CA Foundation · Business Economics · Price Determination in Different Markets
Which of the following is a criticism of the kinked demand curve model of oligopoly?
A main criticism is that the kinked demand model explains why prices stay rigid once set but does not explain how the prevailing price level was determined in the first place, so it is incomplete as a theory of price determination.
- AIt assumes a single seller in the market
- BIt explains price rigidity but not how the original price was determinedCorrect
- CIt assumes that firms produce identical goods and are price takers
- DIt predicts that prices change continuously with costs
Explanation
The model shows why price tends to stay stuck at the kink, but does not explain how that price was initially set. Critics also note that observed prices are not always as rigid as it predicts. The other options describe monopoly, perfect competition or the opposite of the model's prediction.
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