The assumption that rival firms will match a firms price dec

The assumption that rival firms will match a firm\'s price decreases but not its price increases is a basic feature of:

model of limit pricing.

the kinked demand curve model.

the predatory pricing model.

cartel theory.

Solution

The answer is kinked demand curve model.

In a model of oligopoly when the firms indulge in price competition then if one firm decreases its price then the best response of other firms is to decrease prices of their goods too. This is because if the firms are having price competition and the goods are homogeneous in nature then to increase the market share of the firm they must reduce the prices because the firm selling the goods at a lower price will have a higher market share. Similarly, the other firm will also try to reduce the price. But if the prices are increased by other firm, then it is not a dominant strategy of the firm to increase the price of its goods. This is the basic idea behind the kinked demand curve model.