Explain the Kinked Demand Curve

The Kinked Demand Model is used by economists to explain price stability in ologopolistic markets (markets with only a few large firms, such as the cinema industry). It shows how prices normally remain stable, despite the competitive nature of such markets. To explain this in depth, a diagram is extremely useful. This shows that if one firm were to raise their prices, the other firms in the market would not follow suit. However, if one firm were to lower their prices, then the other will also lower theirs. Above equilibrium price, demand is elastic. Below this equilibrium, demand is inelastic.When price is increased, demand is price elastic because consumers will be highly responsive to the increase in price and switch firm. Furthermore when prices are decreased, demand becomes price inelastic. Buyers are unresponsive to a fall in price, because all firms in the market drop their prices too. In both cases, firms will lose out. if they rise prices, consumers will go elsewhere. If they lower prices, other firms will do the same and overall profits will fall. As a result, price stability occurs for long periods of time.