Key terms
- Kinked demand curve
- A kinked demand curve is the demand curve an oligopolist faces when its rivals match any cut in its price and ignore any rise.
- Price rigidity
- Price rigidity is a price that stays the same for long periods even when a firm's costs change.
Assumptions about rivals
Can you name the two assumptions the model makes about how rivals react?
The model rests on how the firm expects its rivals to react when it changes its price.
Definition
Matched price cuts means rivals follow any cut in the firm's price at once, so a lower price wins it very few extra sales.
Can you think of an example?
Example
One of four petrol stations at a busy junction cuts its price by 3p a litre. Within the hour the other three do the same, so few drivers switch and its sales rise only slightly.
Definition
Unmatched price rises means rivals keep their prices where they are when the firm raises its price, so it loses many sales to them.
Can you think of an example?
Example
If the same station puts its price up by 3p a litre and the other three hold theirs, drivers fill up across the road instead and its sales fall sharply.