Price War

Price war is a term used in economic sector to indicate a state of

intense competitive rivalry accompanied by a multi-lateral series of price reduction. One competitor will lower its price, then others will lower their prices to match. If one of them reduces their price again, a new round of reductions starts. In the short term. price wars are good for consumers, who can take advantage of lower prices. Often they are not good for the companies involved. In the medium to long term, they can be good for the dominant firms in the industry. Typically, the smaller, more marginal, firms cannot compete and must close

Causes
The main reasons that price wars occur are:

Product differentiation: Some products are, or at least are seen as,

commodities. Because there is little to choose between brands, price is the main competing factor. Penetration pricing: If a merchant is trying to enter an established market, it may offer lower prices than existing brands. Oligopoly: If the industry structure is oligopolistic (that is, has few competitors), the players will closely monitor each others' prices and

be prepared to respond to any price cuts.

Causes
Process optimization: merchants may incline to lower prices rather
than shut down or reduce output if they wish to maintain the economy of scale. Similarly, new processes may make it cheaper to make the same product. Bankruptcy: Companies near bankruptcy may be forced to reduce their prices to increase sales volume and thereby provide enough liquidity to survive. Predatory pricing: A merchant with a healthy bank balance may deliberate price new or existing products in an attempt to topple existing merchants in that market. Competitors: A competitor might target a product and attempt to gain market share by selling its alternative at a lower price. Some argue that it is better to introduce a new rival brand instead of trying to match the prices of those already in the market

Reactions to price challenges

The first reaction to a price reduction should always be to consider
carefully. Has the competitor decided upon a long-term price reduction? Is this just a short-term promotion? If it is the latter, then the reaction should be that relating to short-term promotional activity, and the optimum response is often simply to ignore the challenge. Too often, price wars have been started because simple promotional activities have been misunderstood as major strategic changes. Reduce price: The most obvious, and most popular, reaction is to match the competitor's move. This maintains the status quo (but reduces profits pro rata). If this route is to be chosen it is as well to make the move rapidly and obviously - not least to send signals to the competitor of your intention to fight.

Reactions to price challenges

Maintain price: Another reaction is to hope that the competitor has
made a mistake, but if the competitor's action does make inroads into a merchant's share, this can soon mean customers lose confidence and a subsequent a loss of sales. Split the market: Branch one product into two, selling one as a premium and another as a basic. This effective tactic was notably used by Heublein, the owner of the Smirnoff brand of vodka). React with other measures - Reducing price is not the only weapon. Other tactics can be used to great effect: improved quality, increased promotion (perhaps to improve the idea of quality) Avoiding price wars Avoidance is by far the best policy, but it is advice which may not always be taken if the benefits seem attractive (which they may also be to competitors

Pricing Cues.

It is defined as any marketing tactic used to persuade

customers that process offer good value compared to competitors prices, past prices or future prices.

Importance of pricing cues.

Reasons for pricing cue are that many customers have poor pricing

knowledge. They are effective at increasing demand. They are more effective, when customers have poor price knowledge. They are more effective on newly introduced items and with newly acquired customers. Price cues are less effective when used more often. Price cues may lower demand if used incorrectly.

Types of pricing cues.

Price endings: the use of 9 digit price endings has been fascinated

for over many years. Using a 9 at the end of a price to denote bargain. Sale signs: its most commonly used price cue. Placing a sale sign on an item costs the retailer virtually nothing and stores generally make no commitment to a particular level of discount. Price promotions for new customers: New customers are least informed about prices and so for these customers deep promotional discounts may act as price cue.

Types of pricing cues

Price guarantee: its of 2 types.
Price matching policies: It guarantees the consumer that prices will be no higher than the prices charged by other retailers. Best price policies: It protects the consumers at future discounts with in a retail store. ex; if a firm decides to give 25% discount, then a best price policy promises to refund this discount to all customers who purchased this item in the previous 30 days

Consumption and pricing

Sensitivity to price change will vary from customer to customer. In a
particular situation the behavior of the consumer is not the same as that of other. Some important characteristics of consumer consumption behavior are as follows. Unambiguous nature Barrier to demand Indicator of Quality Reputation of company Absolute nature of price reduction.

Price sensitivity.
It is based on an understanding of the aims of an organization and the

concepts of price elasticity of demand and consumer surplus. Price elasticity of demand: it is the responsiveness of demand to change in price. Consumer surplus: It is generally seen that consumers would be willing to pay more for the goods, than they actually pay for them. This extra satisfaction the consumers get from their purchase of goods iscalled as consumer surplus.

Factors contributing to price sensitivity.

Unique value effect. Substitute awareness effect. Difficult comparison effect. Total expenditure effect. End- benefit effect. Shared cost effect.

Initiating and responding to price changes.

Companies are not alone in market. Hence they cannot sit idle by
setting prices on their own products. They have to face competitions and hence they sometimes have to alter prices. This can take several forms.

Initiating price cuts

Some situations force a company to lower its offering price , which could be Declining market share Market domination Excess production Economic down trend.

Initiating price Increases:

The main advantage of raising prices is that it immediately raise the profit.

The firms increase prices in case of Escalating the operational cost and overheads Anticipatory pricing, when they feel that there would be further inflation. Multiplexes charge a higher price when a hyped movie is released or when movies is considered to be super hit.

Factors to be considered while increasing or reducing prices

Strength of product Elasticity of demand Market structure Cost structure State of economy Market conditions.

Responding to competitor price changes

Before responding to competitors price change one has to consider the following Intention Duration Forecasting Counter reaction.