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A kink in an otherwise linear demand curve. Note how marginal costs can fluctuate between MC1 and MC3 without the equilibrium quantity or price changing. The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.
The graph below depicts the kinked demand curve hypothesis which was proposed by Paul Sweezy who was an American economist. [29] It is important to note that this graph is a simplistic example of a kinked demand curve. Kinked Demand Curve. Oligopolistic firms are believed to operate within the confines of the kinked demand function.
Paul Marlor Sweezy (April 10, 1910 – February 27, 2004) was a Marxist economist, political activist, publisher, and founding editor of the long-running magazine Monthly Review. He is best remembered for his contributions to economic theory as one of the leading Marxian economists of the second half of the 20th century.
The kinked demand curve for a joint profit-maximizing oligopoly industry can model the behaviors of oligopolists' pricing decisions other than that of the price leader. Above the kink, demand is relatively elastic because all other firms' prices remain unchanged.
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The demand curve the oligopolist faces is that of two separate curves spliced together, creating a discontinuity in the MR curve. This means that a profit maximising firm will still produce at quantity Q and price P if marginal costs are equal to MC1, MC2 or MC3, thus explaining price stability.
Henri Leduc/Getty Images Major alcohol companies have been bracing for a culture shift favoring nonalcoholic options. Consumers under 30 tend to buy less alcohol and drink less often.