In a Bertrand competition scenario, firms may engage in collusion to stabilize prices. However, if one firm lowers its price, what is the expected outcome in terms of demand according to the kinked demand curve model?

In a Bertrand competition, firms compete mainly on price, and they often want to keep their prices stable to avoid losing customers. The kinked demand curve model suggests that if one firm lowers its price, the other firms will likely follow suit to avoid losing sales. This leads to a situation where prices decrease, but the total demand for each firm does not significantly increase because customers are sensitive to price changes. For example, if Firm A lowers its price for a product, Firm B might quickly lower its price too, resulting in both firms having lower prices but not gaining many new customers. Thus, the expected outcome is that overall prices drop, but the demand for each firm remains relatively stable.