The kinked demand curve model explains _____ in an oligopoly.
A)the number of firms that can profitably exist
B)the market share of each firm
C)the outcome of price discrimination
D)price rigidity among firms
E)collusive price agreements between firms

Question

Quizplus · Accepted Answer

The kinked demand curve model explains price rigidity among firms in an oligopoly. This is because firms in an oligopoly have interdependent behavior and react to changes in their competitor's prices. The kinked demand curve suggests that if a firm raises its price, its competitors will not follow suit, causing the firm to lose significant market share. However, if a firm lowers its price, its competitors will likely follow suit, resulting in a small gain in market share for the firm. As a result, firms often keep their prices stable, leading to price rigidity within the industry.

The Kinked Demand Curve Model Explains _____ in an Oligopoly