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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.

How realistic is the kinked demand curve in practice? In many oligopolies, firms may have a degree of brand differentiation.

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Kinked Demand Curve (Oligopoly) Explained

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Kinked Demand Curve (Oligopoly) Explained

Prices stable If the kinked demand curve is true, the firm has no incentive to raise price or to cut price. 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.

How realistic is the kinked demand curve in practice? In many oligopolies, firms may have a degree of brand differentiation. Mobile phone companies can increase the price but consumers are willing to pay because the price is not the dominant factor.

Some petrol stations may increase price and not see elastic demand because they have the best location.

Firms may not want to defend market share. Rather than getting pulled into a price war, some firms may not respond to price cut but concentrate on non-price competition to retain an advantage.

Other examples of the kinked demand curve It is not just in an oligopoly where there is potential kinked demand curve. In the market for an addictive drug like cocaine.

If the price is cut, it may encourage first-time users to try. However, once addicted, if the price rises, then demand will be price inelastic they will be willing to pay the higher price to get their drug fix Related Oligopoly.

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