Price Wars

Question 1

Why Price Wars can be Harmful

Answer 1

a. Price has a strong impact on profit
b. Price advantages fade quickly
c. Price expectations distorted long term
i. Lower reference prices
ii. Higher price sensitivity

Question 2

Why Price Wars can be Helpful

Answer 2

a. Many Chinese companies have thrived in price wars
b. Price wars can help shake out the competition
c. Example: Color TV‘s in China –> Chanhong increases market share from 17 to 32 % in a few months (1996)

Question 3

Price wars more likely if…

Answer 3

a. Initial profit margin is high
b. Economies of scale are large
c. Price change has a large sales impact
i. –> Increases market share and/or market volume

Question 4

Study: Who is the Price War Good For?

Answer 4

1. Albert Heijn:
   a. Decline in market share stopped (but lower spendings)
   b. Price image improved
   c. Downward trend in stock prices stopped
2. High-/middle-service followers:
   a. Lower spendings
   b. No improvement in price image
   c. Edah gone out of business
3. Hard Discounters:
   a. No losses in spendings
   b. More store visits due to higher price image sensitivity
4. Consumers: lower prices