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What does ruinous competition mean?

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2009-05-27 18:40:19
2009-05-27 18:40:19

Prices in a market are generally set by the highest bidder and/or the cheapest provider. Imagine four apple juice providers. It costs each of them $1 to produce one gallon of apple juice. To make a living, each charges an additional 50 cents and sells it for $1.50. Another provider enters the market, doesn't understand his own costs, and sells for 90 cents. Everybody else has to compete, and they all go out of business.

Another form is when the fifth provider understands his costs perfectly but charges 90 cents anyway because he is confident that he can outlast his competitors. Once they go out of business, the demand is still high, he undersupplies the market and raises his price up $2.50/gallon where the diehard apple juice fans are still willing to pay.

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