The Kinked Demand Model and the Stability of Cooperation

Abstract

This paper revisits a particular behaviour for firms competing in imperfect
competitive markets, underlying the well-known model of kinked demand
curve. We show that under some symmetry and regularity conditions, this
asymmetric behaviour of firms sustains monopoly pricing, and possesses
therefore some "rationality" interpretation. We also show that such
behaviour can be generalized and interpreted as a norm that sustains
efficient outcomes in a more general class of symmetric games.