In a scenario where two companies engage in a price war, resulting in lower profits for both, what underlying cause can be attributed to this outcome based on Game Theory principles?

In a price war between two companies, the underlying cause can be explained using Game Theory principles, particularly the idea of competition and strategic decision-making. When both companies lower their prices to attract more customers, they think they will gain a larger market share, but this often leads to reduced profits for both. This situation can be seen as a "Prisoner's Dilemma," where both players (companies) choose to lower prices, believing it is the best strategy, but end up worse off because they both lose money. For example, if Company A and Company B both sell a product for $10 and decide to drop their prices to $8 to outdo each other, they may gain some sales, but their profits decrease significantly because they are earning less per item sold. Ultimately, the competition leads to a scenario where both companies harm themselves instead of benefiting from their actions.