Question

When a competitor cuts its price, a company might decide to ________ if it believes it will not lose much market share or would lose too much profit by cutting its own price.

1) reduce its production costs
2) reduce its marketing costs
3) maintain its current price and profit margin
4) increase its marketing budget to raise the perceived value of its product
5) increase its production costs to improve the quality of the product

Answer 1

Maintain its current price and profit margin (Option 3) is the recommended strategy. This decision balances market dynamics, preventing significant profit loss, and allows time for a strategic response. Options like reducing costs or increasing budgets may not be as directly aligned with addressing competitive pricing.

Step-by-step explanation:

In a competitive market scenario where a competitor cuts its price, a company may decide to maintain its current price and profit margin (Option 3). This strategic decision is based on the company's assessment that reducing its price might lead to a loss in profit without necessarily gaining a significant market share. By holding its current price, the company aims to preserve its profit margin and avoid a potentially detrimental impact on its financial performance.

In such situations, the company likely believes that the value proposition of its product at the current price is strong enough to retain customers, even in the face of a competitor's price reduction. The company might focus on emphasizing the unique features or advantages of its product, reinforcing customer loyalty, and relying on factors other than price to maintain its market position.

While cost reduction (Option 1) or increased marketing efforts (Option 4) could be considered in other circumstances, the decision to maintain the current price underscores the company's confidence in its product's perceived value and the belief that competing solely on price may not be the most effective strategy for sustaining long-term profitability.

Answer 2

A company might maintain its current price and profit margin when a competitor cuts prices if it does not expect significant market share loss or excessive profit reduction. This decision aligns with keeping a stable market position and avoiding customers switching to competitors.

Step-by-step explanation:

When a competitor cuts its price, a company might decide to maintain its current price and profit margin if it believes it will not lose much market share or would lose too much profit by cutting its own price. This decision is based on market dynamics where companies have the ability to set the price they choose, expand or reduce production, and alter their strategies regarding opening or closing facilities and managing their workforce.

According to the given references, in a competitive market where products are similar, raising prices would not be advisable as customers would switch to competitors, leading to a loss of all sales. Conversely, if oligopolists in a cartel always match price cuts but not price increases, they can maintain a high price level and profits without needing an enforceable agreement. This kind of silent cooperation helps to manage the market effectively without legal binding.