Kinked Demand Curve vs Bertrand Competition
Kinked Demand Curve and Bertrand Competition are two Market Structures concepts in AP Economics that students often mix up. The kinked demand curve is an oligopoly model where rivals match price cuts but ignore price hikes, creating a kink at the current price and sticky (rigid) prices. Bertrand competition is an oligopoly model where firms simultaneously set prices, and consumers buy from whoever charges less. Here is how they compare side by side.
Each firm assumes that if it raises its price, competitors will not follow, so it loses many customers (demand is elastic above the kink); but if it cuts price, rivals match to protect their share, so it gains few customers (demand is inelastic below the kink). This kink produces a vertical gap in the marginal revenue curve, meaning marginal cost can shift within that gap without changing the profit-maximizing price or quantity, explaining why oligopoly prices tend to be rigid. The model describes price stickiness but does not explain how the original price is set.
With identical products and equal constant costs, price competition drives firms to undercut each other until price equals marginal cost, giving the competitive outcome and zero economic profit even with only two firms, the Bertrand paradox. The result is sensitive to assumptions: product differentiation, capacity limits, or repeated play restore positive profits.
Kinked Demand Curve vs Bertrand Competition: Two Models of Oligopoly Pricing
| Model feature | Kinked Demand Curve | Bertrand Competition |
|---|---|---|
| What the rival is assumed to do | Match any price cut, ignore any price rise | Leave its own posted price alone while you pick yours |
| Demand facing one firm | Elastic above the going price, inelastic below it, with a kink between | Nearly a step: the whole market if you undercut, close to nothing if you do not |
| Marginal revenue | Breaks, leaving a vertical gap at the kink quantity | Never drawn, since firms choose a price rather than a quantity and the step in demand leaves revenue discontinuous |
| Response to a cost change | Price holds while marginal cost stays inside the gap | Price tracks marginal cost straight away |
| Profit predicted | Margins survive at the sticky price | Zero economic profit once products are identical and capacity is ample |
| Where the starting price comes from | Taken as given, never derived by the model | Derived as the equilibrium of the pricing game itself |
| What it is used to explain | List prices that sit still in concentrated industries | Price wars in near identical goods such as fuel or memory chips |
Opposite assumptions about the rival, opposite predictions
Everything separating these two models comes from one guess: what a rival does when you move your price. Kinked demand assumes rivals follow a cut and ignore a rise. A firm sitting at $20 therefore faces two demand segments. Push up to $22 and rivals stay put, so buyers leave in droves and that upper stretch is elastic. Cut to $18 and rivals cut too, so few extra buyers arrive and the lower stretch is inelastic. Two slopes give two marginal revenue lines that fail to meet, and marginal revenue drops vertically at the kink quantity, say from $11 to $6. Marginal cost can wander anywhere between those numbers, so a supplier pushing the firm's unit cost from $7 to $10 leaves the profit-maximizing price sitting at $20, untouched. Bertrand assumes the reverse: the rival's posted price stays where it is while you choose yours. With identical products and unit cost of $8 at both firms, a rival posting $12 can be undercut at $11.99 by a seller who then takes every buyer. The same reasoning repeats at $11.99, then $10, then $8.01, and it stops only at $8, because cutting below that means selling at a loss. Two firms are enough to erase the margin completely.
Which mechanism the question is actually asking about
Choose the model by the evidence in front of you. Told that list prices in a concentrated industry have not budged for months while input costs drifted, use the kink: the vertical break in marginal revenue swallows the cost change, so no firm gains by moving first. Told instead that two sellers offer an identical product, each can serve the whole market, and both post prices at the same moment, use Bertrand: undercutting runs on until price meets unit cost. The models also differ in how well they hold up. Bertrand is a fully specified game with an equilibrium, so it answers the follow-up every examiner asks, namely why neither firm deviates. The kinked demand model never answers it, because the kink appears wherever today's price happens to sit and nothing explains how the industry arrived there. Studies of price data found little sign that concentrated industries change prices less often than other industries do, and a cost shock hitting every firm shifts the kink itself rather than being absorbed by it. Bertrand has known escapes too. Add capacity limits, product differences, or repeated play with the threat of punishment, and prices settle above unit cost again. Those three fixes are the usual route from /glossary/bertrand-competition toward the pricing behavior real oligopolies show.
Frequently asked questions
Why does the kinked demand curve predict sticky prices?
Because the two halves of the demand curve have different slopes, the marginal revenue curve breaks and leaves a vertical gap below the kink. Any marginal cost inside that gap produces the same profit-maximizing quantity and therefore the same price, so moderate cost changes produce no price change at all.
What is the Bertrand paradox?
It is the result that two firms selling an identical good, each able to supply the whole market, end up pricing at marginal cost and earning zero economic profit. That outcome normally needs many sellers, so obtaining it from a duopoly looks paradoxical.
Which model fits an oligopoly with differentiated products?
Neither one in its pure form. Differentiation blunts Bertrand undercutting, since a price cut no longer captures every buyer, and it softens the kink as well, since rivals have less reason to match. Price competition with differentiated goods predicts margins above unit cost that shrink as the products become closer substitutes.
Related comparisons
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