What is
meant by prices being rigid? How can oligopoly behaviour lead to such
an outcome?
What is meant by prices being rigid? How can oligopoly behaviour lead to such an outcome?
Price
rigidity implies that the price is unresponsive to the changes in
demand. This is because of the fact that even if any firm raises the
price of its product with the motive of earning higher profits, the
other firm will not do so, and the first firm will lose its
customers. On the other hand, if one firm lowers its price in order
to earn higher profits by maximising its sales, then in response, the
other firm may also reduce the price. Consequently, the increase in
total market sales is shared by both the firms. The firm that
initiated selling at a lower price may get a lower share of the
increase than expected.
Therefore,
the firms do not change their prices due to the fear of rival’s
reaction. Hence, there is no incentive for any firm to change its
price. That is why the prices are regarded as rigid prices or sticky
prices.
Price rigidity implies that the price is unresponsive to the changes in demand. This is because of the fact that even if any firm raises the price of its product with the motive of earning higher profits, the other firm will not do so, and the first firm will lose its customers. On the other hand, if one firm lowers its price in order to earn higher profits by maximising its sales, then in response, the other firm may also reduce the price. Consequently, the increase in total market sales is shared by both the firms. The firm that initiated selling at a lower price may get a lower share of the increase than expected.
Therefore, the firms do not change their prices due to the fear of rival’s reaction. Hence, there is no incentive for any firm to change its price. That is why the prices are regarded as rigid prices or sticky prices.
