The kinked-demand theory explains why prices don't change often. When customers only see one store's price, a price increase drives away more customers than a decrease attracts. This creates a "kink" in the demand curve, leading to stable prices. The theory suggests that prices are more likely to change if they recently changed, and are more flexible in markets where prices are easily compared. This theory has important implications for monetary policy, showing that changes in productivity can affect the relationship between output and inflation, and that monetary shocks have long-lasting effects on the economy.