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PRICE WARS: THE COST OF A COMPETITIVE BEHAVIOUR
Introduction
Price wars have racked industry after industry in recent years: from personal computers to mobile phones, from fast-food restaurants to airlines, from grocery retailing to computer software, from beers to frozen diet dinners, from automobile tires to disposable diapers, from detergents to underwear. All too often, there are no winners ? and few healthy survivors. Price wars indeed represent one of the extreme forms of competitive interplay in the market place, causing great losses. On the one hand, firms take a blow in terms of ability to innovate, consumer equity, and margins; they may forego their competitive advantage, fall victim to substitutes, and even face bankruptcy. On the other hand, consumers, benefit from lower prices in the short run. In the long run, however, they may develop unrealistic reference prices and suffer from lower quality products in the long term. In a broader contest, society may suffer from suboptimal allocation of resources.
Definitions
Basically, price wars represent competitive behaviour. Price wars are marked by competing firms struggling to undercut each other (Assael, 1990) and may occur if one company lowers its price and competitors match the price (Urban and Star, 1991). It is proposed that such wars can be viewed as "engagement involving two or more vendors seeking to achieve a goal that each is determined to attain and in which the rival vendors?make successive moves and countermoves in an attempt to gain an advantage or to resist any advantage gained by the other" (Cassady, 1963, p. 2). Other researchers (e.g., Urbany and Dickson, 1991) suggest that price wars commonly start with one firm ...