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Kinked-Demand Theory definitions

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  • Oligopoly
    A market structure with a few dominant firms whose pricing and output decisions are interdependent due to mutual awareness.
  • Kinked Demand Curve
    A graphical representation showing two distinct slopes, reflecting rivals' tendency to match price cuts but ignore price hikes.
  • Price Inflexibility
    A situation where firms are reluctant to change prices due to uncertain or disadvantageous competitor reactions.
  • Marginal Revenue Curve
    A curve with a discontinuity at the kink, indicating abrupt changes in additional revenue from selling one more unit.
  • Marginal Cost
    The expense of producing one more unit, which can shift without affecting output or price within a certain range in this model.
  • Demand Elasticity
    A measure of how quantity demanded responds to price changes, varying above and below the kink in the curve.
  • Game Theory
    An analytical tool for predicting rival firms' strategic responses to price changes in interdependent markets.
  • Interdependence
    A condition where each firm's actions directly influence and are influenced by the decisions of competitors.
  • Profit Maximization
    The process of choosing output and price to achieve the highest possible earnings, complicated by rivals' reactions.
  • Market Structure
    The organizational and competitive characteristics of a market, shaping firm behavior and outcomes.
  • Price Decrease
    A reduction in selling price, typically matched by rivals, resulting in minimal competitive advantage.
  • Price Increase
    A rise in selling price, often ignored by rivals, causing significant loss of customers to competitors.
  • Stable Prices
    A tendency for prices to remain unchanged over time, even with shifts in costs, due to strategic firm interactions.
  • Discontinuity
    A break or gap in the marginal revenue curve, reflecting the abrupt change in slope at the kink.
  • Quantity Exchanged
    The amount of goods sold, which responds differently to price changes depending on competitor reactions.