- A.Price minus variable cost per unit — the dollars each unit contributes to covering fixed cost and profit.
- B.The percentage change in quantity demanded for a 1% change in price — elastic categories lose volume on price increases; inelastic categories don't.
- C.Offering a free tier with limited features to drive adoption, then converting users to paid tiers with premium features.
- D.Setting price based on competitor prices — going-rate (matching), premium (above), or discount (below) — depending on positioning. ✓
Competition-Based Pricing is setting price based on competitor prices — going-rate (matching), premium (above), or discount (below) — depending on positioning. The other options describe related but distinct concepts in Pricing — see the deep-dive guide for the full distinction.
How to think about questions like this
Common in commodity and oligopoly markets. Questions like this test whether you can distinguish Competition-Based Pricing from neighboring concepts. The most common trap is choosing a closely-related concept that sounds similar but applies in a different context.
When you see a definition question on an exam, do two things: (1) translate the question into your own words, then (2) generate the answer in your own words before reading the options. This avoids the cognitive bias of recognizing a familiar phrase as correct just because it is familiar.