Because there is a ‘price war’ demand for a firm is price inelastic – there is a smaller percentage rise in demand.The net effect is that if all firms cut price – the individual firm will only see a small increase in demand. ![]() However, other firms will not want to see this fall in market share and so they will respond by also cutting price to follow the first firm.In the short term, if a firm cuts price it would cause a big increase in demand and therefore would lead to a rise in revenue. If a firm cut its price, it is likely to lead to a different effect.In this case, of increasing price firms will lose revenue because the percentage fall in demand is greater than the percentage rise in price.Therefore for a price rise, there is likely to be a significant fall in demand.If a firm increases the price, then it becomes more expensive than rivals and therefore, consumers will switch to its rivals.The logic of the kinked demand curve is based on The kink in the demand curve occurs because rival firms will behave differently to price cuts and price increases. This model of oligopoly suggests that prices are rigid and that firms will face different effects for both increasing price or decreasing price. One example of a kinked demand curve is the model for an oligopoly. A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices.
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