Final answer:
It's true that for Japanese firms with high levels of operating and financial leverage, maintaining sales volume is critical, even if it means reducing prices. Firms with high fixed and debt-related costs must ensure they cover these costs, which depend on maintaining sales volumes. Matching import prices at a loss risks domestic companies' viability, potentially leading to importer-dominated monopolies.
Step-by-step explanation:
For Japanese firms with high levels of operating and financial leverage, it is indeed true that maintaining sales volume is critical, often taking precedence over price concerns. High operating leverage means that a firm has high fixed costs relative to variable costs, and high financial leverage indicates the firm has taken on significant debt. In such cases, a drop in sales volume can disproportionately affect the firm's profitability, since the high fixed and financial costs remain constant and must be covered by sales revenue. Therefore, firms often prioritize maintaining sales volume even if it means lowering prices.
If imports are sold at extremely low prices, domestic firms would need to match these prices to remain competitive. However, selling at such low prices could mean operating at a loss. If this situation persists and causes domestic firms to exit the industry, the importers could gain larger market shares and eventually raise prices, leading to potential monopolistic behavior to recoup their initial losses and attain long-term profits. This is an example of predatory pricing, which can lead to less competition and higher prices once rivals are eliminated.