81. The kinked-demand curve of an oligopolist is based on the assumption that

A. competitors will follow a price cut but ignore a price increase.
B. competitors will match both price cuts and price increases.
C. competitors will ignore a price cut but follow a price increase.
D. there is no product differentiation.

Question

81. The kinked-demand curve of an oligopolist is based on the assumption that

A.  competitors will follow a price cut but ignore a price increase.
B. competitors will match both price cuts and price increases.
C. competitors will ignore a price cut but follow a price increase.
D. there is no product differentiation.

BlackTom AI · Accepted Answer

Restating the question and options: The kinked-demand curve of an oligopolist is based on the assumption that
A. competitors will follow a price cut but ignore a price increase.
B. competitors will match both price cuts and price increases.
C. competitors will ignore a price cut but follow a price increase.
D. there is no product differentiation.

Now, let’s analyze each option in turn to understand why the correct one fits the standard kinked-demand theory and why the others do not.

Option A: Competitors will follow a price cut but ignore a price increase.
This option captures the core intuition of the kinked-demand curve model. If a firm lowers its price, rivals tend to follow the price cut to avoid losing market share, leading to a relatively elastic demand facing the firm. Conversely, if the firm raises its price, rivals are assumed not to follow, so the firm loses market share and faces a relatively inelastic demand. This asymmetry creates the “kink” in the marginal revenue curve and explains why prices tend to be sticky in oligopolies. Thus, A accurately reflects the conventional assumption behind the kinked-demand curve.

Option B: Competitors will match both price cuts and price increases.
If rivals matched both price cuts and increases, the demand curve faced by a firm would be more constant and symmetric, and there would be less of the characteristic kink in marginal revenue. The observed price rigidity in many oligopolies is better explained by the asymmetry described in option A, not by a symmetric matching behavior. Therefore, this option is incorrect.

Option C: Competitors will ignore a price cut but follow a price increase.
This would imply that rivals resist price reductions but quickly raise prices in response to a price increase, which is the opposite of the standard kinked-demand assumption. The kink arises from the notion that rivals resist price increases but pass along price cuts. Hence, C does not align with the established model.

Option D: There is no product differentiation.
Product differentiation is a separate concept in oligopoly analysis and does not constitute the foundational assumption of the kinked-demand curve. The kinked-demand model centers on rival reactions to price changes, not on whether products are identical or differentiated. Therefore, D is not the basis of the kinked-demand framework.

In summary, option A correctly reflects the key assumption of the kinked-demand curve model, while options B, C, and D introduce features or premises that deviate from the standard explanation of price rigidity under oligopoly dynamics.

ECNM1116.32925.202530 Microeconomics Final; Spring 2025, 100 Multiple Choice Questions

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