A price war occurs when two 𝓀or more rival companies lower the prices of their products or services to steal customers from their competitors or gain market share.

Price wars come at a significant albeit temporary cost because they decrease a company's profit margins in the short term. It can lead to more profitability in the long term if the company gains a sizable increase in market share, particularly if the competition is no longer a viable threat.

How Price Wars Work

The companies involved and the consumers being courted can experience several pros a💦nd cons in price wars.

A Company Lowers Its Prices

🐻Lowering prices is one of the most common strategies that companies use to increase market share for a product. A price war begins if their competitors also lower their🙈 prices.

Price wars are most common in industries where there's both heavy competition and comparable products. There's an incentive for a competitor to cut prices to gain a greater share of the market under these conditions.

Competitors Slash Their Prices

The competing companies are often forced to follow suit and lower their own prices. The nu🅠mber of sales for the products increases as a result but each product is sold for a lower price and this leads to lower profits in the short term.

One of the competing companies reaches its breaking point at some point. It can't afford to lower its prices more. It risks losing profits and potentially harming its long-term viability. Companies with fewer financial resources may even be driven out of business.

Lower prices on certain products are often accompanied by offers of extra products and/or services or incentives to switch🧸 brands. Some marketing strategies might include offering a free subscription-based service for one year, added services with a product purchase, or a buy-one-get-one-free (BOGO) offer. 

The idea behind a price war is to gain market share and hurt the competition through wh⭕atever🐠 strategy is employed.

Advantages of Price Wars

Lower prices mean saving𓂃s for consumers. They may also get additional products and services offered as part of🌊 the deal.

The benefits can be substantial for big-ticket items. Consumers might be able to score higher-end models that would otherwise have been too expensive when car companies engage in a price war. They might also be able to get better financing or better service terms such as a longer warranty, all thanks to the price war🌸.

Companies and workers can benefit from price wars because the winning company can become more financiallꦡy profitable and ensure its longevity and this can lead to more jobs for the economy.

Disadvantages of Price Wars

There can be serious 💧consequences from price wars. Consumers are left with fewer choices in the end if a large firm drives competitors out of business through aggressive price🧜-cutting.

The remaining company gains pricing power over time because there are no competit🃏ors. A compa🧸ny that has gained a sizable market share can raise prices at will.

Workers are left with fewer 𝓀companies that need their skills. The damage from price wars can be especially harsh in regions that have only a few large employers. Workers are♒ forced to either accept lower-paying jobs or move to find different jobs.

How Firms Can Respond

An article published by American Express argues that the best response to a price war is to sidestep direct conflict through a variety of strategies.

One possible tactic is to 澳洲幸运5开奖号码历史查询:differentiate the firm's product offering from that of the lower-cost competitor. A firm will be in a better position to preserve its pricing power if it can offer a product that is unique or superior or augment its value with future discounts and bundled freebies.

Examples of Price Wars

Price wars have typically consisted of companies offering commodities but they've expanded to include companies offering a wide array of services. The marketing strategy includes lowering the prices of products but charging for related services down the road.

Brokerage Price War

Broke🀅rage firms were engaged in a priceও war in 2018 and 2019 in an attempt to gain customers.

澳洲幸运5开奖号码历史查询:Exchange-traded funds (ETFs) had become extremely popular investment products for investors because of their ve🐓ry low fees. ETFs contain stocks or other investments that𝓡 track an index, such as the S&P 500.

Investors typically paid commissions for buying and selling ETFs just as they did for stocks. 澳洲幸运5开奖号码历史查询:Charles Schwab was one of the first brokers to offer zero transaction fees for ETFs.

Fidelity Investments quickly fired back, striking a deal with iShares to offer a choice of several no-transaction-fee ETFs for its customers. Vanguard also moved to offer its ETFs with no trading fees. All the major online brokerages were offering free transactions for stock trades as well as ETFs by the time the pri🤡ce war came to an end.

💧 The goal of a price war for brokers like Schwab was to gain new clients and their deposits and allow the firm to cross-sell its banking products and wealth management advisory services.

2020 Oil Price War

Another example is the 2020 price war between Russia and Saudi Arabia which ultimately led to a 65% drop in oil prices.

The price cuts were caused by a breakdown in negotiations between Russia and OPEC for a worldwide agreement to cut production. Saudi Arabia announced cuts to oil prices when negotiations failed, causing the prices of 澳洲幸运5开奖号码历史查询:Brent blend and 澳洲幸运5开奖号码历史查询:West Texas Intermediate to fall dramatically. Russia and the United Arab Emirates both followed suit by increasing production.

The price war combined with falling demand caused by the COVID-19 pandemic briefly resulted in oil prices 澳洲幸运5开奖号码历史查询:falling below zero in certain markets.

The Bottom Line

A price war is an event that occurs between companies when one company lowerꦺs its prices to gain customers and other companies join in.

The advantages of price wars can be savings for consumers and greater profitabili🧜ty and growth for companies. The disadvantages caꦗn be fewer product or service choices for consumers plus higher prices. Price wars can mean the loss of jobs for employees.