Question

Explain, in detail, Sweezy’s kinky Demand Curve.

Answer 1

Sweezy’s Kinky Demand Curve is a theory developed by Paul M. Sweezy to explain a common phenomenon in oligopolistic markets: price rigidity. In an oligopoly, only a few firms dominate the market. These firms are highly interdependent, and their pricing decisions are influenced by how they believe rivals will react.

Sweezy noticed that, in many oligopolies, prices remain stable over long periods, even when costs or demand shift. His kinked demand curve is designed to explain this behaviour.

• There are only a few sellers in the market.
• Each firm considers how rivals will react to its pricing decisions.
• If one firm raises its price, rivals do not follow.
• If one firm lowers its price, rivals match the cut.