The theory of the kinked demand curve is that
A)although the firm sells a differentiated product, too many competitors exist to make it worthwhile speculating on responses to the firm's behavior.
B)freedom of entry will reduce profits to zero.
C)a firm's competitors will follow it in a price decrease but not follow it in a price increase.
D)firms are all seeking the position of joint profit maximization.

Question

Quizplus · Accepted Answer

The kinked demand curve theory suggests that a firm's competitors will follow it in a price decrease (to maintain market share and prevent losing customers), but not follow it in a price increase (to avoid losing market share and customers themselves). This creates a situation where the demand curve facing the firm is "kinked" at the current price level, with a relatively elastic demand curve for price decreases and a relatively inelastic demand curve for price increases. As a result, the firm is more likely to maintain the status quo price rather than risk losing market share and profits.

The Theory of the Kinked Demand Curve Is That