The Kinked Demand Curve

of the staples of oligopoly theory. It was originally formulated as a theory of price rigidity. A \u85rm conjectures that its rivals will match its price if it reduces the price, but will not match its price if it initiates a price increase. This gives rise to a kink in the \u85rms perceived demand curve, at the prevailing price. The consequent discontinuity in its marginal revenue curve implies that the \u85rm will not adjust its price in response to small changes in costs, giving rise to price rigidity. In contrast with the standard Cournot or Bertrand models, the theory rep-resents one of the \u85rst attempts at a dynamic model of oligopoly. However, this modelling has been criticized. Implicit in the analysis is the assumption that the rm is motivated by its pro\u85ts after all price adjustments have taken place. That is, pro\u85ts in the time interval, where a \u85rm has cut its price and before its rivals have responded, are insigni\u85cant. However, if this is so, why does a rm in a symmetric oligopoly not initiate a price increase? If its rivals fail to respond in kind, it can rescind the original increase. Knowing this, its rival