What term describes a sequence of price reductions by competing firms that drives the market price below production costs?

What term describes a sequence of price reductions by competing firms that drives the market price below production costs?

• A. Price gouging
• B. Price ceiling
• C. Price war
• D. Deadweight loss

Answer: (C)

Engaging in a price war means firms repeatedly cut their prices to outdo competitors. When this competition pushes prices down continually, they can fall below the cost of producing the good. That sequence—hostile price cutting among rivals leading to prices that don't cover costs—best fits the described scenario. Price gouging describes hiking prices during shortages, not lowering them in response to rivals. A price ceiling is a legal cap on prices, not a market-driven sequence of undercutting. Deadweight loss refers to the overall welfare loss from pricing and output that reduce total surplus, not the specific process of firms aggressively cutting prices.

Engaging in a price war means firms repeatedly cut their prices to outdo competitors. When this competition pushes prices down continually, they can fall below the cost of producing the good. That sequence—hostile price cutting among rivals leading to prices that don't cover costs—best fits the described scenario.

Price gouging describes hiking prices during shortages, not lowering them in response to rivals. A price ceiling is a legal cap on prices, not a market-driven sequence of undercutting. Deadweight loss refers to the overall welfare loss from pricing and output that reduce total surplus, not the specific process of firms aggressively cutting prices.