Certified Pennsylvania Evaluator Practice Exam

What effect does lower competition typically have on profits?

1. Increase in profits

2. No effect on profits

3. Decrease in profits

4. Varied effect depending on industry

The correct answer is: Increase in profits

Lower competition typically leads to an increase in profits for businesses. This is because, in a less competitive environment, companies often have greater pricing power and can set prices above marginal costs without losing a significant portion of their customer base. When there are fewer players in the market, each company has the opportunity to attract customers without having to compete as aggressively on price. This can result in higher profit margins on their goods or services. Additionally, with little competition, firms may have the ability to implement less aggressive marketing strategies and still maintain or grow their market share, since customers have fewer alternatives. Overall, lower competition creates a situation where companies can achieve higher levels of profitability, as they are not pressured to lower prices or incur high costs to outmaneuver rivals.