... to reduce loosing a market share to the other firm. * If a firm raises its price, the other rivals will not follow suit and will keep their prices the same. This will increase rivals' market share. Therefore, using these assumptions, we can draw the following graph that is kinked. A rise in price will lead to a large fall in sales as customers switch to the now relatively lower-priced rivals. The firms will thus be reluctant to raise its price. Demand is relatively elastic above the kink. On the other hand, a fall in price will bring only a modest increase in sales, since rivals lower their prices too and therefore customers do not switch. The firm will thus also be reluctant to lower its price. Demand is relatively inelastic below the kink. Thus firms will be reluctant to change prices at all. This price stability can be shown by drawing in the ...

See this essay or coursework document in full right now