Which of the following is a reason to avoid a price matching strategy in competitive markets?

• A. It always increases market efficiency and consumer welfare.
• B. It can reduce incentives for firms to compete on price, leading to higher prices for consumers.
• C. It encourages new firms to enter the market.
• D. It guarantees that firms will earn zero economic profit.

Answer: (B)

Verified step by step guidance

1. Understand the concept of a price matching strategy: it is when firms promise to match lower prices offered by competitors to avoid losing customers.
2. Analyze how price matching affects firms' incentives: if firms always match lower prices, they may have less motivation to reduce prices initially, since competitors will just match them.
3. Consider the impact on market competition: reduced incentives to lower prices can lead to less aggressive price competition among firms.
4. Evaluate the consequences for consumers: less price competition can result in higher prices overall, which reduces consumer welfare.
5. Conclude that while price matching might seem beneficial, it can actually lead to higher prices and less competition, which is a reason to avoid this strategy in competitive markets.