Suppose an oligopolistic producer assumes its rivals will ignore a price increase but match a price cut. In this case the firm perceives its

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If a firm believes that its rivals will match a price cut but ignore a price increase, then it is likely assuming that its demand curve is kinked, being steeper below the going price than above. This is because if the firm raises its price above the going rate, then demand will drop to zero, as all customers will switch to the competitor's identical product. However, if the firm lowers its price below the going rate, it will gain some customers as long as the rivals do not follow suit. Therefore, the demand curve appears to have a kink at the going price, with a more elastic section below and a more inelastic section above.

Suppose an Oligopolistic Producer Assumes Its Rivals Will Ignore a Price