Price Wars

Welcome! You are encouraged to register with the site and login (for free). When you register, you support the site and your question history is saved.

Which of the following best completes the passage below?

In a price war, each of multiple suppliers of highly competitive products and services repeatedly lowers its price to avoid being undercut and thereby losing sales and customers to its competitors. Due to these competitive pressures, the companies involved generally reduce their prices far more than they otherwise would, even to the point where none of the companies is able to make a profit on sales. A price war is usually detrimental to all companies involved, who will profit from reasonable but higher costs, but at the same time a company cannot always afford to let a competitor lower price without matching or lowering beyond that price.

Assuming that none of the competitors can be knocked out of the market, it should be expected that _______________.

in a competitive market, each company will attempt to avoid a price war by setting prices low and being prepared to raise them as circumstances require

in a competitive market, each company will wish to avoid a price war but be prepared to be the first company to lower price

each company in a competitive market will attempt to signal to its competitors that does not want a price war but will not necessarily allow competitors to undercut its price

each company in a competitive market will attempt to signal to its competitors that does not want a price war at any cost, even if competitors undercut its price

each company in a competitive market will attempt to create an atmosphere of complete uncertainty as to whether it will lower prices, for example, by establishing discounts that are marketed as temporary but which may in effect be permanent

Review: Price Wars

Explanation

Reading the question: this prompt defines price wars; then it discusses how they are generally bad for everyone involved, but it can be easy to get dragged into one. Supposing that we're not sure how to predict the blank, we can use a basic filter. In this case, we can attempt to eliminate answer choices that contradict the facts of prompt or are contrary to the spirit of what is said.

Applying the filter: Choice (A) contradicts the prompt because the prompt says companies would prefer high prices, not low prices. So (A) is out. Choice (B) seems contradictory with itself, not to mention the prompt: if you want to avoid it, why would you start it? Choice (C) is definitely not contradictory with the prompt and sounds correct. Choice (D) contradicts what we have been told--namely that, although these wars are undesirable, you "cannot always afford to let a competitor lower price without matching or lowering beyond that price." So (D) is out. Choice (E) does not obviously contradict the prompt, so far as we can see. That leaves us with (C) and (E).

Logical proof: Is (C) objectively better? It boils down to whether it's more logical to be confusing or clear to your competitors. If (C) happens, the companies are likely to avoid a price war: this is what they want, we are told. If (E) happens, it will be easy for them to slip into a price war, through semi-accident: we are told they do not want this. The correct answer is (C).

If you believe you have found an error in this question or explanation, please contact us and include the question title or URL in your message.

Continue »

GMAT Free

The Free GMAT Prep Course

Price Wars