)
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.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005