The Kinked Demand Curve
Graphical Portrayal
Demand
curve to
be
kinked
• Marginal revenue curve has a vertical
segment
Graphical Portrayal
Marginal
revenue
curve has
a vertical
segment
• This kinked demand curve causes price
inflexibility
• If a firm raises the price, it loses (others
will ignore the increase)
• If a firm decreases price, sales rise very
modestly (because others will match the
price)
• A price cut may start a price war, so a
firm's sales may actually decline if prices
decreases
• The broken marginal revenue curve
accompanying demand curve suggests
that substantial changes in marginal cost
will have no effect on output and price.