Question
Explain: ‘Price Stickiness’.
✓
Answer
Price stickiness $($Kinked Demand Curve$):$
Kinked demand curve
- There are a number of theories o Oligopoly. The Kinked-domand theory is one of them.
- Price stickiness is a situation where in the firm would tend to stick to the price of its product and not increase or decrease it even if he wish to.
- In oligopoly market, the number of firms is less and they are interdependent on each other.
- Even if onc of the firm decreases the price of a product, its product
- Even if on of the firm decreases the price of a product, its product will become cheaper than other products. So, according to the law of demand due to comparatively cheaper price of the product its demand will be more compared to the product of other firms. This will result in decroaseing the demand of the products sold by other firms.
- In order to avoid such situation, the competitive firms will also have to decrease ihe price of their product in order to stay in the competition.
- At the end, the price of the product reaches at a nominal level and ¡t becomes impossible to reduce the price lurther.
- Sticky prices, therefore, are prices in an economy which are resistant to change.
- On the other hand, if the firm increases the price of the product then the demand of that product decreases, and the competitive firms are profited. Thus, as the nominal price is resistant to change, the demand curve hecomes kinked.
Kinked demand curve
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