In the context of economics, what is a 'war of attrition'?

• A. A situation where competing firms endure losses over time in hopes that rivals will exit the market first.
• B. A government policy aimed at reducing inflation by increasing interest rates.
• C. A scenario where firms merge to form a monopoly and eliminate competition.
• D. A market structure where firms collude to set prices and maximize joint profits.

Answer: (A)

Verified step by step guidance

1. Understand that a 'war of attrition' in economics refers to a strategic situation where competing firms engage in prolonged competition, often incurring losses, with the goal of outlasting their rivals.
2. Recognize that the key feature of a war of attrition is the endurance aspect—firms continue to operate despite losses, hoping that the other firm will exit the market first, thereby gaining a competitive advantage or monopoly power.
3. Differentiate this from other concepts such as government policies, mergers, or collusion, which involve different mechanisms and objectives.
4. Note that in a war of attrition, the competition is not about immediate profit maximization but about survival and strategic patience.
5. Summarize that the correct understanding is: it is a situation where competing firms endure losses over time in hopes that rivals will exit the market first.