Companies that Dominate an Industry Usually do so by Developing a Competitive Advantage

Question: Companies that dominate an industry usually do so by developing a competitive advantage, often control of a unique resource or superior technology, that allows them to manufacture products at a lower cost than their competitors can. Nondominant companies that seek to increase their share of the market generally must endure drastically lower profit margins as they win customers away from dominant companies by matching their prices. Companies that increase their market share in this way and do not change their disadvantage in production costs relative to those of the dominant companies, will eventually lose their recently won market share as price returns to normal levels.

Which of the following is an assumption upon which the conclusion of the argument depends?

1. Few companies lacking competitive advantages in costs of production that have increased their market share will sustain price margins lower than those of firms with production cost advantages.
2. Dominant companies generally cannot maintain their competitive advantage over long periods of time unless they acquire additional unique resources or develop improved technology.
3. Nondominant companies can improve their competitive positions by developing unique resources or technological innovations similar to those of dominant companies.
4. A dominant company with a competitive advantage generally will not lower its prices to undercut those of a firm that lacks a competitive advantage in production costs.
5. Acquiring unique resources or developing superior technology is a difficult undertaking that requires substantial investment on the part of a company seeking to gain a competitive advantage in production costs.

“Companies that Dominate an Industry Usually do so by Developing a Competitive Advantage”- this is a GMAT Critical question. This particular GMAT Critical Reasoning topic has been taken from the book ‘501 GMAT Questions’. In this particular topic, candidates need to choose the option that best suits the passage. GMAT critical reasoning tests the logical and analytical skills of the candidates. Critical reasoning in GMAT requires candidates to find the strengths and weaknesses of the argument, or find the logical flaw in the argument.  The GMAT CR section contains 10 -13 GMAT critical reasoning questions out of 36 GMAT verbal questions.

Answer: A
Explanation: 
Let’s go through all the available options for this GMAT critical reasoning question and choose the most suitable one.

Option A: Few companies lacking competitive advantages in costs of production that have increased their market share will sustain price margins lower than those of firms with production cost advantages
-Option A states that the companies that lack competitive advantages in production costs and have increased the market share will find price margins lower than the companies that have a production cost advantage. The conclusion here is that companies can still gain market share by accepting lower profit margins but the market share will be lost when they increase the price level. This relies on an assumption that they will eventually raise their prices. So, Option A is correct.

Option B: Dominant companies generally cannot maintain their competitive advantage over long periods of time unless they acquire additional unique resources or develop improved technology.
-According to option B, the dominant companies can not maintain a competitive advantage for a long time if they don’t get soma unique resources or improved technology. The conclusion is that companies without a competitive advantage will not be able to get a rise in market share. This statement talks about the additional resources required by dominant companies to maintain competitive advantage, which is irrelevant to the conclusion. So, Option B is incorrect.

Option C: Nondominant companies can improve their competitive positions by developing unique resources or technological innovations similar to those of dominant companies.
-Option C states that the non-dominant companies can improve their positions if they develop some unique resources or innovations like dominant companies. This statement talks about the need for technological improvements by non-dominant companies and not how they lose their market share by increasing price levels. So, Option C is incorrect.

Option D: A dominant company with a competitive advantage generally will not lower its prices to undercut those of a firm that lacks a competitive advantage in production costs.
-Option D states that a company that is dominant with a competitive advantage will not lessen its prices for a firm that has no competitive advantage. The argument is discussing the nondominant companies that won’t be able to retain the market share if they increase their prices. It’s not talking about the advantages of a dominant company. So, Option D is incorrect.

Option E: Acquiring unique resources or developing superior technology is a difficult undertaking that requires substantial investment on the part of a company seeking to gain a competitive advantage in production costs.
-As per Option E, it is very difficult for a noncompetitive company that tries to gain a production advantage to acquire additional resources or technology as they require a huge amount of investments. Companies that can acquire additional resources or not by investment are not relevant to the argument in the passage given. So, Option E is incorrect.

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