Cause and Effect

Cause and Effect of Price Wars

When large sums of money are at stake, many companies bend and flex to their limits to guarantee defeat over the competition. Sometimes they take a loss in one area for a gain in another area. There is a cause for every action the company makes, and in return for their action there is an effect. Although the effect can sometimes be pre-determined, no one is really sure what the outcome is going to be until the time comes.

There are millions of cars on the road today and they all require tires. When an owner replaces the tires on his or her vehicle, they can decide what make and model will be on the car. But when a buyer purchases a new car, they do not have the option of which tires they would like.

There is severe competition in today’s tire market between Goodyear, Firestone, and Michelin. They all want their tire to appear on new cars. The tires that come on the car are usually determined by who has the lowest price for the best tires. But companies can bid too low in the heat of a price war. Since the company needs to make a profit on their product, the production cost is lowered, in tern the quality of the product could be lowered.

A perfect example of this happened in 1997 between Goodyear and Firestone. They both wanted their tires to appear on the Ford Explorer. This brought a debate to the table. Who could make the better offer to Ford? Well, Firestone did. Goodyear could not match the price Firestone had offered, and at the same time meet their own quality standards. This caused Firestone to take that share of the market, and the effect of the low bid was to soon be realized.

Since Ford had accepted the low bid, Firestone did not have as much money to produce each tire. The lower price directly related to the lower quality of the tire. Also there was less budget for proper testing. Since, Firestone was quick to get their product mounted on the Explorer and on the market, the lower budgeted tire underwent poor, unrealistic testing. Investigators said that Ford never really tested these tires in real world conditions. They ran them at 90 miles per hour for 200 miles at and average temperature of 90 degrees, which is not exactly considered every day driving.