Kinked demand curve
Also called: Sweezy model · Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
The kinked demand curve (Paul Sweezy, 1939) is an oligopoly model that explains why prices in such markets stay stuck. It assumes that rivals will match a price cut but ignore a price rise.
- Price rise: rivals do not follow, so the firm loses many customers. Demand above the current price is elastic, meaning very sensitive to price.
- Price cut: rivals match it, so the firm gains few customers. Demand below the current price is inelastic, meaning not very sensitive.
The demand curve therefore bends (kinks) at the current price. This creates a vertical gap in the marginal revenue (MR) curve. Marginal cost (MC) can move up or down within that gap without changing the best price. So prices are sticky.
Example
Take a cement firm in a market with a few big players. If it raises its price alone, buyers switch to rivals. If it cuts its price, rivals cut too and it gains little. So even when its costs change a little, it leaves its price where it is.
Related concepts
- Monopolistic competition
- Oligopoly
- Duopoly
- Price leadership
- Limit pricing
- Contestable market
- Collusion
- Cartel