Question

The airline industry often engages in price wars. This means that firms often ________ prices until profits ________ .

A) Raise; are maximizedB) Lower; are maximizedC) Lower; approach zeroD) Raise; approach zero

Answer 1

C) Lower; approach zero

Step-by-step explanation:

Price competition is a pricing strategy employed by competing businesses that involves undercutting each other. The objective of lowering prices is to capture a larger market share than the rival. A price war can generate high revenues in the short run and can be used as a long term strategy.

Lowering prices reduces the profit margin of a company. An organization using price war should be cautious as low margins affect profitability. The airlines will try to win customers using low prices. They will reduce their prices to slightly above breakeven. At that point, they will be assured of covering their costs.