Question

Why do many firms strive to maintain stable prices?

Short answer

Firms strive to maintain stable prices in the short run to attract customers.

Step-by-step solution

First reason behind firms maintaining stable prices.

Suppose a firm decides to change the price of its product with the change in demand. During the downturn in the economy, the company will sell its product at a lower price. But during the upturn in the economy, the price will rise.

The consumers who have purchased the product at the lowered price will not be willing to purchase it at an increased price. Moreover, the customers who purchased it during the upturn will feel cheated when others will be offered the same product at a lower price.

Both situations will create a bad impression about the product and its pricing policy among the consumers. The company will lose many of its customers under this pricing policy. Therefore, the company will try to maintain a stable price to please its customers, irrespective of market downturns or upturns in the short run.

Second reason behind firms maintaining stable prices.

Companies are always at a price war with their rival companies. If a company decides to increase the price of its product during an upturn in the market, then the customers of that product will switch to its rival product.

Because of price war and substitutes available in the market, most firms try to maintain a stable price so that their customers do not switch to substitute goods.