Price War
Advantages and disadvantages of price wars for different social groups
By Nelson Rodriguez
Price war is a situation in which rivals companies try to increase the number of consumers by attracting those who are buying from other companies through price lowering (This is common for commodity products that are so similar that price reduction may look as the only alternative to gain more customers).After each reduction there is a period of stability in which all afferents have the same price, but this equilibrium is soon broken by a new price reduction thrown by the most ambitious firm, the other companies will inevitably fall into this spiral process until they can play no more, as a result only the strongest companies get to the final stages of price war. Enterprises compete with prices as a fast and apparently simple way to win over their competitor’s market; big companies can sell at cost to sink their counter parts, usually because they can produce at lower costs and/or because they can go on for longer periods with very low or no profit. According to this strategy the final control of the market will compensate the looses underwent during the process (although it seems that most economist agree on avoiding price war and looking for alternative ways to increase competitiveness).
In the short term price wars are beneficial for consumers who can take advantage of low prices in good quality products, increasing the purchasing power of people. This phenomenon is easily observable in developing economies like South America (national companies used to set high prices due to the lack of competition) but when foreign companies flood the market with equal or better quality products at a much lower price common people stops using traditional products and buy the new ones. Price war not only allows ordinary people to save money, access more and diverse products but also to acquire items priorly considered luxurious (laptop, video cameras, flat tv).
By Nelson Rodriguez
Price war is a situation in which rivals companies try to increase the number of consumers by attracting those who are buying from other companies through price lowering (This is common for commodity products that are so similar that price reduction may look as the only alternative to gain more customers).After each reduction there is a period of stability in which all afferents have the same price, but this equilibrium is soon broken by a new price reduction thrown by the most ambitious firm, the other companies will inevitably fall into this spiral process until they can play no more, as a result only the strongest companies get to the final stages of price war. Enterprises compete with prices as a fast and apparently simple way to win over their competitor’s market; big companies can sell at cost to sink their counter parts, usually because they can produce at lower costs and/or because they can go on for longer periods with very low or no profit. According to this strategy the final control of the market will compensate the looses underwent during the process (although it seems that most economist agree on avoiding price war and looking for alternative ways to increase competitiveness).
In the short term price wars are beneficial for consumers who can take advantage of low prices in good quality products, increasing the purchasing power of people. This phenomenon is easily observable in developing economies like South America (national companies used to set high prices due to the lack of competition) but when foreign companies flood the market with equal or better quality products at a much lower price common people stops using traditional products and buy the new ones. Price war not only allows ordinary people to save money, access more and diverse products but also to acquire items priorly considered luxurious (laptop, video cameras, flat tv).