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"Kinked" demand curves are similar to traditional demand curves, as they are downward-sloping. They are distinguished by a hypothesized convex bend with a discontinuity at the bend - the "kink". Therefore, the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve.

Above the kink, demand is relatively elastic because all other firms' prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Therefore, the best option for the oligopolist is to produce at point E, which is the equilibrium point and, incidentally, the kink point.

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* Contributed by -
V. Venkata Raghvendra is an Engineering graduate with Electrical & Electronics as background. Currently working as sales promoter for MOTOROLA and pursuing Post Graduate Diploma in Management from Institute of Public Enterprise (IPE), Hyderabad.
Article posted on December 1, 2008.