A decline in product demand occurring when a company fails to match competitors' price drops is termed ___________?
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Answer: C. downward demand spiral
Explanation
A downward demand spiral happens when rigid, high prices repel customers as competitors lower theirs. The resulting drop in sales volume forces the firm to spread fixed costs over fewer units. This drives per-unit costs even higher, triggering another round of lost sales. This vicious cycle links pricing strategy directly to internal cost allocation and market demand. As sales plummet, overhead absorption rates increase the calculated cost per unit. Management often reacts by raising prices further, worsening the competitive disadvantage.
Firms facing fierce market competition must monitor their pricing relative to industry averages. Ignoring competitor price cuts can quickly erode market share and cripple production volume. Recognizing this spiral helps executives adjust pricing before demand collapses entirely. Upward spirals involve increasing rather than declining demand and production trends. Supply spirals relate to supplier cost changes rather than customer price responsiveness. Consequently, downward demand spiral accurately describes shrinking sales driven by rigid pricing.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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