Question

During 2003, General Motors cut the prices of its car models. As a result, GM earned a profit of only $184 per car, compared to the profit of $555 per car it had earned in 2002. Does the decline in GM’s profits per car indicate that cutting prices was not a profit-maximizing strategy? Briefly explain.

Answer 1

It's not a fact to adhere that cutting prices means that profit is not maximized. So, I won't be agreeing on the fact that cutting prices was not a profit maximizing but rather cutting it till a particular price is the vital aspect. GM motors' implementation is the cause of the decreased profits in this case. Apart from the rudimentary profit maximizing price setting methods, firms these days follow value based price fixing. In simple words, firms cut their prices to the price maximum a consumer is willing to pay for a product. When GM goes misses out on identifying this value based pricing strategy, profits are bound to decrease although they don't go negative. Had GM set their prices around the customer's maximum willingness to pay for their cars, the profits would've probably eclipsed past $555 per car thereby proving to a worthy strategy.

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