Answer to Question #167929 in Microeconomics for joshua muendo

Question

using a well illustrated diagram,explain why prices are sticky downward under oligopolistic marke

Answer 1

In oligopolistic market, prices are sticky or inflexible over a long period of time regardless of changes in economic conditions. The Kinked Demand curve below explains this tendency of price rigidity. An oligopolist will not gain any larger share of the market by reducing his price below the prevailing level. Also, there will be a substancial reduction in total sales if he increases the price above the prevailing level. Therefore, each oligopolist will adhere to the prevailing price because they do not see any gain in changing it. The prevailing price is OP1 at which a kink is found in the demand curve. This price will remain stable or rigid as every oligopoly firm will find no gain in lowering it or increasing it. Thus, the Kinked Demand curve explains the rigid or sticky prices.