A Level Economics AQA Practice Exam

What do firms aim for in a price war?

1. To increase production costs

2. To reduce market competition

3. To increase or maintain market share

4. To collaborate with other firms

The correct answer is: To increase or maintain market share

Firms engage in price wars primarily to increase or maintain their market share. When companies reduce prices significantly in a competitive market, they aim to attract customers away from competitors. By lowering prices, a firm can increase its sales volume, which can lead to a greater market presence. This strategy is particularly effective in markets where products are relatively homogeneous, and consumers are price-sensitive. While price wars can sometimes reduce overall profitability for businesses in the short term, the long-term objective is often to establish a stronger competitive position within the market. By gaining a larger share of the market, firms hope to solidify their customer base and potentially raise prices back up once they have achieved this goal. The other options do not align with the primary motivations for entering a price war. Increasing production costs goes against the strategies typically employed in a price war. Reducing market competition is a potential outcome but not the objective of firms in a price war, which fundamentally is about increasing competitive pressure. Finally, collaboration with other firms suggests a strategy of cooperation, which contradicts the nature of a price war, where firms aggressively compete against one another.