Question

Do you find a situation of price rigidity under oligopoly? What does it lead to?

Answer 1

Yes, we do find the situation of price rigidity under oligopoly. It occurs as under:
(i) If the firm increases the price of the product, the rival firms may not increase it, leading to a loss of the market (because the buyers will shift to the rival firms).
(ii) If the firm lowers the price of the product, the rival firms may also lower it, leading to a loss of total revenue without any gain of additional buyers.

Hence, the price is neither raised nor lowered. Implying rigidity of the price. Rigidity of the price leads to non-price competition. Because of non-price competition, there are high selling costs. It keeps the market price higher than what it ought to be. Resources are not optimally utilised; social welfare is not maximised.