[expatpat]

This is because the competitor knows that if he lowers his price incrementally (say 1%), he will sell more products (2% more products, for example).

In some markets, that may be true, in others not -- it depends on market elasticity. If he has to drop the price 20% to get 10% more volume, guess what a rational businessman is going to do?

[ThinkDifferent]

it depends on market elasticity. If he has to drop the price 20% to get 10% more volume, guess what a rational businessman is going to do?

With that supply-demand curve, he should be raising his prices 20% *now*, since he'll only suffer a 10% loss in sales. The NRST does not cause microeconomic theory to stop working.

[ancient_geezer]

If he has to drop the price 20% to get 10% more volume, guess what a rational businessman is going to do?

He will optimize his profit as will his upstream suppliers.

The consumer will go for the most he can get for his dollar, whether that be in taxfree earnings on his investments to increase income so he can live better in the future, or choose to purchase and be taxed now where the trade off is advantage to him today.

Just the way a competitive economy works.