Posted in Marketing and Strategy Terms, Total Reads: 377
Definition: Price War
It is a practice by organisations where they repeatedly cut prices below that of the competitor to get a higher market share. If started by one in the industry, it is soon followed by every other competing organisation because if one lowers the price of a product, then the competitor, by the fear of losing their customers also follows suit.
This approach can be very beneficial for the consumers as the industry standard for the price of a particular product comes down, but it can be very harmful for the companies involved as they may end up losing profit margins gravely. However, in the short run such price cuts can be good for well established incumbent organisations as the smaller, marginal companies would not be able to survive the price wars and be forced to eventually quit the market. But in the long run, this will affect the consumers negatively. If the smaller companies will quit the market, the price will be controlled highly by incumbents and the consumers may be forced to buy essential products at higher prices because of lack of options available due to reduced competition.
For example, an airline company AirLine realises that it is operating very efficiently and has accumulated a healthy bank balance, and therefore decides to cut price on its route from Delhi to Bombay, say from Rs. 5400 to Rs. 4500. The other major player(s) say AirDean starts losing its customers to AirLine and hence further reduces its prices to Rs. 4000 (say from Rs. 5454). Another player AirArrow may further reduce it to Rs. 3600. And hence the price war continues.
As shown above, the price war may continue either until the market stabilizes at Rs. 3600 and all the major players offer tickets at almost the same price, or one of the players (say AirLine) may further cut its cost, run major losses and might be forced out of the industry.