In kinked demand theory, if a company increases its price the competitors will not follow that company. Every oligopolist assumes that if he reduces the price below the prevailing level, his rivals will imitate him and thereby lower their prices, while his rivals will not follow his price increase if he increases the price above the prevailing level. Such two distinct rival reaction forms make the upper portion of the demand curve relatively elastic above the prevailing price level and the bottom section of the demand curve is inelastic.

When an oligopolist raises his price above the prevailing amount, his profits would go down significantly. It is because his consumers will quit from him as a result of the increase in his price and will go to his rivals who will greet the new customers and benefit the business. Consequently, these content rivals would have no desire to follow the price increase. The competitors leave their prices constant, so we can expect a fairly large substitution effect which makes demand relatively elastic. The company will then lose market share and expect its overall revenue to decline.