Price wars are spreading in the industry

Symptom: As competitive pressure has intensified, some competitors have resorted to discounting, which has triggered the industry's price wars.

Implications for the market:

  • Price wars tend to train customers to focus on price. The onset of hostility often brings price competition, and the intensity of that competition teaches customers to choose products on the basis simply of price, rather than on other differentiating factors such as features, quality, or ease of purchase. From the supplier's point of view, this is undesirable since price discounts can almost always be matched immediately and do not offer the basis for any sustainable competitive advantage.

  • This price competition is almost certain to last for several years, while it gradually loses its ability to move market share.

    • In the stage immediately preceding hostility, price discounting can successfully move share, especially if industry leaders do not match it.

    • These discounting competitors are rewarded with growth and initiate new rounds of discounts, bringing prices ever lower.

    • After the first few years, though, price competition causes all competitors to suffer but brings little share change, since customers have learned that they can demand and get the low market price from their current suppliers.

    • As the industry evolves through several rounds of price cutting, market participants begin to realize the ineffectiveness of this share-gaining tactic. Only then will price cutting cease.

Recommended Reading
For a greater overall perspective on this subject, we recommend the following related items:


Perspectives: Conclusions we have reached as a result of our long-term study and observations.

  • "Can We Raise Margins With A Price Increase?"
    Before a company commits itself to a price increase, it should check marginal costs in the industry and the ability of low cost producers to expand.

  • "The Myth of the Hockey Stick"
    From the early stages of hostility, real improvement in price was a long time in coming.

  • "The Wisdom of Salomon"
    In the late 80s', the investment banking firm of Salomon Inc. decided to leave the municipal bond market – a market the firm had lead. This withdrawal showed just how limited management's options are when a market goes into overcapacity and how the best choice under such conditions may be the painful decision to leave the industry.

  • "What Ends Hostility?"
    The challenge for business leaders is to recognize the true end of a hostile market place when it arrives and to avoid being deceived by a temporary ending.