Introduction
Price war is a terminology used to refer to the struggle between or among different firms in the market. It is evident in economic situation that calls for intensive competition rivalry among firms in the market that result in a series of price declination or reduction. A milk price war among the leading Australia supermarkets is a good indicator of price war. Price war happens when different firms compete for the market share by lowering their prices in order to attract more customers consequently increasing their sales.
This situation is only evident when different companies or firms are trading or selling similar products. Such companies embark on the use of strategic price as an appropriate market technique or tool to dominate the market. Price war poses severe impacts or effects on the market since it affects both the business and the consumers. Change in the price of a commodity or goods influences consumers demand. That is, price war leads to the reduction of prices that increases accessibility of products to the consumers hence increasing the consumers’ demand for the commodity goods.
Discussion
Many companies in the market find it difficult to escape from price war. This is because of the competition offered by rival firms over a certain good or service. Such companies or firms use a strategic price mechanism that is intended to win over the market or business of the average consumer. For instance in a case study where there are two types of used cars; high quality and low quality. In this, we assume that there are potential buyers who are ready to pay 5000 for high quality used cars and 2500 for low quality used cars.
We further assume there are 500 sellers of high quality cars and 500 sellers for low quality cars and all are risk neutral. In addition, the quality of the cars is observable to the sellers and buyers. With this condition the question rises on what is equilibrium price and quantity (Bamberg, 2009, p. 47)
Australia’s leading supermarket case study has succinctly highlighted the concept of price war by demonstrating the implementation of price strategy to dominate the market. The supermarket is involved in the reduction of price to win the market. Through this process, the milk market was affected hence leading to severe impacts on both businesses (supermarkets) and consumers. The major objective of price reduction by Australia leading supermarkets was to match with each other in terms of prices hence increasing competitiveness.
In the short-term, the average consumers benefits from the price war. This is because price war resulted in the reduction of the prices of goods such as milk in the case study. Consumers’ demand is influenced by price war because of the changes experienced in prices of goods. On the other hand, competing firms are losers because price war hinders them from high profits (Bamberg, 2009, p. 56).
Viewing another situation where selection comes in insurances. There are high risks and low risk types buying insurance. The insurance company cannot observe type and so if it offers an insurance policy that breaks even on average it means only the high risk types will buy it. The insurance company is adversely selected against and so makes a loss. Insurance companies need to consider this when designing policies. This problem of asymmetric information and adverse selection can be overcome to some extent by signaling. How might a seller of a used car signal that it is of high or a low quality.
The lower the price, the lower the profit firms would make from selling certain goods. Many consumers would prefer buying goods from a company offering lowest prices hence those companies offering the same good at higher prices may collapse or go out of market (business). In the long-term, price war possess different effects to those experienced during the short-term. In long term, many companies that are not willing to offer or reduce their prices ends-up collapsing.
This comes because of consumers turning into those companies offering lower prices. Profit is the gigantic goal of firms or companies in the market meaning that if a company is not operating, it cannot make profit and definitely, it would collapse or go out of business. Consumers are also affected by long term price war because the collapse of some businesses would lead to monopoly which in future would result to higher prices due to lack of competition in the market (Bungert, 2003, p. 35).
Different firms have developed two strategies that are considered critical for their operations in a competitive market situation. Such strategies include low and high cost strategies whereby firms or companies such as supermarkets produces low quality products at low cost strategy and vise versa. Such companies embark into the use of quality or cost combination intended to cut down costs thus increasing their profits
Many nations have introduced a price control mechanism to ensure that all firms or companies experience perfect competition that does not involves changes in prices of their goods. In conclusion, the study is interesting in that it explores the concept of price war by demonstrating how Australia’s leading supermarkets compete in the market. In the short-term, businesses continue lowering their prices until the time when some of them would go out of market. Consumers are the major beneficiaries in the short-term (Bungert, 2003, p. 124).
List of References
Bamberg, G. 2009, Up in the air: How airlines can improve performance by engaging their employees, Cornell University Press, London.
Bungert, M. 2003, Termination of price wars: A signaling approach, Sue Ladage DUV, London.