The OP insists that only two choices exist, and as some have already pointed out is a false assumption. Even a "widget" identical in every way to the competitor's discounted "widget" has the potential for product differentiation.
Ace, the act of reducing employee expenses in either pay or benefits has the unintended consequence of high turnover. Turnover is extremely costly to a business, and poorly trained employees create poorly made "widgets." The higher priced "widget" maker capitalizes on this mistake.
Edit: Oops...I am a biconceptualist.
