Skip to content

CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

The kinked demand curve model explains why prices in an oligopoly tend to be rigid. Which assumption about rivals' behaviour underlies the kink?

The kinked demand curve assumes rivals match a price cut but ignore a price rise. Demand is therefore elastic above the going price and inelastic below it, so the firm gains little from cutting and loses much from raising, which keeps prices rigid.

  1. ARivals match a price cut but ignore a price riseCorrect
  2. BRivals match a price rise but ignore a price cut
  3. CRivals match both price rises and price cuts
  4. DRivals ignore both price rises and price cuts

Explanation

If a firm raises its price, rivals do not follow, so it loses many customers and demand is elastic above the kink. If it cuts price, rivals match to protect their share, so the gain is small and demand is inelastic below the kink. Hence the firm hesitates to change price, giving rigidity. Option B reverses this logic.

Did you get it right without looking?

One question tells you little. A timed set on Forms of Market shows your real accuracy, how long you take and where you lose marks.

Practise Forms of MarketFree diagnostic mock

More Forms of Market questions