Price wars often tend to occur in an environment where there are multiple substitutes available for a particular product. This problem is of significance especially for a new company that is trying to introduce a new product in the marketplace and is faced with price wars with rival competitors. When confronted with the challenge, it is only the corporation that will be able to make the best products and services for its customers for the best available market price that will win the war cost challenge (Bertini, 2014). According to van Heerde, Gijsbrechts, & Pauwels (2008), price wars in the marketplace occur when new companies enter the marketplace and sell their products at a lower price than the other competitors. This often happens when the company has a name recognition with enough supporting funds. Another environmental condition where price wars tend to occur is when an industry service is seen as a commodity. A good example of such an illustration is in the airline industry, and often price wars occur when a new carrier enters in the marketplace with reduced charges for services rendered used as a strategy for the company to gain more share in the market.
Most of the price wars occur in an environment after a particular industry has reached its growth stage. The industry then enters a shakeout growth stage where at this particular point the demand for the products slows down while the growth capacity of the industry continues to grow. This lead to the creation of a gap between the industry’s demand and the capacity and often, enterprises are forced to cut down prices of their commodities to be able to increase their market share. This causes a price war in the industry, and when a company fails to strategize effectively, it can become bankrupt. The implications of the war intensify more when one company in the industry tries to make a move and the rival competitors react by undercutting their prices. As well, price wars also occur in mature industry environments that are characterized by slow growth with increased market share competition (Bertini, 2014).
When a company is faced with the price war threat, it is essential for the company to try to improve it processes in an effort of cutting down the production cost. The company should also try to plan for competition with its rivals with full knowledge that the initial product created lacks the best manufacturing process, and the rival company has developed a better way of manufacturing the product that why it can afford to sell the product at a lower price. Therefore, the company should review its production process in an effort of trying to minimize costs and building the company’s brand loyalty. As well, companies faced with the challenge may seek to consolidate the industry and become oligopolies. Mature industries often recognize their interdependence and enter into leadership price agreements to ensure that products are all sold at a similar price. However, such arrangements are not effective when the industry is faced with a declining product demand (Reinmoeller, 2014). Many companies fail when confronted with the challenge because they usually find it quite difficult to change their strategies to be able to adapt effectively to the changing competitive conditions. It is, therefore, important for a company to develop effective strategies for dealing with price wars to avoid experiencing massive losses or even going to bankruptcy.
References
Bertini, M. (2014). Price wars and the managers who start them. Business Strategy Review. http://doi.org/10.1111/j.1467-8616.2014.01122.x
Reinmoeller, P. (2014). How to win a price war. MIT Sloan Management Review, 55(3), 15–17.
van Heerde, H. J., Gijsbrechts, E., & Pauwels, K. (2008). Winners and Losers in a Major Price War. Journal of Marketing Research, 45(5), 499–518.
