CA Foundation · Business Economics · Price Determination in Different Markets
Which of the following is a main criticism of the kinked demand curve model of oligopoly?
The main criticism is that the kinked demand model explains why prices remain rigid but not how the prevailing price was originally determined. It starts from an existing price, so it is incomplete as a theory of price determination in oligopoly.
- AIt assumes a single seller in the market
- BIt assumes firms are price takers
- CIt explains price rigidity but not how the original price is determinedCorrect
- DIt assumes there is free entry and exit of firms
Explanation
The model takes the prevailing price as given and only shows why it tends to stay stable. It does not explain how that price was initially set. The other options describe monopoly, perfect competition or free entry, none of which the model assumes.
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