This sounds plausible, but, like many other plausible things, it is untrue. It is a theory, but the theory is incomplete.
If business men were fools the theory would work with mathematical precision, to the great joy and profit of the consumer; but business men are not built on those lines.
The seller of any article does not trade for trading's sake; he trades for profit.
It is a mistake to suppose that undercutting each other's prices is the only method of competing between rival firms in trade. There are other ways.
A trader, in order to defeat a rival, may
1. Give better quality at the same price, which is equal to giving more for the money, and is therefore a form of underselling; or
2. He may give the same quantity and quality at a lower price; or
3. He may balance the lowering of his price by resorting to adulteration or the use of inferior workmanship or material; or
4. He may try to overreach his rival by employing more travellers or by advertising more extensively.
As to underselling. This is not carried on to such extremes as the theorists would have us believe.
The object of a trader is to make money. He only desires increased trade if it brings more money.
Brown and Jones make soap for sale. Each desires to get as much of the trade as he can, consistently with profits.
It will pay Brown better to sell 1000 boxes of soap at a profit of sixpence on each box than to sell 2000 boxes at a profit of twopence a box, and it will pay him better to sell 4000 boxes at a profit of twopence each than it will to sell 1000 boxes at a profit of sixpence each.