The apparent stickiness of the price of goods sold by oligop

The apparent stickiness of the price of goods sold by oligopolists can be explained by the a. contestable markets model. b. sales maximization model. c. kinked demand curve model. d. entry deterrence model.

Solution

An oligopoly is an industry with few producers,each recognizing their interdependence.Kinked demand curve is one of the reasons why oligopolies keep their prices more stable .If a firm lowers its price, other firms will do the same. But if a firm increases its price, other firms will not follow.

Since the oligopolist will not gain a large share of the market by reducing his price below the prevailing level, and will have substantial reduction in sales by increasing his price above the prevailing level, he will be ex­tremely reluctant to change the prevailing price. In other words, each oligopolist will adhere to the prevailing price seeing no gain in changing it. Thus, rigid prices are explained in this way by the kinked demand curve theory.

So correct option is c.