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!