Anatomy of a Price War

With the recent Amazonā€“Walmart price war on books and the 1992 airline industry price war as the backdrop, James Surowiecki takes a look at how price wars start, how they can be avoided, and how to (possibly) win at them.

The best way to win a price war, then, is not to play in the first place. Instead, you can compete in other areas: customer service or quality. Or you can collude with your putative competitors: that’s why cartels like OPEC exist. Orā€”since overt collusion is usually illegalā€”you can employ subtler tactics (which economists call “signalling”), like making public statements about the importance of “stable pricing.” The idea is to let your competitors know that you’re not eager to slash pricesā€”but that, if a price war does start, you’ll fight to the bitter end. One way to establish that peace-preserving threat of mutual assured destruction is to commit yourself beforehand, which helps explain why so many retailers promise to match any competitor’s advertised price. Consumers view these guarantees as conducive to lower prices. But in fact offering a price-matching guarantee should make it less likely that competitors will slash prices, since they know that any cuts they make will immediately be matched. It’s the retail version of the doomsday machine.

These tactics and deterrents don’t always work, though, which is why price wars keep breaking out.

Surowiecki mentions that there’s apparently a big banana price war going on in the U.K. at the moment! News to me.