Economics • Economic BasicsMedium
What does the 'Kinked Demand Curve' model attempt to explain in oligopoly markets?
A. The tendency of firms to engage in price wars during economic downturns.
B. Price rigidity and stability despite fluctuations in marginal costs.✓ Correct Answer
C. The rapid expansion of output when a new firm enters the market.
D. The emergence of natural monopolies due to high fixed costs.
💡 Solution & Explanation
The kinked demand curve model, popularized by Paul Sweezy, accounts for asymmetric firm behavior in oligopolies where competitors match price cuts but ignore price increases, resulting in price stickiness. Alternative market models or incorrect options describe collusion or price wars rather than stability. Oligopolistic industries are typically characterized by a small number of interdependent firms.
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