As such, when evaluating the change in profit, we need to consider both alternatives and how the possible responses from the competitor will affect it. In the first case, with no response from the competitor, as I have mentioned previously, net sales are likely to increase due to positive price elasticity. In order to evaluate whether the net revenue is modified, we should use a figure example, considering the quantity sold
100 and price P = 10. The total net sales is 1000. On a 10% price cut (P = 9), we should estimate the quantity Q. At 115 (it shouldnt go up to 25%). As such, the net sales will be V = 1035, an increase of 35 units or 3.5%.
In the second scenario, the price cut will implicate a response from the competitor.
The quantity will initially increase, only to later decrease after the competitors price cut. In my opinion, we will be encountering, in the end, an overall decrease in overall net revenues to 850 or 900. This will be the equivalent of a reduction in profit.
As such, this issue has proved one of the essential rules in economics and business: there are only a few situations where the company plays by itself. In almost all other cases, the company is forced to adapt its responses and moves to those of the competitors on the market, otherwise, not considering them will lead to a loss in overall profits, as we have seen previously.
1. Price Elasticity. On the Internet at http://ingrimayne.saintjoe.edu/econ/elasticity/Elastic1.html.