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2 years ago

The kinked-demand curve of an oligopolist is based on the assumption that

Business

1 answer:

masha68 [24]2 years ago

5 0

Answer:

competitors will follow a price cut but ignore a price increase.

Explanation:

The Kinked demand curve model of oligoplolist is based on the assumption that competitors will follow price cut but ignore a price increase because of interdependence among firms price is rigid in oligopoly market. When a firm raises the price of its products none of its competitors will follow the same whereas in case firm reduces its price its competitors will follow the same.

Thus, it is prudent behaviour on the part of a firm not to change in the prices of its products frequently. It is because this reaction of rival firms, the demand curve face by an oligopoly firm has a kink. The kink is formed at prevailing price level.

The portion of demand curve above the kink is more elastic implying, when oligopolist increase the price of its product none of its competitors will follow it with expectation to capture the market demand created due rise in prices by first firm.

The lower portion of the kink is relatively inelastic showing that in case an oligopolist reduces its price its rival firms will also reduce their prices with a view to not to lose their market demand. Thus, it will not beneficial for the oligopolist in either of the situations. Therefore, it will stick to the prevailing price.

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2 years ago

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2 years ago

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Answer:

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