Q.Using Sweezy's kinked demand curve model, explain why oligopoly prices tend to remain rigid even when a firm's marginal cost changes moderately.

The kink creates a vertical gap in the MR curve directly below the prevailing price, so MC can shift within that gap without altering the profit-maximising price or quantity.

Sweezy's model assumes each oligopoly firm believes its rivals will react ASYMMETRICALLY to any price change it makes on its own: if it RAISES its price, rivals will hold their own prices steady (happy to gain customers switching away from the price-raiser), so the firm loses a large share of sales — a highly elastic response above the current price. If it instead LOWERS its price, rivals will immediately match the cut (to avoid losing their own market share), so the firm gains only a little extra business — a much less elastic (steeper) response below the current price.

This produces a demand curve with a visible KINK exactly at the prevailing price: relatively FLAT (elastic) above it, and relatively STEEP (inelastic) below it. Deriving the corresponding Marginal Revenue curve from a kinked demand curve produces something unusual: MR is not a single smooth line but has a VERTICAL, DISCONTINUOUS GAP directly beneath the point of the kink — the MR value associated with the flat (upper) segment of demand is considerably higher than the MR value associated with the steep (lower) segment, and nothing in between is ever actually reached. …

Students sometimes think the kinked demand curve model explains why prices NEVER change under oligopoly — it only explains rigidity for cost changes that stay within the MR gap; a sufficiently LARGE cost change can still push MC beyond …