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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

In the kinked demand curve model of oligopoly, prices tend to remain rigid because a firm assumes that rivals will:

The firm assumes rivals will ignore its price rise but match its price cut. Demand is therefore elastic above the current price and inelastic below it, forming a kink. Neither raising nor cutting price benefits the firm, so prices stay rigid.

  1. AIgnore its price increase but match its price cutCorrect
  2. BMatch its price increase but ignore its price cut
  3. CMatch both its price increase and its price cut
  4. DIgnore both its price increase and its price cut

Explanation

If a firm raises its price and rivals do not follow, it loses many customers, so demand above the kink is elastic. If it cuts its price, rivals match it, so gains are small and demand below the kink is inelastic. Hence the firm avoids changing price. Option B reverses the assumption.

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