What is a potential outcome of firms using certain pricing schemas to discourage competition?

What is a potential outcome of firms using certain pricing schemas to discourage competition?

• A. Market chaos
• B. Increased competitor entry
• C. Reduced competitive intensity
• D. Price wars

Answer: (C)

When firms implement certain pricing strategies to discourage competition, one likely outcome is reduced competitive intensity. This can occur when companies set prices in a manner that creates higher barriers to entry for potential competitors or makes the market less attractive. For example, predatory pricing—where prices are set extremely low to drive out or deter competition—can lead to a less competitive environment as new firms may be discouraged from entering the market due to the fear of not being able to sustain their operations against these aggressive pricing practices. By reducing competitive intensity, existing firms can maintain higher profit margins and market share, stabilizing their position in the industry. This strategy can result in a more monopolistic market structure, where fewer players dominate and have more control over pricing and supply, ultimately impacting consumer choice. Other options like market chaos and increased competitor entry would suggest instability and a more dynamic competitive landscape, contrary to the desired outcome of firms employing these pricing schemas. Price wars, while they could be a response to competitive pricing, are not the intended result of a strategy aimed at discouraging competition, as this typically leads to a cycle of low prices rather than stability. Thus, the outcome that aligns best with firms' objectives in this scenario is the reduction of competitive intensity.

When firms implement certain pricing strategies to discourage competition, one likely outcome is reduced competitive intensity. This can occur when companies set prices in a manner that creates higher barriers to entry for potential competitors or makes the market less attractive. For example, predatory pricing—where prices are set extremely low to drive out or deter competition—can lead to a less competitive environment as new firms may be discouraged from entering the market due to the fear of not being able to sustain their operations against these aggressive pricing practices.

By reducing competitive intensity, existing firms can maintain higher profit margins and market share, stabilizing their position in the industry. This strategy can result in a more monopolistic market structure, where fewer players dominate and have more control over pricing and supply, ultimately impacting consumer choice.

Other options like market chaos and increased competitor entry would suggest instability and a more dynamic competitive landscape, contrary to the desired outcome of firms employing these pricing schemas. Price wars, while they could be a response to competitive pricing, are not the intended result of a strategy aimed at discouraging competition, as this typically leads to a cycle of low prices rather than stability. Thus, the outcome that aligns best with firms' objectives in this scenario is the reduction of competitive intensity.