Paul M Sweezy’s Kinked demand curve model explains price rigidity under oligopoly. Explain how.

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Paul M. Sweezy's kinked demand curve model provides a theoretical framework to explain the phenomenon of price rigidity in oligopolistic markets. In such markets, a few large firms dominate, and each firm must consider the reactions of its competitors when making decisions about pricing and output. The kinked demand curve theory highlights how these interdependencies lead to stable prices even in the face of cost fluctuations or changes in demand.

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### Understanding the Kinked Demand Curve

The kinked demand curve model assumes that an oligopolistic firm faces a demand curve that has a distinct "kink" at the prevailing market price. This kink arises due to the firm’s expectations about how competitors will respond to changes in its pricing:

1. Price Increases: If a firm raises its price above the prevailing market price, competitors are unlikely to follow. This is because customers would switch to rival firms offering lower prices, leading to a significant loss of market share for the firm that raised its price. Consequently, the demand curve above the prevailing price is relatively elastic.

2. Price Decreases: If a firm lowers its price below the prevailing market price, competitors are likely to match the price cut to maintain their market shares. This results in only a modest increase in sales for the price-cutting firm, making the demand curve below the prevailing price relatively inelastic.

These contrasting behaviors create a kink in the demand curve at the prevailing price. The corresponding marginal revenue (MR) curve exhibits a discontinuity ______ _________ ______ _____ ___ ___________ ____________ ___ ___________ __ __________ _______ __ _____________.
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Degree : BACHELOR DEGREE PROGRAMMES
Course Name : BACHELOR OF ARTS
Course Code : BAG
Subject Name : Principles of Microeconomics-II
Subject Code : BECC 132
Year : 2024 2025