the kinked demand curve explains
Answer (1)
16th Sep, 2020
Hello,
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices.
One example of a kinked demand curve is the model for an oligopoly.
In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. The curve is more elastic above the kink and less elastic below it. This means that the response to a price increase is less than the response to a price decrease.
The logic of the kinked demand curve is based on
- A few firms dominate the industry
- Firms wish to maximise profits
Example of a kinked demand curve in practice
- One possibility is the market for petrol. It is homogenous and consumers are price sensitive.
- If one petrol station increased the price there would be a shift to other petrol stations.
- However, if one petrol station cuts price, other firms may feel obliged to follow suit and also cut price – therefore a price cut would be self-defeating for the first firm.
Hope it helps
Good luck!
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