A demand curve will be kinked if rivals match price reductions but not price increases.

Question

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A kinked demand curve arises when a firm faces a different elasticity of demand in the upward and downward directions of price change. In other words, rivals are more likely to match price cuts than price increases. This results in a sharp angle or kink in the demand curve at the current market price, leading to price rigidity.

A Demand Curve Will Be Kinked If Rivals Match Price