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CFA Level I · CFA Level I Exam · Industry and Competitive Analysis

A industry has four dominant firms that each watch rivals' prices closely, and a price cut by one is quickly matched by the others. The most likely effect on industry pricing is that prices:

Prices are most likely stable. In a concentrated industry where rivals quickly match price cuts, cutting prices gains no share and lowers everyone's profit, so firms tend to avoid price competition and compete on other factors, producing relatively rigid prices.

  1. Afall steadily toward marginal cost
  2. Bbecome stable because firms avoid price competitionCorrect
  3. Cswing widely because each firm acts independently

Explanation

In a concentrated industry with interdependent firms, price cuts are matched and produce no share gain, so firms avoid price competition and prices tend to be stable. Falling to marginal cost is typical of perfect competition.

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