Kinked Demand Curve

The kinked demand curve is an economic theory that explains how firms in an oligopoly (few firms dominating a market) might set prices. It suggests that if a firm raises its price, competitors will also raise theirs to maintain their market share, leading to little change in sales. Conversely, if a firm lowers its price, competitors will also cut theirs, causing a significant drop in price industry-wide. This creates a “kink” in the demand curve, making prices stable because firms expect that changing prices won't significantly improve or harm their sales, leading to price rigidity.