Define price rigidity. Show the shape of demand curvein oligopoly.


Dear Student
Price rigidity refers to a situation in which price remains fixed whether there is change in demand and supply . In an oligopoly market condition, firms are in a condition to influence prices.  But, they stick to their prices in order to prevent a price war. For instance, if the firm reduces the price, the competitors will also react by reducing their prices.  As a result, there is no benefit to both of them. Similarly, if a firm tries to increase the price, other firms do not react to it. This will finally led to the firm that increases the price losing its customers. 
The shape od demand curve in oligopoly is kinked .
* kinked demand curve of oligopoly was developed by Paul M. Sweezy in 1939.
The kinked demand curve model seeks to explain the reason of price rigidity under oligopolistic market situations. Therefore, to understand the kinked demand curve model, it is important to note the reactions of rival organizations on the price changes made by respective oligopolistic organizations.
Regards
 

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