10. Company A opened its retail location in October. Company B, an established competitor, advertised deep discounts for the first three months that company A was open. As a result, company A closed within that three month period. Which pricing tactic was used by Company B?
Answer: C
Predatory pricing was used by Company B.
Company B employed predatory pricing to undermine Company A's market entry by advertising deep discounts aimed at attracting customers away from the new competitor. This tactic ultimately led to Company A's closure within the initial three months of operation.
A) Bait and switch
Bait and switch involves advertising a product at a low price to lure customers in, only to replace it with a different, often more expensive product. This tactic does not apply here, as Company B's actions were focused on lowering prices rather than misleading customers to buy something else.
B) Price fixing
Price fixing refers to an agreement among competitors to set prices at a certain level, eliminating competition. In this scenario, Company B's discounts were independent actions aimed at driving out competition, not a collusive agreement with other companies.
C) Predatory pricing
Predatory pricing is characterized by setting prices low with the intent to eliminate competition. Company B's strategy of offering deep discounts during the critical early months of Company A's operation clearly aligns with this definition, as it aimed to weaken the new entrant's market position.
D) Price discrimination
Price discrimination occurs when a company charges different prices to different customers for the same product or service. This tactic is not relevant in this case, as Company B's pricing strategy was uniformly low across the board, targeting the new competitor rather than differentiating prices among customers.
Conclusion
Predatory pricing is the definitive answer as it accurately describes Company B's strategy to eliminate competition by undercutting prices. The other options fail to capture the essence of Company B's actions, which were specifically designed to harm Company A's market viability through aggressive discounting.