A price war refers to a situation of intense competitive price-cutting between rival firms within an industry. It occurs when two or more competitors repeatedly lower their prices in response to price decreases by others.
Key characteristics include:
- Reactive short-term price reductions in tug-of-war style
- Margins squeezed to unprofitable levels in battle for market share
- Customers benefit from lower prices in the short run
- Long-term damage to industry profits if prices fall below costs
Causes can be defensive reactions, different cost structures, or attempts to drive weaker rivals out of business. But price wars rarely benefit all sides in the long run due to razor-thin margins.
Effects range from bankruptcies and industry consolidation to price-fixing probes. Governments may monitor for predatory pricing too. Overall, frequent price wars signal a lack of constructive competition based on quality, variety or innovation.