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CA Foundation · Business Economics · Price Determination in Different Markets

Suppose in a town there are only two petrol pumps: Bharat Petroleum and Indian Oil, selling petrol at ₹95 per litre. If Bharat Petroleum reduces its price to ₹92 per litre while Indian Oil maintains ₹95, what is the likely outcome in this market structure?

In a duopoly, when one firm cuts price, it initially gains market share. However, the competitor is likely to retaliate by reducing price too, potentially triggering a price war. This interdependence and mutual recognition of competitive moves is characteristic of oligopolistic markets.

  1. ABharat Petroleum will gain market share as customers switch due to lower price, but Indian Oil may retaliate by cutting its price below ₹92Correct
  2. BBharat Petroleum's profit will increase because price reductions always boost profitability
  3. CThe market will move toward perfect competition due to price differentiation
  4. DBoth firms will be forced to exit the market due to unsustainable pricing

Explanation

This is a duopoly, where firms are interdependent and recognize their mutual influence on price and quantity. When one firm cuts price, the competitor faces a choice: maintain price and lose customers, or match/undercut the price. Bharat's price cut gains share initially, but Indian Oil will likely retaliate to avoid losing business. Price wars in oligopolies are common because firms fear rival reaction. Options 1 and 2 confuse profit with revenue, and option 3 ignores the market concentration.

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