Price Wars: The Cost of a Competitive Behavior 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 or more parties expend resources battling with each other" (p. 426). Likewise, it is maintained that such warfare is a period in which the firms set prices that are significantly below the prices commonly charged in the industry (Busse, 2000). According to Slade (1989) price wars entail that one competitor cuts price to punish another competitor for violating a rule of competitive conduct. Consequently, the firm to be punished reacts through another price cut, prompting further such cuts by the competitor, and so on.
According to businesses who supply to Woolworths and Coles, for Woolworths and Coles to be able to sell products at low prices, they would exert their market power on suppliers whose majority of products were sold to them and were dependant on them to operate. The suppliers were pressured to reduce their prices or threatened be released as a supplier. This effectively forced suppliers to drop prices or lose their largest source of revenue and potentially result in closing down. The long-term implications of this would be that as suppliers are unable to sustain their business due to price cuts, they would close down and result in many brands ceasing to exist. This would greatly impact consumers as it would reduce the range of products and limit consumer choice. The low prices also create a high barrier to entry for new businesses and effectively run smaller retailers out of business, further reducing the already low level of competition. This would additionally negatively impact consumers because as the level of competition decreases, prices for consumers would rise due to the lack of
We the consumer would rather pay less for any product that is needed or want. Ultimately we are the reason for high prices as well as low prices. Prices of products do not always stay the same and more popular products have higher prices than less popular products. These fluctuations, high prices and low prices are from the idea of supply and demand. Supply and demand defines the effect that the availability of a particular product and the desire or demand for that product has on price. Generally, if there is a low supply and a high demand, the price will be high (Investopedia). To understand the idea of supply and demand, the understanding of supply and the understanding of demand must be defined. The Law of Supply states that at higher prices, producers are willing to offer more products for sale than at lower prices, also that the supply increases as prices increase and decreases as prices decrease (Curriculum Link). The Law of Demand states people will buy more of a product at a lower price than at a higher price, if nothing changes, at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price and that at lower prices, people tend to buy some goods as a substitute for others more expensive (Curriculum Link). In todays economics these ideas are seen frequently in everyday life. The laws of supply and demand are seen in many ways in the company Apple Inc. Each year Apple Inc unveils a long awaited mobile operating system and IPhone. We can also see many aspects of the law of supply and demand in Nike Inc’s Jordan Brand. Jordan Brand has released a number of...
A perfect competition is a microeconomics idea that depicts a market sector structure controlled totally by market sector powers. In a perfectly competitive market sector, all organizations offer indistinguishable products and services. Firms could not control winning market sector costs, piece of the overall industry per firm is little, firms and clients have immaculate learning about the market, and no boundaries to passage or way out exist. If by any chance that any of these conditions are not met, a market sector is not perfectly competitive. Perfect competition is a conceptual idea that happens in economics aspects course books. However, not in this present reality. Imperfect competition, in which a focused market sector does not meet
According to Neill (1992), “It’s time to stop sacrificing the economic wellbeing of the vast majority of Americans and our children’s future in order to underwrite the conspicuous consumption of the very rich” (p. 114). Monopolies are the only ones that can produce certain merchandises in a specific market. With no alternative product to buy, monopolies often brand their products as luxurious items and in return driving prices up. The insights of the monopoly model suggest some of the problems that arise from monopoly power are restricting output, artificially higher prices, lower quality, and persistent profits.
In the article. “What’s wrong with price gouging”, by Jeff Jacoby, talks about, why it is not a good idea to increase prices at more than a higher expectation when there is a sudden shortage. This article is referring to the massive pipe break that more than dozens of town in Boston without drinking clean water over the weekend. After the aftermath, the prices of bottled water increased. Massachusetts Attorney General, Martha Coakley insisted the vendors not to increase the prices of bottled water since consumers would not be willing to buy at that given price. After hearing anecdotal reports of price gouging of water bottles. Martha Coakley stated
Ford competes with other automobile industries on many factors such as price, quality, reliability, appearance, available features, and fuel economy just to name a few. Such intense competition within the automobile industry tends to put downwards pressure on prices, making it harder for Ford to put a price on vehicles that are similar to other cars produced by competitors. The challenging price environment puts pressure on Ford to increase value to customers while trying to dramatically reduce costs to achieve the similar pricing of competitors. Ford must be able to reasonably price vehicles so that customers still feel as if they are getting the best car for their money. Competitive pricing is a threat to Ford because it must increasingly rely on customer perceived value to differentiate its car quality from its competitors. Ford must be able to justify its pricing in an industry where resembling cars have similar pricing and nearly identical features. Ford’s pricing objectives must somehow be achieved as other competitors are cutting costs and improving their vehicles. Negative pricing pressure threatens Ford’s ability to provide outstanding value to its customers for smaller or comparable pricing within the competitive automobile
Rivalry among established firms is fierce. There are several factors that illustrate this: established market players (6.1). The product is highly standardized and the switching costs of the customers are low. Players are aggressive (6.2)
Pricing is an important aspect of every business. Chief Financial Officer’s (CFO) use pricing to create financial projections, establish a break-even point, and calculate profit and loss margins (Power Point, 2005). It is the only element in the marketing mix that produces revenue. Price is also one of the most flexible elements of the marketing mix as it can be changed very quickly. This is usually done to beat competitor prices in an attempt to fix the product’s market value position very low (Anderson & Bailey, 1998). After all, high prices make it difficult to become the market share leader. The leading US retailer, Wal-Mart, is an expert at low product pricing as evident in 2004 with $250 billion dollars in sales to their 138 million weekly shoppers. However, they are also responsible for reducing prices so low that it drives specialty stores out of business. This is the effect Wal-mart has had on many toy stores and has almost closed the doors of the famous toy store Toys “R” Us Inc.
Realizing that fierce price war in China’s color television industry brought them ever-decreasing profit margins hard to bear, in 2000, some core members of the color TV industry formed a price alliance intended to stifle the price war and re-establish their leadership in the value chain of home appliance. Responding to the price control, Gome initiated its powerful strike by lowering the price of Prima’s (a member of the alliance) color televisions to an extent lower than the price laid down by the alliance. The consumers’ response confirmed Gome’s low prices strategy at the beginning, while the allied manufacturer’s once again signal of price control was obviously aimed at Gome’s defiant market strategy.
But since " price wars" only lead to a loss in revenue for these firms
Firms with market power or monopolies are often seen as detrimental for customers and economic welfare. According to the neoclassical theory, the market power of monopolies and oligopolies is potentially higher than that of firms in monopolistic or perfect competition since they have to face very limited competition, if any (Ferguson and Ferguson 1994). In monopolistic or perfect competition can make supernormal profits in the short term but eventually other firms will enter the market and offer alternative products that reduce the demand for the established firm’s products (Sloman et al., 2013 p. 177). Dissimilarly, this is not the case for dominant firms or monopolies; the lack of competition allows them to set prices and make supernormal profits increasing the perception that big companies are “bad” for consumers. As shown by the graphs in Figure 1 and 2, there are substantial differences in the competitive and monopoly markets. In a competitive environment, the equilibrium is reached where demand meets supply. In a monopolistic market, thanks to the establishment of higher prices and the production of lower quantities, monopolies or dominant firms make supernormal profits; additionally, there is a deadweight loss and some consumers who were willing to pay lower prices wil...
Markets have four different structures which need different "attitudes" from the suppliers in order to enter, compete and effectively gain share in the market. When competing, one can be in a perfect competition, in a monopolistic competition an oligopoly or a monopoly [1]. Each of these structures ensures different situations in regards to competition from a perfect competition where firms compete all being equal in terms of threats and opportunities, in terms of the homogeneity of the products sold, ensuring that every competitor has the same chance to get a share of the market, to the other end of the scale where we have monopolies whereby one company alone dominates the whole market not allowing any other company to enter the market selling the product (or service) at its price.
An oligopolistic market has a small number of sellers dominating market share and therefore barriers to entry are high. These sellers are highly competitive and do not act independently of each other. Access to information is limited so sellers can only speculate of their competitor’s actions. Sellers will take advantage of competitor’s price changes in order to increase market share.
1. Intensity of rivalry among competitors- there is intense rivalry among the automobile industry. There is only a handful of companies in the world, and it is war to survive.
...n the companies will have to decrease the price otherwise the product will not be sold at higher prices and the revenue would not be as large as companies would like to.