curve, used by Paul Sweezy, explained the observed rigidity of

price in an oligopoly market.

The kinked demand model is based on the following

assumptions:
• There are many firms in the oligopolistic industry.
• Each producer manufactures a product which is a close
substitute for that of the other firm.
• Product qualities are constant, advertising expenditures are
zero.
• Each oligopolist believes that, if he reduces the price of his
product, his competitors will also lower the prices of their
products and that if he rises they will maintain the prices at
the existing levels.

Based on the above assumptions, the demand curve faced

by any individual seller has a kink at the initial price-quantity
combination. The kinked shape of the demand curve is based on
the assumption that the competitors react differently to a rise in
price or to a fall in price. It is also assumed that when an individual
seller increases the price of his product other sellers will not
increase their prices so that the sales of the seller increasing the
price will be reduced considerably. This means that the demand
curve is relatively elastic for a rise in price. On the other hand, it is
assumed that when a single seller reduces the price, other sellers
will also reduce the price so that the seller who reduces the price
first cannot gain much for a fall in the price. Hence, when the price
is reduced the demand curve will be relatively inelastic. The
kinked demand curve is therefore based on the assumption that a
rise in price by one seller will not be followed by the corresponding
fall in the price by others and a reduction in price by a firm is
followed by reduction in price by all other firms. This can be
explained with the help of figure 1.2.