Question

1)Describe how retailers and gas stations used to make pricing decisions and explain how that could lead to price wars?

Answer 1

The pricing decision of retailers and gas stations are based on the prices set by the their competitors in the market. They try to keep the prices low as compared to their competitors to attract the entire market to themselves. This is because this is oligopolistic type of market structure where strategic decisions play an important role.

This leads to undercutting of prices by the players in the market and sometimes prices fall below the marginal cost and thus leading to losses for the producers. This undercutting of prices by one player in response to the action by other player to attract the consumers is known as price war which is common in oligopolistic type of market structure.