KINKED DEMAND Meaning and
Definition
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Kinked demand refers to an economic theory that explains the behavior of firms operating in oligopolistic markets. In such markets, there are only a few dominant suppliers offering similar or identical products. Under the kinked demand theory, it is argued that firms face unique challenges in determining their price and output levels.
The kinked demand curve depicts a particular pattern observed in oligopolistic markets. It suggests that if a firm raises its price, its rivals are unlikely to follow suit and will instead maintain their prices, resulting in a significant loss of market share for the price-raising firm. Conversely, if the firm lowers its price, it is anticipated that rivals will quickly follow suit, resulting in no significant gain in market share.
This distinctive demand curve shape leads to price stickiness in oligopolistic markets. Firms perceive that changing their prices will have limited impact on their sales volume, as rival firms are assumed to maintain their prices within a narrow range. It establishes a state of price rigidity in the market, as firms have little incentive to initiate price adjustments.
Kinked demand theory suggests that because of this price rigidity, firms in oligopolistic markets often compete through non-price methods, such as marketing campaigns, quality improvements, or product differentiation. By focusing on these aspects, firms strive to attract and retain customers without resorting to price changes, thereby maintaining their market share.
In summary, kinked demand refers to the unique demand curve pattern observed in oligopolistic markets, where price changes by one firm result in limited changes in sales volume due to the anticipated responses of rival firms. This theory highlights the importance of non-price competition strategies for firms operating in such markets.
Etymology of KINKED DEMAND
The term "kinked demand" is derived from the field of economics and was introduced by economist Paul Sweezy in 1939. The word "kinked" refers to the shape formed by the demand curve in a specific market situation.
In essence, "kinked demand" refers to a theory that explains the behavior of oligopolistic firms in response to changes in price. The theory suggests that in an oligopoly, firms face a demand curve that is not smooth but exhibits a "kink" at the current prevailing price. This kinked demand curve implies that firms are more sensitive to a decrease in price compared to an increase in price.
The term "demand" in this context refers to the quantity of goods or services that people are willing and able to purchase at a given price, while "kinked" is used metaphorically to describe the inflection point or discontinuity in the demand curve.
