A kinked demand curve occurs once the need curve is not a directly line however has a various elasticity for higher and reduced prices.
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One example of a kinked need curve is the design for an oligopoly. This model of oligopoly argues that prices are rigid and that that company will face different impacts for both raising price or to decrease price. The kink in the need curve occurs because rival firms will behave differently to price cuts and price increases.Diagram the kinked demand curve
Impact that price riseIf a firm rises the price, climate it becomes much more expensive 보다 rivals and therefore, consumers will certainly switch to its rivals.Therefore for a price rise, over there is likely to be a far-reaching fall in demand. Need is, therefore, price elastic.In this case, of enhancing price firms will lose revenue due to the fact that the percentage fall in demand is greater than the portion rise in price.
Impact of price cutIf a firm reduced its price, that is most likely to bring about a different effect. In the brief term, if a firm cuts price the would cause a huge increase in demand and therefore would cause a increase in revenue. The firm would acquire market share.However, other firms will not want to see this loss in market share and also so they will respond by likewise cutting price to follow the an initial firm. The net impact is the if all firms reduced price – the individual firm will just see a little increase in demand.Because over there is a ‘price war’ demand for a firm is price inelastic – there is a smaller percentage rise in demand.If demand is inelastic and also price falls, then revenue will fall.
Prices stableIf the kinked need curve is true, the firm has no motivation to advanced price or to reduced price.
Example that a kinked need curve in practiceOne possibility is the sector for petrol. It is homogenous and also consumers space price sensitive.If one petrol station enhanced the price there would be a shift to other petrol stations.However, if one petrol terminal cuts price, other firms might feel obliged come follow fit and also cut price – as such a price reduced would be self-defeating for the very first firm.
How reality is the kinked demand curve in practice?In countless oligopolies, that company may have actually a degree of brand differentiation. Mobile call companies deserve to increase the price yet consumers are willing to pay due to the fact that the price is not the dominant factor. Part petrol stations may increase price and not watch elastic demand since they have actually the finest location.Firms might not desire to protect market share. Quite than obtaining pulled right into a price war, part firms may not respond come price cut but concentrate ~ above non-price competition to retain an advantage.
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Other instances of the kinked demand curve
It is not just in an oligopoly whereby there is potential kinked demand curve.In the market for one addictive drug like cocaine. If the price is cut, it might encourage first-time customers to try. However, as soon as addicted, if the price rises, then demand will be price inelastic (they will be willing to salary the higher price to obtain their medicine fix)