Question

You see your competitor lower prices, so you respond by lowering prices even more, inflicting damage on your competitor. After experiencing this several times, your competitor learns to keep its price high with yours. This type of pricing strategy is referred to as what?

Answer 1

Predatory pricing is a strategy where a company lowers prices in response to a competitor, aiming to drive them out of the market. This can discourage new entrants but may harm competition and consumers in the long run.

Step-by-step explanation:

The pricing strategy described, where a company lowers its prices in response to a competitor's price reduction, is known as predatory pricing.

Predatory pricing is a method used by businesses to drive competitors out of the market by temporarily lowering prices below the competitors' costs. This strategy aims to discourage new entrants and maintain the dominating position of the predatory firm.

In the long run, predatory pricing can be detrimental to competition and consumer welfare, as it reduces options in the market and allows the predator to potentially raise prices once their competitors are eliminated. However, determining whether a price reduction is predatory or simply market competition can be challenging.