The kinked demand curve theory of oligopoly assumes that rival firms:

a. React to price increases.

b. React to price increases and decreases.

c. Do not react to price changes.

d. React to price decreases.

When a demand curve is not straight such that higher and lower prices have different elasticity, a kinked kind of demand curve is derived. Oligopolies are involved in price wars that result in this kind of a curve. Prices above the equilibrium are highly elastic, while those below are inelastic. This implies that if the prices of a firm are set above the equilibrium, the demand for their products reduces together with the market share. If a firm sets prices below the equilibrium, other firms follow suit, and the gain in the market share is insignificant. Setting prices below the equilibrium could also result in a price war. These make the prices quite rigid in the oligopoly market.

The kinked demand curve theory of oligopoly assumes that competitor firms (d) react to price decreases.