Price War

A price war is a competition among the business's competitors in lowering the price of their products to gain an advantage over their competitors in price and capture a greater market share. It is used as one of the strategies to increase the business firm's revenue and increase the market share.

• A price war refers to competition among the business's competitors to lower the product prices to gain the benefits over the competitors in price and dominate the large market share. 
• One can use it to raise the business firm's revenue and market share. 
• Small firms suffer big time in this war as they cannot operate a business with less or no profits. Hence, it can be managed or triggered by business firms that can remain in the market after the price reduction. 
• Every business must have its Unique Selling Proposition (USP) to survive in the market for the long term. 

• A price war is carried out to eliminate the competitors from the market or gain an advantage over them by selling products and services at a lower price. When the cost of the goods reduces, customers would prefer to procure at a lower price, which would increase the revenue of the business firm. Customers are benefited from this process as they would pay less for the products.
• The business firms entering into a price war may not enjoy profits much or even incur losses for the initial period when they reduce the prices. That could be a short-term strategy to gain an advantage, or it may be a long-term one for capturing the market completely. When one competitor reduces its price, the other is forced to reduce its cost to sustain in business and market.
• Small firms can suffer big time in this war as they cannot run businesses with less or no profits. Therefore, it can be managed or triggered only by the business firms that can stay in the market even after reducing the prices.

Price War in the Airline Industry:

The price charged by S airlines to fly from Chicago to London is $560. S airlines compete with Xone airlines which charges $550 for the same trip. S airlines entered into a price war to attract customers, reduced its price substantially, and lowered the price to $500 per trip. To sustain itself in the market, Xone airlines also dropped its price to $490 per trip. This mechanism leads the airlines to incur losses, and customers benefit from lower prices.

Case A: When S airlines are backed by strong financial background:

S airlines will further reduce its price to $470 since strong finances back it. However, Xone airlines cannot reduce the cost since it is already incurring losses. If this continues, then Xone airlines will exit the market since it cannot sustain the price war, which reduces the healthy competition in the market, and over time, S airlines will again start increasing prices.

Case B: If Xone airlines have a unique selling proposition:

Though the S airlines reduced its price, Xone airlines can still retain the same pricing structure with special features and facilities. They can avoid it by establishing product differentiation and the value-added benefits to customers.

• In a highly competitive market, comparable goods' existence triggers a price war by reducing the price to gain an edge over its competitors.
• It is one of the ways through which the market share can be increased, which will increase the business's revenue.
• It is entered when the business wants to penetrate the established market and offers a price less than that of the existing market players.
• A business nearing the bankruptcy stage may enter into a price war by reducing the price of the products, which will improve the liquidity.

• The business that enters the war must forgo the profits to gain an advantage.
• They can avoid it through the right market strategy, proper networking, and understanding of competitors and the market.
• Big players in the market reduce prices drastically to eradicate competitors, which can impact the consumers as they are left with lesser options to choose from.
• If the business enters into a price war, affecting the brand name is high. Also, once the prices are reduced, it is not easy to increase them again.

• Customers are benefited as the price of the products is reduced.
• Companies have the advantage of getting more customers for their products.

• It can seriously impact the company’s financial performance and influence the market and the customers.
• Small business firms cannot sustain this like other big players. Over time they would close down their business.
• Once the market is captured in the process of the price war, the big players enjoy the market share and start increasing the prices again.
• It eradicates healthy competition in the market.
• Since prices are reduced, they may reduce employees' salaries and overtime. Therefore, when competition reduces, employment opportunities will also decrease.
• With a low pricing strategy, the business cannot achieve the position of the best product available in the market.

Price war gets triggered only when the products are comparable with similar aspects. If more value addition is provided in the products, customers will automatically choose the best ones. (E.g.) Audi car over Tata car.

Though the price of the Audi car is more, customers still choose it seeing the value derived from it. It is always better to make the products unique rather than lower prices and enter into price wars. Healthy competition is needed in the market and can cause long-term issues for both customers and the business.

It is good if it is a short-term strategy where both businesses and customers are benefited. However, every business should have its Unique Selling Proposition (USP) to sustain itself in the market for a longer time.

This article is a guide to a Price War meaning. Here, we discuss the price war example, the causes, and effects, with advantages and disadvantages. You may learn more about financing from the following articles: -

• Open Market Operations
• Barriers to Entry
• Imperfect Market
• Types of Bankruptcies
• Foreign Investment