How to Fight a Price War Essay

5507 Words Aug 2nd, 2016 23 Pages
If you find yourself

facing a price war, you'll need to understand how it started in order to respond effectively.
Often the best counterattack does not. involve a retaliatory price

How by Akshay R. Rao,
Mark E. Bergen, and


^ 1




Scott Davis


companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice - and frequently the skirmishing degenerates into a price war.
Creating low-price appeal is often the goal, hut the result of one retaliatory price slashing after another is often a precipitous decline in industry profits.
Look at the airline price wars of r992. When American Airlines, Northwest Airlines,
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• E-Trade and other electronic hrokers are changing the competitive terrain of financial services with their extraordinarily low-prieed brokerage services. The prevailing price for discount trades has fallen from $30 to $15 to $8 in the past few years.
There is little doubt, in the first example, that the major players in the long-distance phone business are in a price war. Price reductions, per-second billing, and free ealls are the principal weapons the players hring to the competitive arena. There is little talk from any of the carriers ahout service, qual-

Price wars are becoming more common because managers tend to view a price change as an easy, quick, and reversible action. ity, brand equity, and other nonpriee factors that might add value to a product or service. Virtually every eompetitive move is based on price, and every counter measure is a retaliatory price cut.
In the second example, the competitive situation is subtly different - and yet still very much a price war. E-Trade's success demonstrates how the emergence of the Internet has fundamentally changed the cost of doing business. Consequently, even businesses such as Charles Schwab, which used to compete primarily on low-price appeal, are chanting
Aksbay R, Rao is an associate professor and coordinator of the doctoral program in the department of marketing at the University of Minnesota's Carlson School of Management in Minneapolis. Mark E. Bergen is an

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