Question

The model of the kinked demand curve implies that

A Strong brand loyalty means there is little incentive for firms to cut price.
B Rivals will match any price increases but tend to ignore any price cuts a firm makes.
C Rivals will match any price decrease but tend to ignore any price increases.
D Firms will coordinate prices to maximize group profit.

Answer 1

The correct answer is option C.

Step-by-step explanation:

The kinked demand model was given by Paul M Sweezy. It states that the demand curve of an individual oligopoly firm has a kink in it. The demand curve has two different elasticities.

We know that in an oligopoly market there are very few firms. These firms are interdependent and price decisions of a firm affect their rivals. So price generally remains sticky as an oligopoly firm has to consider its rivals' reaction before changing the price.

When a firm decreases its price, its rivals will also decline their prices. Thus the firm will not be able to gain profits from the price reduction.

On the other hand, if a firm increases its prices, the rivals will not follow. the firm will, as a result, will lose some of its market shares. This is why the demand curve of an individual firm has a kink at the prevailing price.