<blockquote>
<p>In a competitive market with companies with different cost structures, could not the company that produces at the lowest cost sell at a price below the equilibrium price (still obtaining an economic benefit, although this would certainly not be the maximum benefit at least during that period) so that by lowering prices it could gradually remove the less efficient producers from the market until only they are left and be able to recover the profit not obtained when it becomes a monopolist?</p>
</blockquote>
<p>No, one of the assumptions of competitive market is free entry (eg see Frank Microeconomics and Behavior or any other textbook). This means that as soon as the company would start jacking up prices new entrants will enter the market, meaning that company did that sacrifice for nothing.</p>
<p>If the company is really more efficient than all other companies it could become contested monopoly. However, contested monopoly must maintain low prices as not to give incentive for new firms to enter, hence this doesn’t give extra benefit to the firm either.</p>
<blockquote>
<p>The only answer that comes to my mind is that the producer, by becoming a monopolist and raising prices to “recover” the profit not obtained during the time he used his strategy, the competitors he expelled from the market would re-enter (there are no barriers to entry), so the price would go down again and he would be in the same initial situation obtaining the same profit. However, I would like to share this doubt with you to know your opinions on whether these conclusions are correct.</p>
</blockquote>
<p>This is more or less correct. Your text specifically mentions reentry of the previous competitors but technically these can be new competitors as well. In fact that’s what generally implicitly assumed in standard undergraduate models (that these are new firms not old firms re-activating).</p>

CC BY-SA 4.0
2024-12-12T02:20:45.353Z
2024-12-12T02:20:45.353Z
1muflon1
<p>In microeconomics it is often taught that firms in a competitive market face a perfectly elastic demand curve (graphically it is a completely horizontal demand curve). That is, firms must necessarily sell their output at the equilibrium price. If they sell above the equilibrium price, even by a penny, no consumer would be willing to buy their product from them (it is also assumed that there are no transaction costs and no information asymmetries). However, the fact that firms face perfectly elastic demand also implies that they cannot sell their output below the equilibrium price. This is because it is also assumed that firms ALWAYS maximize profits, so that if they decided to sell below the equilibrium price, even by a penny, they would be failing to maximize their profits. This is where my doubt arises. In a competitive market with companies with different cost structures, could not the company that produces at the lowest cost sell at a price below the equilibrium price (still obtaining an economic benefit, although this would certainly not be the maximum benefit at least during that period) so that by lowering prices it could gradually remove the less efficient producers from the market until only they are left and be able to recover the profit not obtained when it becomes a monopolist? The only answer that comes to my mind is that the producer, by becoming a monopolist and raising prices to “recover” the profit not obtained during the time he used his strategy, the competitors he expelled from the market would re-enter (there are no barriers to entry), so the price would go down again and he would be in the same initial situation obtaining the same profit. However, I would like to share this doubt with you to know your opinions on whether these conclusions are correct.</p>

<microeconomics><producer-theory><perfect-competition>
Why can't producers in a competitive market lower the price to attract more customers and drive other competitors out of the market?
Armando Gómez
# Why can't producers in a competitive market lower the price to attract more customers and drive other competitors out of the market?

(Asked by: username_0 on 2024-12-12)

In microeconomics it is often taught that firms in a competitive market face a perfectly elastic demand curve (graphically it is a completely horizontal demand curve). That is, firms must necessarily sell their output at the equilibrium price. If they sell above the equilibrium price, even by a penny, no consumer would be willing to buy their product from them (it is also assumed that there are no transaction costs and no information asymmetries). However, the fact that firms face perfectly elastic demand also implies that they cannot sell their output below the equilibrium price. This is because it is also assumed that firms ALWAYS maximize profits, so that if they decided to sell below the equilibrium price, even by a penny, they would be failing to maximize their profits. This is where my doubt arises. In a competitive market with companies with different cost structures, could not the company that produces at the lowest cost sell at a price below the equilibrium price (still obtaining an economic benefit, although this would certainly not be the maximum benefit at least during that period) so that by lowering prices it could gradually remove the less efficient producers from the market until only they are left and be able to recover the profit not obtained when it becomes a monopolist? The only answer that comes to my mind is that the producer, by becoming a monopolist and raising prices to “recover” the profit not obtained during the time he used his strategy, the competitors he expelled from the market would re-enter (there are no barriers to entry), so the price would go down again and he would be in the same initial situation obtaining the same profit. However, I would like to share this doubt with you to know your opinions on whether these conclusions are correct.

**Tags:** microeconomics, producer-theory, perfect-competition

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## 1 answers

### Answer by username_1 on 2024-12-12. Score: 1 | Accepted answer

> In a competitive market with companies with different cost structures, could not the company that produces at the lowest cost sell at a price below the equilibrium price (still obtaining an economic benefit, although this would certainly not be the maximum benefit at least during that period) so that by lowering prices it could gradually remove the less efficient producers from the market until only they are left and be able to recover the profit not obtained when it becomes a monopolist?

No, one of the assumptions of competitive market is free entry (eg see Frank Microeconomics and Behavior or any other textbook). This means that as soon as the company would start jacking up prices new entrants will enter the market, meaning that company did that sacrifice for nothing.

If the company is really more efficient than all other companies it could become contested monopoly. However, contested monopoly must maintain low prices as not to give incentive for new firms to enter, hence this doesn’t give extra benefit to the firm either.

> The only answer that comes to my mind is that the producer, by becoming a monopolist and raising prices to “recover” the profit not obtained during the time he used his strategy, the competitors he expelled from the market would re-enter (there are no barriers to entry), so the price would go down again and he would be in the same initial situation obtaining the same profit. However, I would like to share this doubt with you to know your opinions on whether these conclusions are correct.

This is more or less correct. Your text specifically mentions reentry of the previous competitors but technically these can be new competitors as well. In fact that’s what generally implicitly assumed in standard undergraduate models (that these are new firms not old firms re-activating).


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