Q. In an oligopolistic or monopolistically competitive market, firms do not raise their prices because even a small price increase will lose many customers. Which among the following is the most suitable terms used for this concept ?
Answer: Kinked Demand
Notes: The correct term is "Kinked Demand." In oligopolistic markets, firms face a kinked demand curve, where they believe that if they raise prices, competitors will not follow, leading to a important loss of market share. Conversely, if they lower prices, competitors will match the decrease, resulting in minimal gain. This model illustrates price rigidity in oligopolies, where firms are reluctant to change prices due to the anticipated reactions of rivals. The kinked demand theory was introduced by economist Paul Sweezy in 1939.