Advantages And Disadvantages Of Price Wars For Different Social Groups

Advantages and disadvantages of price wars for different social groups

By Nelson Rodriguez

Price war is a situation in which rivals companies try to increase the number of consumers by attracting those who are buying from other companies through price lowering (This is common for commodity products that are so similar that price reduction may look as the only alternative to gain more customers).After each reduction there is a period of stability in which all afferents have the same price, but this equilibrium is soon broken by a new price reduction thrown by the most ambitious firm, the other companies will inevitably fall into this spiral process until they can play no more, as a result only the strongest companies get to the final stages of price war. Enterprises compete with prices as a fast and apparently simple way to win over their competitor’s market; big companies can sell at cost to sink their counter parts, usually because they can produce at lower costs and/or because they can go on for longer periods with very low or no profit. According to this strategy the final control of the market will compensate the looses underwent during the process (although it seems that most economist agree on avoiding price war and looking for alternative ways to increase competitiveness).

In the short term price wars are beneficial for consumers who can take advantage of low prices in good quality products, increasing the purchasing power of people. This phenomenon is easily observable in developing economies like South America (national companies used to set high prices due to the lack of competition) but when foreign companies flood the market with equal or better quality products at a much lower price common people stops using traditional products and buy the new ones. Price war not only allows ordinary people to save money, access more and diverse products but also to acquire items priorly considered luxurious (laptop, video cameras, flat tv). The academic and scientific fraction of the population find greater possibilities to access technology that facilitates and broadens their work, constituing a unique chance, mainly because in developing economies the budget for research is not a priority for goverments and the private sector is just learning to see the technological development as a business strategy. For the higher social classes price war may have both good and bad consequences, on one hand they can also purchase better and more luxury items, but on the other hand as owners or share holders of low competivity companies it may reduce or even anulate their income. In the industrial and agricultural sectors consequences of war price could be also ambivalent because they increase the access to new machinery and technology, consequently increasing their competitiveness but it can also represent the end of a company when its own competitors implement this strategy faster and better than them (e.g. some companies have the capital needed for modernization while others not).

Undoubthely for the companies involve in the war it is a very dangerous bet, and if the prices go down

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