Kinked Demand: If a firm raises price, rivals DON'T follow → firm loses many customers (elastic above kink). If it lowers price, rivals DO follow → gains few customers (inelastic below kink).
MR Gap: The kink creates a vertical discontinuity in the MR curve. MC can shift within this gap WITHOUT changing price or output → price rigidity.
Price Rigidity: Oligopolists tend to maintain stable prices because any price change hurts them. This explains why gas stations and airlines rarely initiate price changes.
Tags
OligopolyKinked DemandPrice RigidityMR Gap
Parameters
Kink Price = $6
MC Level = $3
KINKED DEMAND MODEL
Kink Price:$6
Kink Quantity:5
MR Gap size:$4
MC in gap?Yes ✓
Why Prices Are Sticky: The MR gap means MC can fluctuate significantly (due to input price changes) without affecting the profit-maximizing price. This is why oligopoly prices tend to be rigid — firms are reluctant to change prices first.