Abstract
<p>The first part of this paper describes the characteristics of price wars, pointing to recent examples that have caused a stir among the public as well as in the respective industries. A new, concise definition of the term price war is suggested. In the second part drivers for price wars are discussed and explained based on behavioral economics (understanding the competitor’s strategy as well as a company’s own cost situation). Particularly in industries that are characterized by a high proportion of costs that are unchangeable in the medium-term and low variable costs there is a substantial risk for unintended price competition possibly ending in a price war. Even slight price reductions can have fatal consequences when decision makers mistakenly estimate the price elasticities too high. In the third part a case study of a price war is presented by focusing on the market of long-distance bus journeys in Germany. Since the market for intercity bus connections was liberalized in 2013, the newly created market segment faces a very strong growth and intensive competition. Using a multi-source-multi-method-approach it is shown how the market entry of UK-based company Megabus affected price levels for bus journeys und initiated competitive reactions of the German railway operator Deutsche Bahn. The interaction of various parameters (low barriers to enter the market; high similarity of products/services; fixation on market share and capacity utilization) leads to a ruinous price competition and leaves few chances for a sustainable profitability. Measures to avoid an impending or to terminate an ongoing price war are presented.</p>
Highlights
1.1 Price War: A Typical Phenomenon in Many Industries?An often cited example for a price war: In 1992, a fierce price war on bus services between New York City and Washington D
The first part of this paper describes the characteristics of price wars, pointing to recent examples that have caused a stir among the public as well as in the respective industries
In industries that are characterized by a high proportion of costs that are unchangeable in the medium-term and low variable costs there is a substantial risk for unintended price competition possibly ending in a price war
Summary
An often cited example for a price war: In 1992, a fierce price war on bus services between New York City and Washington D. Peter Pan lowered their initial fare of $25 to $9.95, to “turn some heads”. In 2015 alone, a number of examples can be found where the market situation is described as price war (see Table 1). These include examples from the airline industry as well as IT and Computing. There are several major factors that motivate a competitor to start and likely win a price war. A dominant company owning more than 50 percent market share in a profitable industry is a prominent indicator for a highly probable price war, since it carries more risks for a dominant company to initiate or respond to price decreases. Additional factors are a large concentration of market share, new market entrants, exit barriers and price leadership (Heil & Helsen, n. d.)
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