In the kinked-demand model of oligopoly, if one firm increases its price, the most likely reaction of the other firms will be to
A) decrease their prices.
B) increase their prices.
C) not change their prices.
D) reduce their quantity.

Question

Quizplus · Accepted Answer

In the kinked-demand model, the demand curve facing each firm is broken and steep at the current price, indicating that if one firm increases its price, the demand for its product will be highly elastic, and it may lose a significant share of the market. On the other hand, if one firm decreases its price, the demand for its product will be relatively inelastic, and it may gain a small share of the market. As a result, firms will be unlikely to increase their prices, but they may not change their prices either, leading to a period of price stability. Therefore, the most likely reaction of the other firms will be to not change their prices (choice C).

In the Kinked-Demand Model of Oligopoly, If One Firm Increases