When do price wars occur

The initiating company responds by reducing its price again. The competition follows up with another price cut, creating a downward price spiral. Price wars are fiercest when there are a few companies competing for the same business.

Each is interdependent, which means the companies do not reach a decision without considering the reaction of the others. Price wars are common among airlines, particularly when an airline enters a new market and offers an attractive price to gain a foothold.

Price wars are most common with oligopolies. An oligopoly is a market structure with a few companies that dominate their market. Prices in oligopolies are normally sticky. Companies operating in an oligopoly fear lowering their price and inciting a price war, but they also hesitate raising their price because customers can purchase a substitute from a competitor. Who wins when there is a price war? A more recent example might be the solar industry, with Chinese manufacturers flooding the world markets with low-priced photovoltaic modules stemming from large volume fabs.

Marginal or negative market growth, where firms have to steal market share in order to be able to grow. Market power is either highly concentrated or fragmented. The researchers here build on political science arguments, where highly concentrated power stimulates fear of hegemony, and highly fragmented power tempts expansion and aggression.

High exit barriers. If firms have built e. Bad financial conditions. The reasons are similar like for high exit barriers. Examples are price wars in the airline industry where price wars began on the most important routes. No clear price leader in the market. In contrary, when a single firm holds price leadership in the market, the players will take this firm as a reference value, potentially ignoring others.

Another example of a price war is in the low-cost airline market caused in part by over-capacity on some routes. The leading supermarkets often engage in extensive price-cutting for staple products after Christmas when budgets are tight, and many families are even more price-sensitive than usual.

We can find examples of price wars in many other markets including price discounting in cinemas , the UK funeral industry , the mortgage market and the online film streaming industry Hulu v Netflix.

Prices fall for consumers which leads to an increase in their real incomes their disposable incomes stretch further each month and an increase in consumer surplus. In this sense, aggressive price wars can have a progressive effect on the distribution of real income and consumption. Price wars are nearly always bad news for the majority of businesses that get locked into them.

Price cutting erodes profit margins and, in some cases, can lead to firms making losses and at risk of leaving the market. Lower profits mean fewer resources are available to fund capital investment. Consider for example a price war in broadband services. Ultimately service providers need to make sufficient profit not only to meet the expectations of their shareholders but also because the industry needs to invest huge amounts in increasing the capacity and efficiency of telecoms infrastructure.

A balance might need to be struck between the short-term needs of customers to get the best deal on their phones and the medium-term challenge of expanding the supply-side capacity of the industry.

If some smaller firms with less backing eventually go out of business, then competition in a market can be stifled and this might lead to higher prices for consumers in the long run.