The kinked demand curve model assumes that in an oligopolistic industry, firms will quickly match any price cuts by competitors but will not follow price increases, leading to an asymmetrically kinked demand curve. Specifically, (1) if one firm cuts prices, others will match and demand is inelastic, but (2) if one firm raises prices, others will not match and demand is elastic as customers switch to cheaper alternatives, maintaining a prevailing market price.

1. Kinked Demand
Curve Model

2. Assumptions of Kinked Demand Curve Model
• All Firms in the Industry are quite developed with or without
Product differentiation.
• All firms are selling goods on fairly satisfactory price in the
market.
• If one oligopolistic organization reduces the prices, then
other organizations would also cut their prices (so Demand
would be inelastic)
• If one oligopolistic organization increases the prices, then
other organizations would not follow increase in prices and
customers will shift to relatively low priced firms product. (so
Demand would be elastic)
• There is always a prevailing price

3. Diagram of Kinked Demand Curve Model