Q. 135.0( 1 Vote )

What is meant by prices being rigid? How can oligopoly behaviour lead to such an outcome?

Answer :

Oligopoly firms face price rigidity mainly because of the factors like few firms and interdependence and intense competition among firms.

Firms are highly dependent in an oligopoly market.

Any change in decision of one firm leads to the change in decision of other firm.

Also the goods in oligopoly are close substitutes to each other.

Any change in the price of one good will affect the quantity demanded for some other good which is a close substitute.

As number of firms is less, increase in the price of the good will lead to a smaller quantity of that particular good since the consumers will move to the purchase of some other low priced goods as the goods in the oligopoly market are close substitutes.

Again, if the price of a good is reduced by one firm, the other firms will also reduce the price of its good to attract consumers and few consumers will now move to the other firm to buy this good.

Thus a firm in oligopoly will face a two-way trouble.

To avoid this two-way trouble, the oligopoly firms try to stick to their original prices and do not want to shift from it. In this way the problem of price rigidity is created in oligopoly market.

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