What is a Price War?

In business, a price war is the act of competitive price reduction between two or more businesses. It results when competitors sell the same products using strategic pricing meant to win over the business of the average consumer. A price war can have a domino effect on the market, affecting businesses and consumers alike because as prices drop, accessibility to products increases for consumers and business profits can decline.

There can be many causes of a price war. Positioning or perceiving a product as a commodity can lead consumers to make purchasing decisions based on price. Businesses that are just getting started in a market may offer lower starting prices so that they can get a foothold in the industry. If competitors in an industry are few, businesses will keep up-to-date on competing businesses' pricing tactics and can try to match or beat them. Businesses may also feel that they have to simplify the way products are made and reduce prices to stay afloat in an industry which would otherwise force them to significantly reduce or stop output; similarly, businesses may drastically reduce prices in order to survive the threat of bankruptcy.

As beneficial as a price war can be to the average consumer in the short term, consumers should be aware that their actions during a price war could affect them in the long-term. Always choosing to buy from the competitor offering the lowest price may result in the destruction of businesses that offer shopping options. For example, if all consumers choose to buy a product from a company offering the lowest price, companies selling the same product at higher prices may go out of businesses. As a result, the company selling the product at the lowest price will be the only one left in the market and can price the product however it pleases, once all the competition has been crushed.

Reactions to price wars can vary between industries and businesses. Usually, businesses have to consider whether a price war really exists or whether it simply appears to be happening due to short-term promotional strategies. Businesses can react by ignoring the challenge, reducing prices, maintaining prices, splitting products into two separate products or changing a product's quality or promotion.

Generally, engaging in a price war against a major chain store is not the best move for a small business. Large chain stores may engage in predatory pricing and encourage a price war for the sole purpose of causing a smaller company to go out of business. The chain store can then adopt the small business' former market share.