[I'm not out of business so quick. I drop my price to $9.50 so we both sell 50 and make $75 (down from $100 each). Your profits have gone down.]
That isn't the way you laid out the rules for your game. If I drop my price to $9.50 all at once, I get all your customers. You don't get any back until your price is below my price.
Or did you mean that we took turns -- I drop a penny, then you drop two pennies to get your customer back, then I drop two pennies to get him back to my side ... and so on until we've both hit the lowest price we are willing to go ?
Having only two competitors in a market is not realistic in terms of the 'competitive market' where I think prices devolve to the lowest level.
The reason we would embark on this race to the bottom is because we never know the intentions of all the competitors in the market. There is always the chance that they are just trying to capture the market and expect to be able to raise prices after you've been eliminated. If the market has easy entrance and exit, then this never works. The competitor they eliminated is just replaced by a new entrant.
New entrants fail all the time because established competitors are willing to underbid them to keep them out of the market. If there is a large pool of potential new entrants, the result is perpetual low prices.
That isn't the way you laid out the rules for your game. If I drop my price to $9.50 all at once, I get all your customers. You don't get any back until your price is below my price.Sorry. I should have been more clear. If when have the same price we split the market.
Or did you mean that we took turns -- I drop a penny, then you drop two pennies to get your customer back, then I drop two pennies to get him back to my side ... and so on until we've both hit the lowest price we are willing to go ?No. You drop a penny, take my customers and then I drop a penny and get them back.
Having only two competitors in a market is not realistic in terms of the 'competitive market' where I think prices devolve to the lowest level.It doesn't matter how many competitors there are. None of them profit by making it a race to the bottom.
New entrants fail all the time because established competitors are willing to underbid them to keep them out of the market. If there is a large pool of potential new entrants, the result is perpetual low prices.If there is a large pool of new entrants into the market and replace the supply that left, how is the company going to make more money by lowering prices? They would just be selling the same amount at lower prices. Then the lower price would just be temporary.