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Question -

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



Answer -

  1. Price rigidity refers to a situation in which whether there is change in demand and supply, the price tends to stay fixed.
  2.  In an oligopolistic market firms . are in a position to influence the prices.
  3. However, they stick to their prices in order to avoid a price war. If a firm tries to reduce the price the rivals will also react by reducing their prices. So, it will be of no benefit.
  4. Likewise, if a firm tries to raise the price other firms will not do so. As a result, the firm which intended to raise the price will lose its customers. So, oligopoly behaviour leads to price rigidity in an oligopolistic market.

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