What is the outcome of a price war in an oligopolistic market?

In an oligopolistic market, the few firms that dominate the industry often find themselves in intense competition with one another. A price war occurs when these firms aggressively lower their prices in an attempt to gain market share or counteract competitor moves. The natural outcome of this scenario is a reduction in prices, as each firm reacts to the pricing strategies of its competitors.

This behavior stems from the interdependence characteristic of oligopolies, where the actions of one firm can significantly impact the others. Consequently, firms may engage in price cuts to attract price-sensitive customers, creating a scenario where competition drives prices lower. This reduction can be temporary, and while it may benefit consumers in the short term, it can also lead to a deterioration of profit margins for the firms involved.

This context emphasizes why a reduction in prices is the correct answer. Other potential outcomes—such as increased consumer loyalty, stable pricing strategies, or enhanced product differentiation—are typically less likely during a price war, as the focus tends to be on immediate competitive pricing rather than long-term brand loyalty or innovation initiatives.