What is the basis of the kinked-demand model? Explain the reason for the gap in the oligopolist's marginal-revenue curve. How does this model explain price rigidity in oligopoly?
Why is advertising prevalent in many oligopolies, especially when industry demand is inelastic? Illustrate your answer by assuming that with advertising, a firm's demand curve has price elasticity of -1.5 and without advertising, it is -2. If MC is $10, what is the difference in the profit-maximizing price?