Price Wars: the Cost of a Competitive Behaviour
PRICE WARS: THE COST OF A COMPETITIVE BEHAVIOUR
Introduction
Price wars have racked industry after industry in recent years: from personal computers to mobile phones, from fast-food restaurants to airlines, from grocery retailing to computer software, from beers to frozen diet dinners, from automobile tires to disposable diapers, from detergents to underwear. All too often, there are no winners and few healthy survivors. Price wars indeed represent one of the extreme forms of competitive interplay in the market place, causing great losses. On the one hand, firms take a blow in terms of ability to innovate, consumer equity, and margins; they may forego their competitive advantage, fall victim to substitutes, and even face bankruptcy. On the other hand, consumers, benefit from lower prices in the short run. In the long run, however, they may develop unrealistic reference prices and suffer from lower quality products in the long term. In a broader contest, society may suffer from suboptimal allocation of resources.
Definitions
Basically, price wars represent competitive behaviour. Price wars are marked by competing firms struggling to undercut each other (Assael, 1990) and may occur if one company lowers its price and competitors match the price (Urban and Star, 1991). It is proposed that such wars can be viewed as "engagement involving two or more vendors seeking to achieve a goal that each is determined to attain and in which the rival vendors make successive moves and countermoves in an attempt to gain an advantage or to resist any advantage gained by the other" (Cassady, 1963, p. 2). Other researchers (e.g., Urbany and Dickson, 1991) suggest that price wars commonly start with one firm trying to take hold of market share. The result of such a price is downward price pressure that eventually drives other competitors to follow the initial move.
Moreover, price wars typify wars of attrition. According to Besanko et al. (1996), "In a war of attrition, two
Introduction
Price wars have racked industry after industry in recent years: from personal computers to mobile phones, from fast-food restaurants to airlines, from grocery retailing to computer software, from beers to frozen diet dinners, from automobile tires to disposable diapers, from detergents to underwear. All too often, there are no winners and few healthy survivors. Price wars indeed represent one of the extreme forms of competitive interplay in the market place, causing great losses. On the one hand, firms take a blow in terms of ability to innovate, consumer equity, and margins; they may forego their competitive advantage, fall victim to substitutes, and even face bankruptcy. On the other hand, consumers, benefit from lower prices in the short run. In the long run, however, they may develop unrealistic reference prices and suffer from lower quality products in the long term. In a broader contest, society may suffer from suboptimal allocation of resources.
Definitions
Basically, price wars represent competitive behaviour. Price wars are marked by competing firms struggling to undercut each other (Assael, 1990) and may occur if one company lowers its price and competitors match the price (Urban and Star, 1991). It is proposed that such wars can be viewed as "engagement involving two or more vendors seeking to achieve a goal that each is determined to attain and in which the rival vendors make successive moves and countermoves in an attempt to gain an advantage or to resist any advantage gained by the other" (Cassady, 1963, p. 2). Other researchers (e.g., Urbany and Dickson, 1991) suggest that price wars commonly start with one firm trying to take hold of market share. The result of such a price is downward price pressure that eventually drives other competitors to follow the initial move.
Moreover, price wars typify wars of attrition. According to Besanko et al. (1996), "In a war of attrition, two
References: Assael, H. (1990). Marketing. Englewood Cliffs, NJ: Prentice Hall. BBC News (Sept. 16, 2005). "UK petrol price war breaking out." Retrieved 29 November 2005 from http://news.bbc.co.uk/1/hi/business/4251964.stm. Besanko, D., Dranove, D. and Shanley, M. (1996). Economics of Strategy. New York: Wiley. Bruce, L. (July 4, 1991). Ford Lands Price Blow in U.K. Car War. International Herald Tribune. Retrieved 29 November 2005 from http://www.iht.com/articles/1991/07/04/ford.php. Busse, M.R. (2000). Firm Financial Conditions and Airline Price Wars. Working Paper, Yale School of Management, New Haven, CT. Cassady Jr., R. (1963). Price warfare in business competition: A study of abnormal competitive behavior. Paper No. 11, Bureau of Business and Economic Research, Graduate School of Business Administration. Michigan State University, East Lansing, MI. Daily Times (13 May 2002). "UK tabloids go to war." Retrieved 29 November 2005 from http://www.dailytimes.com.pk/default.asp?page=story_13-5-2002_pg4_6 Heil, O "Indian detergents price war." (May 2004). Focus on Surfactants, 5, 5. Putsis, W.P. and Dhar, R. (1998). "The many faces of competition." Marketing Letters, 9, 269–284. Slade, M.E. (1989). "Price wars in price setting supergames." Economica, 56, 295–310. Thomas, G.P Urbany, J. and Dickson, P. (1991). "Competitive price-cutting momentum and pricing reactions." Marketing Letters, 2(4), 393–402. Urban, G.L