Price war is a term used in business to indicate a state of intense competitive rivalry accompanied by a multi-lateral series of price reductions. One competitor will lower its price, then others will lower their prices to match . If one of the reactors reduces their price below the original price cut, then a new round of reductions is initiated. In the short-term, price wars are good for consumers that are able to take advantage of lower prices. Typically they are not good for the companies involved. The lower prices reduce profit margins and can threaten survival.
In the long term, they can be good for the dominant firms in the industry however. Typically the smaller more marginal firms will be unable to compete and will shut down. The remaining firms absorb the market share of the terminated ones. The main losers then, are the marginal firms and the people that invested in them. In the long-term, the consumer could lose also. With fewer firms in the industry, prices tend to increase, sometimes to a level higher than before the price war.
The main reasons that price wars occur are:
To utilize excess plant capacity. Rather than run a plant at well below its optimum capacity, firms reduce their prices so as to sell enough to keep the plant running at its optimum level.
Bankruptcy and survival. Companies near bankruptcy may be forced to reduce their prices so as to increase sales volume and thereby provide enough liquidity for survival.
Response to a competitive attack. A competitor might target your product and attempt to gain share from you by selling a product at a low price. Rather than retaliate with a matching price cut, it is usually better to introduce a fighting brand (see brand management).
The nature of the product. Some products, such as commodities, are very difficult to differentiate. Without unique product features, price becomes the main basis of comparison.
Penetration pricing. If some of the firms are employing a penetration pricing strategy, their prices will be relatively low.
Oligopoly. If the industry structure is oligopolistic (that is, few competitors), the players will closely monitor each others prices and be prepare to respond to any price cuts.
Thus, during the 010 pricewar, one broker is always being undercut by another, resulting in zero profit for that broker, while during the 101 pricewar two brokers are always being undercut by the lowest-priced one.
During the 010 pricewar, a single broker is left to offer both categories 1 and 3, which is unsatisfactory to consumers who are highly interested only in one of the two categories.
On the whole, the pricewars tend not to be quite as devastating as they are in societies consisting entirely of myoptimals, because they often involve brokers that are only partially in competition with one another, so a broker that is being undercut in price may still retain some customers.
A successful pricewar was the one Philip Morris began on Marlboro Friday, 2nd April 1993.
The pricewar largely destroyed the cheap brands, and American Tobacco quit the market altogether, selling the remains of their operations to BAT (a committed segment manufacturer).
The pricewar continued through the winter, with both companies filling their coaches but draining their revenues.
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