Price wars can be the result of

A. a cooperative equilibrium.

B. new firms entering the industry and immediately agreeing to abide by a collusive agreement.

C. new firms entering the industry and all firms then finding themselves in a prisoners' dilemma.

D. a firm playing a tit-for-tat strategy in which last period the competitors complied with a collusive agreement.

Price wars can be the result of C. new firms entering the industry and all firms then finding themselves in a prisoners' dilemma.

Prisoners' dilemma is a situation when each of the rational individuals act in their self-interest. Each firm operating in the market would only be interested in increasing their market share. The easiest way to attract customers is by cutting down the prices of the product. Such a reduction by a firm in prices often calls for the start of a price war.