Price wars in theory and practice. Market competition

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

The beginning of a price war means a sharp decrease in retail or wholesale prices by one of the market players. It is carried out for the latter's commercial gain, but usually results in losses on all sides.

Potentially favorable environment for starting wars

This situation develops with a high level of market competition between economic entities operating in the same industry. The industry should have the following characteristics:

• large number of businesses with roughly comparable market shares;
• Market growth is slow;
• fixed costs high;
• high perishable or high inventory costs;
• low costs for buyers when switching between sellers, which leads to the desire of one of them to reduce the price of similar goods;
• low differentiationgoods;
• opportunity to get high returns when taking risky actions;
• there are significant barriers to exiting the market if it is not possible to realize its potential during a market downturn;

• competitors are heterogeneous - each has its own value system, different rules;
• The restructuring of the industry is due to the insufficient size of the market for all players, therefore, as a result of the price war, the weakest economic entities leave.

Reason for confrontation

There are three main reasons for the start of a price attack by one player on others:

• Potential increase in the number of customers - this takes into account the hidden demand in market competition, which indicates that it would be possible to attract new customers if prices fell slightly;
• a small price for a small company can bring it a significant increase in sales, which will lead to additional profit, while large business entities will have to change the entire price range for their products;
• existing cost advantage - if there is, prices can be lowered, which will increase the market share of this company.

Thus, price wars also have positive aspects for individual firms.

The concept of dumping

Sometimes individual sellers reduce prices to "junk", which means their significant reduction incompared with the average market level, they may even be lower than the cost of sales. This technique is called "dumping". In price wars, it can be useful when a new player enters the market.

If this technique is used for a long time, it can lead to a sharp drop in profits for the economic entity using it, the customer base becomes unstable, since these customers will switch to him when another entity with even lower prices appears, while others buyers will assume that counterfeit goods are being sold at this point.

The consequences of price wars

Increasing the volume of sales in practice rarely leads to even the initial profit. If the price decreases by 5%, then in order to ensure the previous level of profitability, it is necessary to increase the volume of sales by 18-20%. Thus, price wars in theory and in practice are somewhat different things.

A sharp increase in sales will lead to a significant increase in variable costs.

In the vast majority of such attacks, economic entities cannot fully realize the value of products.

If this reduction in the cost of any product, which was undertaken by one of the players, turns out to be effective, other economic entities will follow, which will not allow the person who started this war to receive any significant dividends.

Another consequence of these attacks is thatsends the wrong signal to buyers, causing them to focus only on prices, ignoring the benefits of products.

A price war is usually aimed at attrition of competitors.

Positive aspects of the phenomena under consideration

As they say, if wars start, then someone needs it. Accordingly, they must benefit someone. What could it be? First of all, with a properly constructed strategy, it is possible to inflict an asymmetric response on the enemy who started this war, which may consist in the fact that the attack is carried out on the competitor's main product. Savings can be achieved by optimizing manufacturing processes and resource use. In addition, it is necessary to study the market, conduct market research and find out how important this product is for consumers. And if it is really important, you need to apply a strategy of persuasion. It is necessary to focus the consumer's focus on some unique feature of the product that is specific to your product.

Besides this, it is necessary to take into account that there is anti-dumping legislation, the possibility of combining various economic entities into some kind of corporation. It is possible to weaken the position of competitors by creating so-called "kamikaze brands" that will prevent price cuts. In most cases, their introduction is less expensive compared to the fall in the cost of a number of goods.

The biggest beneficiary is the consumer. Some of them receive high-quality goods, while others receive their usual products at reduced prices.

Thus, in a properly planned and implemented strategy, there are also positive aspects of price wars.

Examples

As an example of a price war, consider the situation that developed in the Indian shampoo market in 2004. During this period, Hindustan Lever Limited (HLL), a subsidiary of the large manufacturer Unilever, launched an attack on competitors’ offers “1 + 1 for free from Sunsilk and Clinic Plus. Two weeks later, Procter & Gamble joined this war. The head of the hair care department told the company that started the price war that they were neutralizing profits by increasing sales volume, however, after a short time he quit from there, and in February 2005, HLL announced another quarterly, fourth in a row, reduction arrived.

An example of a "predatory" strategy in such wars is the takeover of the American market by TV manufacturers from Japan. This happened due to the active supply of these goods of good quality from the Land of the Rising Sun at low prices to the US markets, which forced competitors from the latter country to curtail their production.

Another example is the price war in the transportation market. Irkutsk and Krasnoyarsk had their own airports and carriers. The Krasnoyarsk airline did not allow competitors to implement profitabletransportation. Therefore, they began to fly to Irkutsk, where they unleashed a trade war among themselves. A ticket to Moscow from this city cost two times cheaper than from Krasnoyarsk. As a result, all the carriers that moved to that city went bankrupt today.

What can start trade wars?

They may arise from a misinterpretation of the actions of competitors or the same interpretation of their reactions. Another option for their start is the case in which one of the competitors releases a product of higher quality, which leads to a revaluation of currently existing brands. As a result, rivals in the trade reduce prices, and the opposite side may perceive this as the beginning of a price war.

Strategies to prevent such "military action"

There are four main such strategies:

• buyer needs to be presented with information about the benefits of products, not prices;
• you need to be able to clearly articulate your intentions;
• must take into account the reaction of competitors when releasing new products;
• if you are going to respond to the actions of trading opponents, then first you need to study all the available facts.

Before the start of "military operations", you can try to implement non-price solutions. They may boil down to:

• need to focus on quality versus price;
• need to be notifiedbuyers about possible risks - special emphasis on the reduced quality of competitors' products;
• focus on other negative consequences, such as the fact that competitors' products can harm the environment;
• need to seek support from other stakeholders.

Also, when engaging in trade wars, visual imagery can help. For example, if one of the electricity suppliers goes bankrupt, the emphasis can be on the dangers of low prices, as the supplier may go bankrupt. The visual image here will be the fact of a power outage for consumers who receive electricity from a bankrupt.

Price war can be prevented by offering large buyers conditions suitable for them.

Response actions can be reduced to any one segment.

If it is impossible to get away from the confrontation, prices should be reduced as much as possible in order to confuse the enemy, and then return to the usual price range.

In conclusion

Price wars can only be carried out if, according to their instigator, there is a significant probability of latent demand with limited ability to respond to competitors.