What kind of elasticity of demand is faced by the oligopolistic firm?

Correct option is D

This question refers to the Kinked Demand Curve Model of Oligopoly, most prominently developed by Paul Sweezy. The model explains the price rigidity observed in oligopolistic markets, where a few interdependent firms dominate.

• If an oligopolistic firm raises its price, competitors are unlikely to follow, and customers switch to rivals, causing a large drop in quantity demanded—this makes demand highly elastic for price increases.

• If the firm lowers its price, competitors match the cut to protect their market share, leading to only a small increase in quantity demanded—this makes demand relatively inelastic for price decreases.

Thus, the demand curve is kinked: elastic above the current price and inelastic below it. This asymmetry in elasticity results in a discontinuous marginal revenue curve, discouraging price changes even with cost variations.

Information Booster:

• The Kinked Demand Curve explains why firms in oligopoly avoid price competition.

• There’s a kink at the prevailing price due to asymmetric competitor responses.

• Above the kink (price increases): high elasticity – customers switch to alternatives.

• Below the kink (price cuts): low elasticity – rivals match, sales barely improve.

• Result: Price rigidity – firms prefer stable pricing and compete via non-price strategies.

• Used widely to explain pricing behavior in industries like telecom, airlines, and oil.

Additional Knowledge:

(a) Low elasticity for price rise and more elasticity for price cuts – This reverses the actual behavior observed in the kinked demand curve. In reality, price rises face high elasticity (consumers switch), and price cuts face low elasticity (rivals match).

(b) High elasticity for both whether there is price rise or price cuts – If both were highly elastic, any small price change would drastically alter demand in either direction, which contradicts the price rigidity seen in oligopoly.

(c) Low elasticity for both whether there is price rise or price cuts – This implies consumers are insensitive to price changes in any direction, which does not align with oligopolistic behavior. In reality, consumer response is asymmetric.