Price Rigidity-Sweezy's Kinky Demand Curve Model or Equilibrium under Independent Action

In markets with a few big firms (oligopoly), prices rarely change. Paul Sweezy's 1939 model explains this with a "kinked" demand curve—like a sharp bend at the current price. Firms fear rivals' reactions: cut price and they match (little gain); raise it and they don't (big loss).

• Above the kink price P, demand is elastic because rivals do not follow price hikes, resulting in a steep sales drop.
• Below P, demand is inelastic since rivals match price cuts, limiting any sales gain.
• The MR curve has a discontinuity or gap at the kink, so firms avoid changing price to maximize profit.
• Firms stick to P because both raising and lowering prices reduce total revenue and profit.

• When costs fall, the MC curve shifts right (MC₁) and still hits the widening MR gap, keeping output at OR and price at OP₀.
• The MR gap widens with lower costs as the upper demand becomes more elastic and lower part more inelastic.
• When costs rise, MC shifts left (MC₂) and stays in the gap for rigidity, but exiting the gap leads to higher prices and lower output.
• Price rigidity holds better for cost reductions than rises in oligopoly.

• A demand decrease shifts to D₁ and MR₁, widening the MR gap EF, so price stays at OP but output falls from OQ₂ to OQ₁.
• The lower demand portion becomes more inelastic as rivals match cuts more certainly.
• An increase to D₂ and MR₂ may shrink the gap, allowing price hikes if rivals follow, but MC in gap maintains rigidity.
• Price remains stable if MC intersects the discontinuous MR portion during shifts.

• Firms learn from past price wars that they lead to futility and uncertainty.
• Sellers are content with current prices, outputs, and profits at the prevailing level.
• Stable prices deter new firms from entering the oligopolistic market.
• Firms shift rivalry to sales promotion and advertising instead of price changes.
• Heavy advertising investments make sellers reluctant to raise prices and lose market share.
• Collusive agreements on price prevent any seller from disturbing the stable level.

• Sweezy explained price rigidity in oligopoly using the kinked demand curve.
• If a firm cuts price, rivals follow → demand becomes inelastic; if it raises price, rivals do not follow → demand becomes elastic.
• Due to the kink, the MR curve has a gap, so changes in cost or demand do not change price easily.
• Hence, firms prefer to stick to the prevailing price, leading to price stability in oligopoly markets.