price war

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Attempt by a market competitor to drive one or more other competitors out of the market by pricing relatively lower. Before launching a price war, the initiator must be sure that it can survive a low price longer than the competitors can. The initiator is best positioned to sustain the low price if the lower price is a reflection of a true cost advantage and if competitive products have no perceived advantages. Strategies available to a competitor forced into a price war, other than matching the lower price, include adding perceived value to its product or targeting the nonprice sensitive segment of the market.

Retailers in the same line of business continually trying to underprice each other, sometimes below actual merchandise costs, as a competitive strategy to attract customers. Price wars result in low profits and often in bankruptcy. Since deregulation the major air carriers have frequently waged price wars.

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When companies continuously lower prices to undercut the competition. A price war may be used to increase revenue in the short term or as a longer term strategy to gain market share. Price wars can be prevented through strategic price management (with non-aggressive pricing), thorough understanding of the competition, or even communication with competitors.

Investopedia Says:
When a company wants to increase market share, usually the easiest way is to reduce prices, which increases product sales. The competition may be forced to follow suit if its products are similar. As prices get lower the quantity of sales increases and customers receive the benefits. Eventually, a price point is reached that only one company can afford. Some companies will even sell at a loss in an attempt to eliminate the competition completely.

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For a list of words related to price war, see:

• Commerce and Trade - price war: business competitors’ repeated lowering of prices

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