Three gas stations are located at different corners of a busy intersection. Kelly manages one of them, and he notices that when he raises his gas prices, the other stations don't follow suit, but that when he cuts his gas prices, his competitors follow. What does demand for Kelly's gas look like, and how should he respond to a change in the wholesale price of gasoline?

Answer 1

Kelly faces a kinked demand curve. When he raises his price, his competitors don't, and he loses a lot of
sales. But when Kelly lowers his price, his competitors lower their prices, too, and so he doesn't enjoy a big
increase in sales. Kelly will probably not change his price if the change in the wholesale price of gasoline is
minor because the MC curve may well remain within the MR gap. He will, however, raise price in response
to a significant cost increase that shifts his marginal cost curve beyond the gap in his marginal revenue curve.