A major drawback of price competition is that:

• A. It always results in higher prices for consumers.
• B. It can lead to reduced profit margins for firms.
• C. It eliminates the need for advertising and marketing.
• D. It encourages firms to produce less efficiently.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of price competition, which occurs when firms compete primarily by lowering prices to attract customers.
2. Step 2: Analyze the effects of price competition on firms' profit margins. When firms lower prices, their revenue per unit decreases, which can reduce profit margins if costs remain constant.
3. Step 3: Consider the impact on consumers. Price competition typically leads to lower prices, benefiting consumers rather than resulting in higher prices.
4. Step 4: Evaluate the role of advertising and marketing. Price competition does not eliminate the need for these activities; firms may still use them to differentiate their products.
5. Step 5: Assess efficiency incentives. Price competition often encourages firms to become more efficient to maintain profitability despite lower prices, rather than producing less efficiently.