Durable Ceramics, Inc., provides inexpensive ceramic tile to builders of institutional buildings such as schools, prisons, and public administration buildings.It has always competed on a cost leadership basis.Most of its products are purchased by a few commercial construction firms, so it is fairly dependent on these construction firms for selling its product.Durable Ceramics' next-most-efficient competitor, Cost-Less Ceramics, Inc., earns average returns, whereas Durable earns above-average returns.The commercial construction firms are putting pressure on Durable to reduce its prices.If Durable reduces its prices below those of Cost-Less's prices, it is likely that:
A) both Durable and Cost-Less will devise additional ways to become more efficient in their production processes.
B) Durable will be unable to absorb the lower cost and will go out of business.
C) both Cost-Less and Durable will go out of business, leaving the customers with fewer alternative sources of low-cost tile.
D) Cost-Less will go out of business, and Durable will gain higher power over its customers.

Question

Quizplus · Accepted Answer

Durable Ceramics, being more efficient and already earning above-average returns, can likely absorb the price reduction better than Cost-Less, potentially driving Cost-Less out of business and increasing Durable's market power.