PRC-3 · Chapter 12 · Question 28 of 69
A monopolistic firm notices that if it lowers its price, rival firms will immediately copy the price cut to retain customers. However, if it raises its price, rivals will ignore it and steal its customers. What type of demand curve does this create for the firm?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) A 'kinked' demand curve
Explanation
The kinked demand curve model in oligopoly/monopoly theory assumes rivals will match price cuts (making demand inelastic downward) but ignore price increases (making demand elastic upward).
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