The model of the kinked demand curve in price competition implies that:
A) strong brand loyalty by consumers gives firms little incentive to reduce prices.
B) free entry in the market will eventually reduce economic profits to zero.
C) a firm's competitors will match any price cuts by the firm but not price hikes.
D) firms will coordinate prices so as to maximize group profit.
E) firms in the market match the market price set by a single dominant firm.

Question

Quizplus · Accepted Answer

The kinked demand curve model suggests that if a firm lowers its price, its competitors will follow suit to capture the same market share. However, if a firm raises its price, its competitors will not follow suit and instead maintain their current price, leading to a significant loss in market share. As a result, firms have little incentive to engage in price competition unless they feel they can maintain a significant advantage over their competitors. The kinked demand curve model is often used to explain why prices in some oligopolistic markets remain relatively stable over time.

The Model of the Kinked Demand Curve in Price Competition