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A-Level Economics · Kinked demand (oligopoly) diagram question

EVALUATION: prices in a market have not moved for two years. What does this diagram let you say about it?

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The diagram

The answer

Sticky prices can happen with no agreement at all — so stable prices are not proof of a cartel. Interdependence alone produces rigidity. Useful as a supporting model — but it is a bonus in a collusion essay, not the main argument. Rival-watching alone is enough: raise the price and you are left out on your own, cut it and you are matched, so the price sits still even when costs move. That means observed price stability is consistent with collusion AND with independent competition — a genuinely useful evaluation point. Keep it as the supporting model though; the cartel diagram and the payoff matrix carry a collusion essay.

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This is one of 6 questions on the kinked demand (oligopoly) diagram — every corner lettered, every wrong answer diagnosed.

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