Question

The kinked demand curve describes price rigidity. Explain how the models works. What are its limitations? Why does price rigidity occur in Oligopolistic markets? Carefully Explain.

Answer 1

Kinked demand curve describes price rigidity since oligopolistic competition experience kinked demand curve. Oligopoly is characterised by price rigidity because price changes in downward direction. Like if an organisation who works under oligopolistic competiton reduces its price of the product then their competitors will also donthe same thing to nutrilize the expected gain.

Limitations -

• If the organisation is an oligopolistic competition want to increase the price their competitors will not fall the same hemce due to increase in price they will loose some of its market share.
• Since oligopolistic competition experience price rigidity if they want ro increase the price of any product to increase their profit they will not be able to do.

Price rigidity occur in oligopolistic competition because the goal of profit which they want achieve is attained by maximising the sales instead of reducing the price of product