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What does price rigidity imply in pricing?
  • a)
    Inflexibility in pricing
  • b)
    Frequent price fluctuations
  • c)
    Low pricing strategies
  • d)
    Government intervention in pricing
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
What does price rigidity imply in pricing?a)Inflexibility in pricingb)...
Price rigidity implies inflexibility in pricing. It means that prices are stable over a given period and do not change frequently.
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Community Answer
What does price rigidity imply in pricing?a)Inflexibility in pricingb)...
Price rigidity refers to the inflexibility or resistance of prices to change in response to changes in market conditions. It implies that prices do not adjust quickly or frequently in response to changes in demand, supply, or cost factors. Instead, prices remain relatively stable or sticky over time.

Price Rigidity as Inflexibility in Pricing:
- Prices are slow to adjust: Price rigidity means that prices do not adjust quickly in response to changes in market conditions. This can be due to various factors such as market structure, industry norms, or the behavior of firms.
- Resistance to price changes: Price rigidity implies that firms are reluctant to change their prices, even when there are changes in factors that would typically influence pricing decisions. This can include changes in input costs, demand levels, or competitive pressures.
- Limited price flexibility: In a price rigid environment, firms may be hesitant to lower prices during times of low demand or economic downturns. Similarly, they may be reluctant to increase prices during periods of high demand or inflation. This lack of flexibility in pricing can lead to inefficiencies in resource allocation and market distortions.

Reasons for Price Rigidity:
- Menu costs: One reason for price rigidity is the existence of menu costs, which are the costs associated with changing prices. These costs can include printing new price lists, updating computer systems, or retraining employees. Firms may avoid price changes to minimize these costs.
- Customer behavior: Price rigidity can also be influenced by customer behavior and expectations. Customers may become accustomed to a certain price level and may respond negatively to price changes. Firms may be hesitant to risk losing customers by changing prices.
- Market conditions and competition: Firms operating in highly competitive markets may be more reluctant to change prices due to the fear of losing market share. Price changes could trigger aggressive price competition and erode profit margins.
- Government regulations: In some cases, government regulations or interventions can contribute to price rigidity. Price controls, price ceilings, or other regulatory measures can limit the ability of firms to adjust prices freely.

Effects of Price Rigidity:
- Inefficiencies in resource allocation: Price rigidity can lead to inefficiencies in resource allocation as prices do not accurately reflect changes in supply and demand conditions. This can result in surpluses or shortages in the market.
- Reduced market flexibility: Price rigidity reduces the flexibility of markets to adjust to changing economic conditions. It can hinder the ability of prices to act as signals for resource allocation and can slow down the process of market equilibrium.
- Increased price volatility: While price rigidity implies inflexibility in pricing, it does not necessarily mean that prices remain constant over time. Instead, price rigidity can lead to price spikes or sharp adjustments when prices do eventually change.

In conclusion, price rigidity refers to the inflexibility or resistance of prices to change. It implies slow adjustment of prices in response to changes in market conditions and a reluctance to change prices. Price rigidity can be influenced by factors such as menu costs, customer behavior, market conditions, and government regulations. It can lead to inefficiencies in resource allocation, reduced market flexibility, and increased price volatility.
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What does price rigidity imply in pricing?a)Inflexibility in pricingb)Frequent price fluctuationsc)Low pricing strategiesd)Government intervention in pricingCorrect answer is option 'A'. Can you explain this answer?
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