Price war
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A price war is a situation in which companies in a certain market compete with one another by continually reducing their prices in order to gain a larger share of the market. This type of competition typically results in a decrease in profits for all firms involved. Ultimately, a price war can result in a decrease in demand for goods and services within the market, as consumers are less likely to purchase goods and services at the lower prices.
Price wars are often used by companies as a strategy to gain an advantage over their competitors. Companies may lower their prices in order to drive out competitors or to gain customers away from their competitors. Companies may also lower prices in order to entice new customers to purchase their products and services.
Price wars can also be caused by changes in supply and demand within a certain market. For example, if a market experiences an increase in supply, companies may reduce their prices in order to sell their products and services in order to remain competitive. On the other hand, if there is a decrease in demand, companies may also lower their prices in order to attract more customers.
Example of Price war
In a classic example of a price war, two companies in the same market will reduce their prices in order to gain a larger market share. This type of competition will result in a decrease in profits for both companies, as they are each selling their products and services at a lower price in order to remain competitive. Ultimately, this type of competition can result in a decrease in demand for goods and services within the market, as consumers are less likely to purchase goods and services at the lower prices.
The companies may also use tactics such as promotional discounts, bundled packages, and other incentives in order to attract more customers. In some cases, companies may even enter into a price war in order to drive out their competitors, as they will be unable to compete with the lower prices.
In conclusion, a classic example of a price war is two companies in the same market reducing their prices in order to gain a larger market share. This type of competition results in a decrease in profits for both companies, as well as a decrease in demand for goods and services within the market. Companies may also use tactics such as promotional discounts, bundled packages, and other incentives in order to attract more customers.
When to use Price war
Price wars can be a useful tool for companies to gain an advantage in the market and to increase their market share. Some of the most common situations in which a price war may be beneficial for a company include:
- When a company is looking to gain a larger market share: By lowering prices, companies can attract more customers and increase their market share.
- When there is an increase in competition: By lowering prices, companies can gain an advantage over their competitors and drive them out of the market.
- When there is a decrease in demand: By lowering prices, companies can increase demand for their products and services and attract more customers.
Types of Price war
- Price Skimming: Price skimming occurs when a company sets a high initial price when a new product is introduced to the market. This allows the company to make a higher profit at the beginning, but as the demand for the product decreases, the company will lower its prices in order to keep sales up.
- Price Discrimination: Price discrimination occurs when a company charges different prices to different customers based on their willingness to pay. This allows the company to maximize its profits by charging more to customers who are willing to pay more.
- Price Leadership: Price leadership is used when one company sets a price in the market, and other companies follow suit. This is often done by the company that is the market leader in order to maintain their position as the leader and to prevent any other competitors from entering the market.
Steps of Price war
- Step 1: Identify the Competition: In order to participate in a price war, companies first need to identify their competitors in the market. Companies should look at the prices of competitors in the same market and evaluate how their prices compare.
- Step 2: Set a Price: Once the competition has been identified, companies need to decide on a price that they want to set for their product or service. Companies should consider the prices of their competitors, as well as the costs associated with producing and distributing their product or service.
- Step 3: Monitor Prices: Companies need to continually monitor the prices of their competitors to ensure that they remain competitive in the market. Companies should also be aware of any changes in the market that could affect their prices.
- Step 4: Respond to Changes: Finally, companies need to be prepared to respond to any changes in the market. If competitors lower their prices, companies may need to lower their prices in order to remain competitive.
Advantages of Price war
- Price wars can lead to increased competition and innovation within a certain market. Companies may be forced to develop new products or services in order to remain competitive, which can lead to increased consumer satisfaction.
- Price wars can also lead to lower prices for consumers. Companies may reduce their prices in order to gain a larger share of the market, resulting in lower prices for consumers.
- Price wars can also lead to increased profits for companies. Companies may reduce their prices in order to entice new customers to purchase their products and services, resulting in increased profits.
Limitations of Price war
Price wars have several potential drawbacks that may affect firms involved. These include:
- Reduced profit margins: Price wars can lead to reduced profit margins for all firms involved as prices are continually lowered. This can affect a company's ability to sustain itself in the long-term.
- Increased cost of production: As prices are lowered, firms may be forced to reduce the cost of production in order to remain competitive. This can lead to a decrease in the quality of products and services offered.
- Reduced market share: Price wars can lead to a decrease in market share for firms as competitors enter the market with lower prices.
- Negative public perception: Price wars can have a negative impact on a company's reputation as customers may perceive the company as being desperate to gain market share.
There are a variety of other approaches that companies can take to compete with one another in a market. These include:
- Differentiation: Companies may attempt to differentiate themselves from their competitors by offering unique features and benefits that their competitors do not have. This can include higher quality products, better customer service, and specialized services.
- Innovation: Companies may attempt to innovate by introducing new products and services that are more advanced or efficient than those of their competitors.
- Strategic partnerships: Companies may form strategic partnerships with other companies in order to gain access to new markets and customers.
- Advertising: Companies may use advertising to increase their visibility and create brand recognition.
In conclusion, companies may use a variety of different approaches to compete with one another in a market. These include differentiation, innovation, strategic partnerships, and advertising. By using these strategies, companies can gain a competitive advantage and increase their market share.
Suggested literature
- Rao, A. R., Bergen, M. E., & Davis, S. (2000). How to fight a price war. Harvard business review, 78(2), 107-120.
- Van Heerde, H. J., Gijsbrechts, E., & Pauwels, K. (2008). Winners and losers in a major price war. Journal of Marketing Research, 45(5), 499-518.
- Krämer, A., Jung, M., & Burgartz, T. (2016). A small step from price competition to price war: understanding causes, effects and possible countermeasures. International Business Research, 9(3), 1-13.
