A kinked demand curve is perceived by the firm as being:

Question

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The kinked demand curve theory suggests that demand is more inelastic above the current price level (to the right of the kink) and more elastic below the current price level (to the left of the kink). This is because competitors are assumed to match price cuts but not price increases, so the firm faces a discontinuity in marginal revenue at the current price. Therefore, the firm perceives demand as more inelastic to the right of the kink, which means that small changes in price will have a smaller effect on quantity demanded.

A Kinked Demand Curve Is Perceived by the Firm as Being