ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Is a Price War? A price war is a competitive exchange among rival companies who lower the price points on their products, in a strategic attempt to undercut one another and capture greater market share. A price war may be used to increase revenue in the short term, or it may be employed as a longer-term strategy.

Detailed explanation-2: -Price war is “commercial competition characterized by the repeated cutting of prices below those of competitors". One competitor will lower its price, then others will lower their prices to match. If one of them reduces their price again, a new round of reductions starts.

Detailed explanation-3: -S airlines compete with Xone airlines which charges $550 for the same trip. S airlines entered into a price war to attract customers, reduced its price substantially, and lowered the price to $500 per trip. To sustain itself in the market, Xone airlines also dropped its price to $490 per trip.

Detailed explanation-4: -As long as there are at least two firms, oligopolistic price competition leads to the same outcome as perfect competition-all firms make zero profit and Nash equilibrium prices equal marginal cost.

Detailed explanation-5: -Price Leadership Model In many industries, there is a dominant firm in an oligopoly, and the other firms often follow the dominant firm in price changes, which can be viewed as a type of implicit price collusion. Hence, the dominant firm also becomes the price leader.