What effect does a price war typically have on competitors?

A price war typically drives down profit margins for competitors because businesses engage in aggressive pricing strategies to attract or retain customers. When one company lowers its prices, competitors often feel pressured to do the same to avoid losing market share. This can create a perpetual cycle of decreasing prices, which diminishes overall profitability for all involved. As companies continue to reduce prices to remain competitive, their profit margins shrink accordingly.

In contrast, the other options imply outcomes that are not consistent with the reality of a price war. Higher prices or increased prices across the market generally do not occur in a competitive environment characterized by price cuts; instead, the opposite effect takes place. Similarly, a price war does not stabilize market share; it often leads to market volatility as companies struggle to maintain their competitive edge through pricing strategies. Consequently, the primary and most significant impact of a price war is the erosion of profit margins among competitors.