Race to the Bottom

Posted in Finance, Accounting and Economics Terms, Total Reads: 65
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Definition: Race to the Bottom

Race to the bottom is a phrase in economics which stands for lowering the prices, taxes or offering more attractive benefits along with a scope for loss. It is basically suffering a loss at the present moment to make up for the same in the future & to break even with an even more revenue. The profit may come as a result of attracting investors, funding which may benefit the company.


Implications:

1. It is not only confined to the prices, but also in other HR aspects, like labor laws, customer satisfaction, where companies go to any extent to satisfy the customers.

2. Implementing some of the laws may have some violent effects, when the organizations resort to any extent to implement them, or may allow scope for relaxation. It should be more subtle when they are competing based on that.

3. The phenomenon triggers lower wages for the employees, low motivation

4. Since deregulation of the business environment happens, chances are poor working conditions further coupled with environmental protection for the organization.


Advantages:

1. Reduced prices enable clients & companies to get a much better benefits if they act as the consumer.

2. The company following this principle is sure to get a much greater visibility if possible.

3. Even though the profit margin is low, or loss is suffered, the company can make up for it by means of the increased sales.


Disadvantages:

1. Too much reduction in prices can lead to monopoly for any particular company in the market

2. Price wars, as a result of race to the bottom may lead to formation of the cartels which may then affect the consumers in the long run.

3. Sometimes the quality of the service or the product may be degraded as a result of the reduction of the prices.

4. There is a scope for the jobs to be lost, when the companies try to cut down prices, and follows an approach of restructuring.

Thus, to understand the implications of “racing to the bottom” is to study the economics of the region, the organization & so on.


Example, Flipkart, Amazon & Snap-Deal had been playing the race to bottom, when any one of them goes for a price reduction, the other reacts by giving away attractive offers to sway away customers.

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