How to Fight a Price War

5490 Words Sep 9th, 2012 22 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
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War
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by Akshay R. Rao, Mark E. Bergen, and

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HARVARD BUSINESS REVIEW March-April 2000

N THE BATTLE TO CAPTURE THE CUSTOMER,

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,
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By understanding their causes and characteristics, managers can make sensihle decisions about when and how to fight a price war, when to flee one-and even when to start one. The first step, then, is diagnosis. Consider a small commodities supplier that suddenly found that its largest competitor had slashed prices to a level well below the small company 's costs. One option the smaller company considered was to lower its price in a tit-for-tat move. But that price would have heen below the suppher 's marginal cost; it would have suffered debilitating losses. Fortunately, a few phone calls revealed that its adversary was attempting to drive the supplier out of the local market by underpricing its products locally but maintaining high prices elsewhere. The supplier correctly diagnosed the pricing move as predatory and elected to do two things. First, the manager called customers in the competitor 's home market to let them know that the price-cutter was offering special deals in another market. Second, he called local customers
HARVARD BUSINESS REVIEW March-April 2000

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
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