The kinked demand curve explains how companies in an oligopoly (a market with few large sellers) react to price changes. It is based on the idea that rivals will match price drops but ignore price increases.

Key features include:

• Above the kink (price increases): Demand is highly elastic. If one firm raises its price, others will not follow, causing that firm to lose many customers.
• Below the kink (price reductions): Demand is highly inelastic. If one firm lowers its price, others will match it to stay competitive, leading to only a small increase in sales.
• Price rigidity: Because neither raising nor lowering prices is profitable, firms tend to keep prices stable, even if their production costs change.

This model helps explain why prices in industries with few competitors often remain stable or “sticky” over long periods.