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 other's prices and be prepared to respond to any price cuts.
- 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 deliberately 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.
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