Reply To: Price Undercutting


Economic theory deals with universal principles. Regarding the competition among entrepreneurs, economic theory says that an entrepreneur anticipates a profit when making an investment in resources used to produce the output and sell it to customers. If entrepreneurs in a particular line are earning profit, then other entrepreneurs will invest in the profit earning line and push down selling prices of outputs and push up buying prices of inputs. This competitive pressure continues until no profit is anticipated in further expansion of output. At that point, entrepreneurs will earn merely an interest return on their investments.

Entrepreneurs can also compete by attempting to lower their cost structures (say, by innovation or more efficient combinations of inputs) or raise their revenue structures (say, by marketing or differentiating their products). Entrepreneurs with a lower cost structure can successfully undercut entrepreneurs with higher cost structures.

Finally, since entrepreneurs invest in resources only with an anticipation of earning profit by selling their output in the future, they may be surprised by the unanticipated competitive pressure placed on them when they try to sell.