The kinked demand curve model
The kinked demand curve model explains why oligopoly firms rarely change their prices. Rivals copy price cuts but ignore price rises, so changing price in either direction hurts the firm.
Formula
Kinked demand: elastic above P*, inelastic below P* → discontinuous MR at current price
Real World
When Tesco raised the price of its Everyday Value range, rivals like Asda and Sainsbury's kept their prices unchanged, causing Tesco to lose customers rapidly — exactly the elastic upper segment the kinked demand model predicts.
Exam Focus
Draw the gap in the MR curve clearly and label it; explain that costs can shift within the gap without changing the profit-maximising price — this is the model's key prediction.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
How well did you know this?