Economics Monopolistic Competition Questions
Price wars in monopolistic competition refer to intense competition among firms in an industry, where they engage in aggressive price reductions to gain a larger market share. This occurs when firms perceive that their competitors' prices are threatening their own market position. As a result, they lower their prices to attract more customers and increase their sales volume.
Price wars can be triggered by various factors, such as excess capacity, declining demand, or the entry of new competitors. Firms may engage in price wars to maintain or expand their market share, drive competitors out of the market, or deter potential new entrants.
However, price wars can have negative consequences for firms involved. The aggressive price reductions can lead to lower profit margins and reduced profitability. Additionally, price wars can create a perception of low-quality products or services, damaging the brand image of the firms involved.
To avoid price wars, firms in monopolistic competition often differentiate their products through branding, advertising, or product features. By creating a unique selling proposition, firms can reduce direct price competition and maintain customer loyalty.