In a price war, each of multiple suppliers of highly competitive produ

Can i please know the explanation for this question.

Can someone please provide an explanation

Option C is correct.

Here is a step-by-step analysis:

Restating the Passage:

The passage explains that in a price war, companies repeatedly lower prices to avoid being undercut, leading to overall reduced prices that can even eliminate profits. Although a price war harms all companies involved, each company cannot simply allow competitors to lower prices without responding.

What Must Follow:

Given that competitors cannot be eliminated from the market, the companies must find a way to avoid the harmful downward spiral. They need to send signals to each other about their willingness to avoid or retaliate in a price war.

Evaluating the Options:

(A) "...each company will attempt to avoid a price war by setting prices low and being prepared to raise them as circumstances require."

Issue: This option suggests that companies set low prices and then raise them later, but it does not address the critical need to prevent or react to undercutting by competitors.

(B) "...each company will wish to avoid a price war but be prepared to be the first company to lower price."

Issue: The idea of being the first to lower price contradicts the passage’s notion that a company cannot afford to let competitors lower their prices. The focus is on reacting, not initiating.

(C) "...each company in a competitive market will attempt to signal to its competitors that it does not want a price war but will not necessarily allow competitors to undercut its price."

Strength: This option encapsulates the need for each company to communicate its reluctance to engage in a price war while simultaneously maintaining a stance that prevents competitors from gaining an advantage by lowering prices.

(D) "...each company in a competitive market will attempt to signal to its competitors that it does not want a price war at any cost, even if competitors undercut its price."

Issue: This implies that a company would refrain from reacting to competitors’ price cuts, which conflicts with the passage’s assertion that companies cannot afford to let a competitor lower their price without matching or lowering further.

(E) "...each company in a competitive market will attempt to create an atmosphere of complete uncertainty as to whether it will lower prices, for example, by establishing discounts that are marketed as temporary but which may in effect be permanent."

Issue: While this option introduces uncertainty as a strategic element, it does not directly address the mutual signaling needed to prevent a harmful price war, as outlined in the passage.

Conclusion:

Option (C) best completes the passage because it directly addresses the need for companies to both avoid triggering a price war and protect themselves from being undercut by competitors.

The passage mentions that "A price war is usually detrimental to all companies involved, who will profit from reasonable but higher costs" which means they do not want a price war. The same line continues that "but at the same time a company cannot always afford to let a competitor lower price without matching or lowering beyond that price."

This means the companies neither want a price war, nor do they want their competitors to reduce prices from what they have set.

Option C matches.