Q.What is meant by prices being rigid? How can oligopoly behaviour lead to such an outcome?
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Start your 14-day free trial to unlock the full solution →Rigid prices stay fixed despite cost/demand changes; in oligopoly this happens because a firm expects rivals to ignore a price rise (losing it customers) but to match a price cut (starting a price war), so it changes nothing.
What price rigidity means. Prices are said to be rigid (or 'sticky') when the market price tends to stay the same over long periods even though the firm's costs or the market demand may change. Instead of adjusting price frequently, oligopoly firms tend to keep it fixed.
How oligopoly behaviour produces it. The key is the mutual interdependence of the few firms — each firm must anticipate how its rivals will react to any price change:
- If a firm raises its price, it expects that its rivals will not raise theirs. Its product then looks dearer than the others, so it loses many customers to them — a price rise is unattractive. …
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