The use of sharp, temporary price cuts as a pricing strategy would enable traditional US automakers to discourage new competition from smaller electric car manufacturers. This type of strategy is called __? A. natural monopoly B. monopolistic competition C. predatory pricing D. oligopolistic competition
The correct answer and explanation is:
The correct answer is C. predatory pricing.
Predatory pricing is a strategy where a firm temporarily lowers its prices below cost in an attempt to drive competitors out of the market or prevent new entrants from establishing themselves. The goal is to make it difficult for smaller firms, like new electric car manufacturers, to compete, as they cannot afford to sell at such low prices. Once the competition is eliminated or discouraged, the firm can then raise prices back to more profitable levels.
This type of pricing is considered anti-competitive and is illegal in many jurisdictions because it harms consumers in the long run. While consumers may initially benefit from lower prices, the lack of competition can lead to higher prices and reduced innovation once competitors are forced out of the market.
In the case of traditional US automakers using predatory pricing to discourage smaller electric car manufacturers, the strategy would likely involve lowering the prices of their own electric models temporarily. The large automakers can afford to sustain losses for a while because of their scale and financial resources. However, smaller electric car manufacturers, which have less financial cushion, might not be able to compete with the heavily discounted prices and may exit the market. This leaves the larger automakers with fewer competitors and more control over pricing and market share.
The other options are not correct in this context:
- Natural monopoly refers to a market where a single firm can supply the entire market more efficiently than multiple firms could, typically due to high fixed costs.
- Monopolistic competition involves many firms selling differentiated products, where each firm has some control over its prices.
- Oligopolistic competition occurs when a few large firms dominate the market, but it does not specifically involve the pricing strategy of driving out competitors through temporary price cuts.