When the products of several competing suppliers are perceived by

When the products of several competing suppliers are perceived by consumers to be essentially the same, classical economics predicts that price competition will reduce prices to the same minimal levels and all suppliers’ profits to the same minimal levels.

This statement presents a prediction made by classical economics.

What is the prediction?

The prediction is of the form: When X happens, Y will happen.

X: the products of several competing suppliers are perceived by consumers to be essentially the same

Y: price competition will reduce prices to the same minimal levels and all suppliers’ profits to the same minimal levels

Let me address a common mistake made w.r.t. this statement.

If we are given that “when X happens, Y will happen” can we infer the following?

• X is currently happening
• X is always the case

The answer is that we cannot infer any of the above two statements.

For example, if I say that “when you jump, you will fall,” my statement doesn’t mean either that you’re currently jumping or that you keep jumping all the time. It is entirely possible that you rarely jump.

Thus, we cannot take “the products of several competing suppliers are perceived by consumers to be essentially the same” as a fact that is always the case.

Therefore, if classical economics is true, and given suppliers’ desire to make as much profit as possible, it should be expected that ____________

The author makes a conditional conclusion.

There are a couple of pieces of information given in the “if” part:

1. The classical economics is true. That means the prediction given in the first statement is true. That means we can be sure that when X happens, Y will happen (X and Y have been defined earlier)
2. Suppliers have a desire to make as much profit as possible

Given these two pieces of information and the first statement, we can expect something. That something is what we need to find from the options.

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Essentially, we’re given two facts:

1. When the products of several competing suppliers are perceived by consumers to be essentially the same, price competition will reduce prices to the same minimal levels and all suppliers’ profits to the same minimal levels.
2. Suppliers have a desire to make as much profit as possible

Given that the situation presented in the first fact leads to minimal profits for suppliers and that suppliers want to maximize their profits, we can expect that suppliers will want to avoid that situation, i.e., suppliers will want to avoid the situation in which their products are perceived to be essentially the same by the consumers.

(Can we expect that suppliers will be able to avoid such a situation? No, we cannot expect that. While we can expect them to want to avoid such a situation, we don’t know whether they have the capability to avoid such a situation.)




(A) in a crowded market widely differing prices will be charged for products that are essentially the same as each other

Incorrect. (“Crowded market” literally means that the market is crowded, i.e., a market with very many suppliers. My analyses of all the options use this understanding of the term “crowded market”)

This option seems to contradict the information given in the passage. The passage says that when the products are perceived to be the same, price competition will reduce prices to the same minimal levels. On the contrary, this option says that widely differing prices will be charged!

(B) as a market becomes less crowded as suppliers leave, the profits of the remaining suppliers will tend to decrease

Incorrect. This option talks about what happens when a market becomes less crowded.

Are we given any information about what happens in such a case?

No.

Perhaps, the profits of the remaining suppliers tend to remain the same or increase.

(C) each supplier in a crowded market will try to convince consumers that its product differs significantly from its competitors’ products.

Correct. This option is in line with what we expected when we combined the two facts in the passage.

We expected that suppliers would want to avoid such a situation where their profits become minimal.

Thus, we can expect that each supplier will try to convince consumers that its products are significantly different from other products. (We can expect that they will try; we don’t expect that they will be successful.)

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I believe some people reject this option by saying that it contradicts the information given in the passage. As we discussed while understanding the passage, the statement “When X happens, Y will happen doesn’t mean that X is happening or always happens.

(D) when consumers are unable to distinguish the products in a crowded market, consumers will judge that the higher-priced products are of higher quality

Incorrect. The “when” part of this statement is the same as the “when” part of the prediction given in the passage. The passage says that in this case, price competition will reduce prices to the same minimal levels and all suppliers’ profits to the same minimal levels.

However, this option says that in this case, consumers will judge higher-priced products to be of higher quality.

Essentially, this option indicates that in the given case, consumers will figure out a way to differentiate the products.

This is nowhere indicated in the passage.

(E) suppliers in crowded markets will have more incentive to reduce prices and thus increase sales than to introduce innovations that would distinguish their product from their competitors’ products

Incorrect. I believe some people who mark this option think that introducing innovations is a waste of money because it is given in the passage that consumers perceive the products to be the same.

The reasoning is flawed because it is based on incorrect comprehension. As we discussed, the statement “when X happens, Y will happen” doesn’t mean that X is happening or always happens.

Thus, there is no reason to say consumers perceive the products to be the same.

On the contrary, since when the consumers perceive the products to be the same, suppliers’ profits go down, it is reasonable to say that suppliers will have an incentive to introduce innovations to distinguish their products.

Option E presents a comparison between two alternatives with suppliers in crowded markets:

1. Reduce prices and thus increase sales
2. Introduce innovations that would distinguish their product from their competitors’ products

Option E says that suppliers will have more incentive to go with 1 than to go with 2.

The passage provides support for the second strategy for suppliers. However, the passage doesn’t talk about (support or go against) the first strategy. The passage also doesn’t say that reducing prices will increase sales (the “thus” part cannot be justified on the basis of the passage).

For these reasons, we cannot expect option E.

Thus, option E is incorrect.