Final answer:
The market risk of using lower prices to get people to buy a product or service is price erosion. This can lower profit margins and reduce the perceived value of the product, potentially damaging a well-respected brand.
Step-by-step explanation:
The market risk associated with using lower prices to attract customers to buy a product or service is price erossion. When a company consistently lowers its prices to gain sales, it risks reducing the perceived value of its product or service over time. Consumers may start to associate the lower price with lower quality, or competitors may follow suit, leading to a race to the bottom where profit margins become unsustainable for all players involved. Moreover, a well-established rputation for slashing prices in response to new entry might deter potential competition, but this approach can also signal a market where competition is primarily price-based, rather than quality or innovation-based.
In industries where there are small economies of scale compared to market demand, price cuts might not lead to significant cost savings, thereby hurting a firm's profitability. On the contrary, a business with a well-respected brand name built over many years might be able to sustain higher prices due to consumer loyalty and perceived value, thereby reducing the risk of price erosion.