Ok, you own a business. Your competitor across the street drops his prices. What do you do? Keep your prices up and lose customers and go out of business, or follow suit to remain competitive?What the hell do you think he's going to do? He's going to drop his prices. That's why it is stupid for his competitor to drop his prices. If they get into a price war, they both lose. They would both be better off leaving prices where they are.
Good lord, that comment is ignorant. By that argument there would never be ANY price competition. And yet it happens ALL THE TIME. Therefore your argument is false.
Look at from the other side. Every business that lowers their price to match their lowered costs (i.e. there is NO LOSS to the business), gets a chance to increase market share. Simple, eh? If you don't believe in this, you basically don't believe in free markets or capitalism and don't really belong in a discussion of either.
If it's stupid, why is Wal-Mart one of the largest companies in the world?
The reason you compete on price is because you feel that you can make higher profits by selling more volume. The reason you do that despite the fact that your competitor might also lower their prices is because you think you run your business more efficiently. If your competitor has more overhead, or is simply unwilling to accept lower profit margins on that product, then they can't compete with you on price.
They can try and compete by adding value to their products in some way such as better service, better quality. They can also try and compete by adding perceived value through better marketing or more skilled sales people.
Usually competition isn't just done on price alone. It is a combination of price and value, and retailers offer different versions of the same product that have different values to the customers at different prices.
Read some game theory.
Play some more complex games.