According to the kinked demand curve theory, if Kit-N-Sit cuts prices, Kittysitters will ; if Kit-N-Sit raises prices, Kittysitters will .

respond aggressively by cutting prices ; will do nothing and leave prices unchanged.

Explanation:

The kinked demand curve was developed by an economist, Sweezy to addressing price inflexibility associated with an oligopolist market. In an oligopolist market, prices tends to remain unchanged over a long period of time even when costs are declining. The kinked demand curve hypothesis states that a firm faces a demand curve with a kink at the prevailing price level. This means that the curve is more elastic above the kink and less elastic below it. Here, there is less response to a price increase compared to much response to a price decrease.

According to the assumption under kinked demand curve, each firm in an oligopoly believes that if a firm cut price below the prevailing level, then competitors will follow suit. This is because competitors feels that if they do not cut their prices too, then their customers will leave them and buy from the competitor that is selling at lower price.

It is also assumed that, if a firm increases the price of his goods and services above the prevailing level, then competitors will not follow suit. This means that if a firm increases the price of his goods and services, there will be reduction in sales hence competitors will not increase their price. This because customers will patronize firms with the same or similar products hence increase competitors sales.

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