The stock market proved its resilience on Friday morning, as an initial drop for the Nasdaq Composite (^IXIC -0.21%) and other major stock indexes after the release of discouraging bank earnings reports proved to be short-lived. By 10:45 a.m. ET, the Nasdaq was back to unchanged, regaining the 11,000 level and keeping some of its upward momentum from the beginning of the year.

However, shares of Tesla (TSLA 10.62%) were down sharply, opening lower by 6% before recovering to a 2% decline by mid-morning. The electric car maker has had a nice pop in its stock price to begin 2023, but its most recent business move has some investors wondering whether changing consumer demand trends could keep it from maintaining pricing discipline to maximize profits. Others, though, note that there are additional factors involved that could justify the moves.

More price cuts from Tesla

The initial decline in Tesla stock came from reports that the automaker had reduced prices for its Model 3 and Model Y electric vehicles for buyers in the U.S. and Europe. News reports based on posted prices on Tesla's website noted declines of as much as 20% in some cases, with significant disparities in percentage reductions depending on the specific configuration and options chosen on each vehicle.

Immediately, the move raised concern among bearish Tesla investors that the company was once again seeing reduced demand for its vehicles. Offering discounts is often a sign that a company has more supply than consumers want, with lower prices hopefully giving more customers the incentive they need in order to make a purchase.

Indeed, Tesla's discounting in the U.S. and Europe follows similar moves in Asia-Pacific markets recently. Price cuts in China, Japan, South Korea, and Australia had investors asking similar questions about whether demand for Tesla EVs was experiencing an unusual decline.

More bullish views on the price cuts

Yet bullish Tesla investors noted that price declines are consistent with the EV automaker's longer-term strategy. In its early years, Tesla concentrated on making high-end cars at premium prices in order to demonstrate the viability of its technology. Then, it aimed to make its vehicles accessible to a wider range of customers by introducing mass-market models at lower price points. As production capacity has increased, Tesla arguably should be able to reap efficiencies of scale that make it more competitive against rivals.

Indeed, Tesla pointed to moderating cost inflation as one factor in the price cuts. Passing on the impact of lower expenses to customers is a common way for an industry leader to demonstrate a competitive advantage.

There's also an issue relating to recently renewed tax credits that might have prompted lower prices. Due to the U.S. government's definition of vehicles eligible for an electric vehicle tax credit, many Model Y configurations didn't qualify for the $7,500 incentive because their prices were too high. The cuts bring more Model Y vehicles below the threshold for eligibility.

Let the EV wars begin

For a long time, Tesla had undisputed command of the electric vehicle market. As other automakers ramp up their EV production efforts, however, Tesla will have to deal with a different industry environment. That doesn't mean that its competitive advantages will disappear, but it will require investors to recognize that the best long-term corporate strategy for keeping would-be competitors at bay might be to take steps that hurt margins in the short run.