UGC NET COMMERCE January 2017(Paper-II) Q14
0. The Kinked demand curve model of oligopoly was developed by
- Option : D
- Explanation : The Kinked demand curve model was developed by Paul Sweezy in 1939. The model attempts at explaining as to why prices are rigid or sticky in spite of moderate changes in demand and cost under conditions of oligopoly. The argument, which is generally given, is that in such market structures where there are only a few firms which are interdependent on each other if a firm reduces its price other firms in the industry will also match the decrease in price. Hence, the firm, which initially reduced the price, will not be in any way better off. If a firm increases its price, other firms in the industry will not increase their price. Hence, the firm which initially increased the price will suffer a loss. Hence, firms are unwilling to change the price of their good.
The assumptions in the model are as follows:
(i) The firms recognize their interdependence but do not collude in any way.
(ii) The behavioural assumption is that firms in the industry match decreases in the price but not any increases. A price decrease by one firm in the industry leads to a decrease in the price by the others and hence the firm will not benefit in any way. A price increase by one firm is not matched by a price increase by the others and hence the firm would lose its customers. Thus, there is a non-price competition between the firms.
