinked demand curve’ with prices tending to settle at K. The theory suggests that price K is likely to ‘stick’ even though costs may change.

It can be seen that there is a sharp step in the marginal revenue curve corresponding to the kink in the demand curve. In consequence, for a wide range of vertical shifts in the marginal cost curve (between points X and Y) K remains the profit-maximizing selling price. See GAME THEORY, MUTUAL INTERDEPENDENCE, PRICE LEADERSHIP.

References in periodicals archive ?
1) More specifically, these studies indicate that there are two price regimes, one with high price levels and inelastic demand and another with low price levels and more elastic demand, implying a kinked demand curve for fishmeal.
Fishmeal has been used in pig and poultry feeds for several decades, and there is evidence of a kinked demand curve for fishmeal prior to aquaculture's entrance into this market (Hansen, 1980).
It is the game-strategic reaction from competitors and similar to the kinked demand model.
This paper is concerned with the lower portion of the demand curve, below the kink of the famous kinked demand curve model (Sweezy; Hall, and Hitch, 1939).
To illustrate when a larger price increase can be profitable when a smaller one is not, we construct a formal kinked demand function in the appendix.
A critical elasticity calculation is not very informative in the cases of kinked demand functions.
This has resulted in a kinked demand curve model for the market (please see Figure 1).
This suggests that a modified form of kinked demand curve model may be more appropriate for modeling small business than typical Bertrand models, since Bertrand conjectures are symmetric with respect to increases or decreases in price.
In addition, extensions of Hotelling's famous location model indicate that kinked demand curves may be due to locational or spatial effects which were not addressed in the analysis.
This results in a classically kinked demand curve, as seen in Diagrams i and 2, given by DaDc.
So in Diagrams 1 and 2, we now have a kinked demand curve DaDc, with an adult portion above Wa, and a child portion below Wa.
For example, Dranove and Satterthwaite link a kinked demand curve and balanced billing practice to provide a technical explanation of the effect of implementing a RBRVS on demand by Medicare patients.