Price wars are spreading in the industry

Symptom: As competitive pressure has intensified, some competitors have resorted to discounting, which has triggered the industry's price wars.

Implications for the market:

• Price wars tend to train customers to focus on price. The onset of hostility often brings price competition, and the intensity of that competition teaches customers to choose products on the basis simply of price, rather than on other differentiating factors such as features, quality, or ease of purchase. From the supplier's point of view, this is undesirable since price discounts can almost always be matched immediately and do not offer the basis for any sustainable competitive advantage.

• This price competition is almost certain to last for several years, while it gradually loses its ability to move market share.

  • In the stage immediately preceding hostility, price discounting can successfully move share, especially if industry leaders do not match it.

  • These discounting competitors are rewarded with growth and initiate new rounds of discounts, bringing prices ever lower.

  • After the first few years, though, price competition causes all competitors to suffer but brings little share change, since customers have learned that they can demand and get the low market price from their current suppliers.

  • As the industry evolves through several rounds of price cutting, market participants begin to realize the ineffectiveness of this share-gaining tactic. Only then will price cutting cease.