Under what environmental conditions are price wars most likely to occur in an industry? Why? What are the implications of price wars for a company? How should a company try to deal with the threat of a price war? Explain.
Price wars are most likely to occur in an industry in which savvy customers force down a company's prices by pitting competitor's product against one another. Price wars are also likely to occur if there are new entrants to the market, who are able to come in at a low price to buy business. This is especially true if the company is well funded or has name recognition. An example of this would be the price wars involved in the smart phone industry. Apple's entry in 2007 was initially pricy, but the category has been reduced to price wars as more manufacturers are involved and consumers play each company off the other.
Another environmental condition for price wars is when an industry's product is seen as a commodity. The airline industry is viewed in this manner, and at various times price wars ignite. This might be due to a carrier entering a new market (as discussed previously) or as a way to gain market share ...
This detailed solution discusses under what environmental conditions price wars are most likely to occur in an industry and why. It also explains the implications of price wars on a company and how a company should try to deal with the threat of a price war. Examples and reference are given.