Minimising the pain of price wars
Price wars, like other forms of aggressive pricing (such as predatory pricing and loss leading), are strategic in nature. Firms will only make drastic cuts to prices now if they believe that there may be a longer-term gain. After a price war, however, the gain materialises remarkably rarely, and persists still more infrequently.
Many price wars are embarked on misguidedly or even by mistake – triggered by firms who have misinterpreted rivals’ strategies, or who are too focused on short-term results. This is a particularly strong but dangerous temptation when firms are worried about an economic downturn. This bulletin explains how and why price wars occur - and what to do if you find yourself in the middle of one.