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Price Wars in International Business

Keywords: price wars economics,

Introduction

'Price wars' are characterized by competing firms struggling to undercut one another's prices (Assael, 1990). Price wars are a universal phenomenon that touches practically every industry - telecommunication, retail, airlines, groceries. A circumstance of price wars makes existence in market situation wherein lots of players compete to gain a larger share of the marketplace by primarily minimizing the price tag on goods or services they are advertising. Companies find price as a logical weapon of choice because it is easy to improve fast (Kalra, Raju and Srinivasan, 1998). Within the short run, this may seem profitable as it helps the business gain a more substantial market share by higher market penetration. The clients also stands to get from these price wars in the brief run, as they are able to benefit from the unpredictable manner of prices offered by the competing businesses. However, in the long run, price wars end up being suicidal for the organizations engaging in it and for his or her customers too. Price wars over time lead to lots of smaller businesses to shut down, as they can not continue to operate at such low profit margins like dominant organizations can. This leads to a reduction in the amount of players on the market, which in turn might trigger a rise in prices of the products / services to a level higher than it was prior to the onset of the price wars. Thus no subject who wins, the combatants all seem to be to end up worse off than before they signed up with fight ( Akshay Rao, Mark Bergen & Scott Davis, 2000) Despite this fact, price wars have become more common and fiercer in their strength.

While multiple causes such as change in strategy within a set of oligopolists, demand fluctuations, finances of the initiator, price image improvement or industry rationalization can be attributed to initiation of a cost conflict, however, research demonstrates most price wars are induced either by incorrect examination of market signals or misunderstanding of your competitor's motives. When price battle is used as deliberate technique, companies need to examine their finances and weigh the price of a price battle on present vs future increases and deficits (Meghan Busse, 2002).

The threat of price war is real in today's global and super competitive market. Since price wars influence profitability and the very success of companies, they need to anticipate to meet this challenge. Companies that contain survived price wars have invariably cracked clear of the "most reasonably priced" symptoms and focussed on technology and creative ways to reinvent and reframe the best way to do business.

Why do price wars start?

Profit maximization and market penetration are the key parameters that determine the success of a company. In their fight to fully capture customers, companies use a number of tactics, however price appears to be a weapon of choice as it is fast to perform and reversible (Akshay Rao, Draw Bergen & Scott Davis, 2000).

Price wars arise due to a variety of reasons not restricted to any one industry or to the lowest charged distributor. In market sections where product differentiation in a number of goods is not very apparent price becomes one of the most crucial customer decision points (Exhibit 1). Firms make an effort to decrease the price of goods / services to catch the attention of a more substantial customer foundation with the reduced price behaving as a penetration price supporting the organization gain higher market share. Specific niche market industries or those with high product differentiation are less susceptible to price manipulations while industries with low capacity utilization and a declining demand or in which a few large customers have the ability to influence prices are definitely more vulnerable than others to price wars (Display1).

Economists provide a number of reasons for price wars to can be found. Many companies across establishments have avoided competition by working collaboratively as cartels to improve prices and gains. Stigler (1964) argued that cartel gains induce cheating or accessibility. This in turn leads to a cost war, and the collusion disintegrates as was noticeable in the bromine price wars (Margaret Levenstein, 1997). Although some cartels do well, others fail anticipated to misjudgment of competition reactions, failure to monitor competitor price and output levels, incorrect interpretation of market information, access of new market players or therefore of technological changes. The threat of price wars has been used by cartels to stimulate individual organizations to cooperate and sign up for the cartel (Friedman, 1971); while at times it has been used by companies as an instrument to punish and to keep their profitability secure. On the other hand, game theorists have argued that price wars may be necessary for cartel stability, and they occur in response to exogenous shocks(Green and Porter [1984], Abreu, Pearce, and Stacchetti [1986]. Julio J Rotemberg and Garth Saloner (1986) support a contrarian view that price wars happen from business pattern fluctuations even with perfect information.

Oligopolistic marketplaces witness higher price wars as the rival firms can keep an in depth watch on the price of which other firms are available their goods/ services. Within a set of oligopolists, price warfare signifies a change in strategy and non cooperative tendencies. In the air travel industry price wars take place when there is certainly idle capacity and low demand, however due to cyclical aspect of the industry where demand fluctuations are normal, price wars also occur both during low and popular periods (Saloner, 1986; Haltiwanger and Harrington, 1991). In response to price cuts, competition reduce their prices further to draw in customers, thus marking the beginning of a downward price spiral. Dominant businesses that are cash rich vacation resort to predatory prices to create obstacles to entry and by creating an 'manufactured' competitive environment for the new entrants to operate a vehicle them out whereas, in the case of financially weak organizations the cost of present gains through increased sales outweighs the erosion of future value that a price warfare may bring to it.

It is mistakenly presumed that price wars are usually started by the lowest priced competitor; even highest priced suppliers can begin price wars within their business strategy. In a well balanced market show environment the "perceived benefits to price romance" can be indicated linearly with customers in a position to choose price points for the huge benefits they desire. However, in unstable market share conditions this equilibrium is disturbed by the talk about gainers through recognized value enlargement of the merchandise or service at same or cheap points. Within their effort to capture additional market talk about, the premium dealer supplies the new increased value product/ service at lower prices and starts off a price war.

Why do firms avoid entering a price war?

Price is the most hypersensitive economic lever in business (Robert Garda, Michael Marn, 1993) and income of businesses are directly impacted by a decline in average prices. Firms need to understand that price elasticity's due to additional sales volume credited to a reduction in the price of a good / service is not enough to compensate for the decrease in prices resulting from a price warfare. When the combat is on price only, this effect of additional quantities is temporary as your competition will follow suit in lowering prices. Price wars are counter intuitive, in order to appeal to a pool of 'price sensitive' customers, why would organizations reduce their price to levels at which monetary sustainability may be troublesome? In such situations, success for a company or its competition is temporary if price is really the only differentiating factor for the client to decide.

Price wars invariably bring in regards to a change in customer perception. Customer conception of a price versus the power derived from a good / service is instrumental in deciding the success for the organization and subsequently continued customer devotion. Low prices that result from a price warfare lead to a lower anchor price (reference point price) in the imagination of a person. The customer gets used to being serviced at a certain good deal consequently of the price war. When organizations that did engage in the price conflict try and revert to the bigger pre price battle levels they face customer amount of resistance with customers re-analyzing recognized benefits versus the new prices and seeking other cheaper alternatives. The low prices associated price wars influence a customer's notion of what is a "reasonable" price long following the conflict ends (Garda and Marn, 1993). Inside the airline price wars of the 1990s, prices of air tickets were cut in an attempt to draw a greater pool of travelers. As the airline sector suffered major losses, when the same airlines attempted to increase fares, a sizable quantity of customers didn't accept the price rise because they had a lesser 'guide price' from the price of flights (Busse, 2002).

Price wars are instrumental in unbalancing the "perceived value - price " relationship that is accessible in market. It triggers customer's understanding to these becoming skewed towards price sensitivities at the price tag on benefits and quality of goods/ services. In such situations industries run the risk of discovering a collapse popular levels once prices stop dropping. It is therefore in the interest of organizations to emphasize the value benefit to the client instead of the purchase price benefit. By appropriately understanding the total amount and value of incremental benefits on offer firms create long-term financial benefits and sustainable advantage. High quality brand organizations avoid entering price wars thus protecting their brand collateral by using selective costing options, loyalty programs or like McDonald by creating alternative product packaging for burgers (as value dishes) when threatened by Taco Bell's costs.

Firms involved with predatory pricing use this tactic to move towards a far more monopolistic market condition where they could be the purchase price setters and push weak competitors to exit the market. However, firms wanting to engage in price wars because of this need to remember that strong laws and regulations exist to safeguard smaller players on the market. Thus it will always be advisable for a company to stay away from a price conflict. A price warfare does not help any organization over time and neither will it really help the industry grow on the whole.

Conclusion

The paper targets price wars as an industry wide phenomenon caused not only by external market conditions but also by interior characteristics of organizations like it's financial health, position on the market and even at times as part of a proper thought market strategy. Invariably price wars impact success of the industry, with both initiators and followers in a cost war finish up without any sustainable benefits and an erosion with their economical value.

Companies do not always to react by retaliatory price slashes as such move erodes their brand collateral, they instead want to target more on quality as against price as a determinant of value. Even for customers, while such price cuts may appear beneficial for a while, finally they lead to a threat of low quality products/ services.

Because price wars are so damaging economically, all advisable organizations need to be prepared to manage such eventualities. As time passes it is seen that while elimination is best cure, there are some key steps companies have to take to prevent the starting point of such an environment. Managers need to continually re-examine their costs initiatives to ensure that their activities do not contribute to any competitive misread and the creation or expansion of a cost war in the industry (Garda and Marn, 1993). By creating price command, companies avoid price slices and retain income by using different techniques from predatory costs, financial abuse and diplomacy to rein in errant companies endeavoring to initiate a cost war. Finally price wars can never be gained, the victor and the vanquished both are affected the consequences to different diplomas.

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