Aquarius, Inc. is the dominant company and the price leader in its market. One of the other companies in the market attempts to gain market share by undercutting the price set by Aquarius. The market share of Aquarius will most likely:
A is correct, but why? If Aquarius can determine the prices for goods/services shouldn’t the share stay at the same level maybe or increase since they are “controlling” the market?
I guess the reasoning behind answer A is :
Since Aquarius is known as the price leader of its market it means that it operates with the most optimal cost structure which allows the company to settle prices = marginal revenus - marginal costs = 0.
In other words, the company can survive by putting the cheapest prices in its market.
The competitor (lets call him X) wants to challenge Aquarius by cutting prices BUT since Aquarius is the price leader it means : IF X cut prices it will operate at a loss (Cost>Rev), and maybe aquarius will operate at a loss too but with better performance still (because it has the most optimal cost structure).
Hence, since X will have negative performance that will be worst than ones from Aquarius. In the LT, by pursuing this strategy, X will go bankrupt and the whole market (not only aquarius) will gained the share of X.
Does this make any sense ?
According to Google,
Explanation from the text: A is correct.
As prices decrease, smaller companies will leave the market rather than sell below cost.
The market share of Aquarius, the price leader, will increase
Ah that makes perfect sense, thanks! So I just have to approach the problem as in that they have the optimal cost structure and in long term they can beat all competitors trying to enter the market because the competitors will have higher costs and can therefore only survive short term.
Thank you guest!