Limitations of the kinked demand curve model

This model of oligopoly suggests that prices are rigid and that firms will face different effects for both increasing price or decreasing price. The kink in the demand curve occurs because rival firms will behave differently to price cuts and price increases. The model explains why oligopoly prices are stable. But it fails to explain how the industry-wide price was established in the first place. Though the model explains the reluctance of oligopolists to change prices, it provides no clue as to how the original price was arrived at. It says nothing about how firms arrived at the original price in the first place, and why they did not fix some different prices.  #Economics #JC Economics #A Level Economics


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