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Price war

A price war is a form of market competition in which companies within an industry engage in aggressive pricing strategies, “characterized by the repeated cutting of prices below those of competitors”.[1] This leads to a vicious cycle, where each competitor attempts to match or undercut the price of the other.[2] Competitors are driven to follow the initial price-cut due to the downward pricing pressure, referred to as “price-cutting momentum”.[3]

Heil and Helsen (2001) proposed that a price war exists only if one or more of a set of qualitative conditions are satisfied. These conditions include: (1) a primary focus on competitors rather than consumers, (2) undesirability of pricing interactions for competitors, (3) absence of intention to start a price war by any competitor, (4) violation of industry norms through competitive interactions, (5) accelerated pricing interactions in comparison to the usual pace, (6) a downward direction of pricing, and (7) unsustainable pricing interplay.[4]

While price wars can offer short-term benefits to consumers by providing them with lower prices, they can have a negative impact on the companies involved by reducing their profit margins. Moreover, the negative effects of price wars on companies can extend beyond the short term, as the companies involved may struggle to recover their lost profits and maintain their market share.[4] Firms may be cautious when engaging in price wars as this competition can lead to prices that are unsustainable for long-term profitability.[5]

  1. ^ "Definition of "Price war"". Merriam-Webster. Retrieved 23 April 2023.
  2. ^ Rao, A.R; Bergen, M.E.; Davis, S. (2000). "How to fight a price war". Harvard Business Review. 78: 107–116.
  3. ^ Urbany, J.E.; Dickson, P.R. (1991). "Competitive Price-Cutting Momentum and Pricing Reactions". Marketing Letters. 2 (4): 393–402. doi:10.1007/BF00664225. S2CID 73560463.
  4. ^ a b Heil, O.P.; Helsen, K. (2001). "Toward an Understanding of Price Wars: Their Nature and How They Erupt". International Journal of Research in Marketing. 18 (1–2): 83-98. doi:10.1016/S0167-8116(01)00033-7.
  5. ^ Slade, M.E. (1992). "Vancouver's gasoline price wars: An empirical exercise in uncovering supergame strategies". Review of Economic Studies. 59 (2): 257–276. doi:10.2307/2297954. JSTOR 2297954.

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