Premium Essay

How to Fight a Price War

In: Business and Management

Submitted By williamgao
Words 5496
Pages 22
If you find yourself

facing a price war, you'll need to understand how it started in order to respond effectively.
Often the best counterattack does not. involve a retaliatory price

How by Akshay R. Rao,
Mark E. Bergen, and

War

^ 1

I

1^

f

Scott Davis

N THE BATTLE TO CAPTURE THE CUSTOMER,

companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice - and frequently the skirmishing degenerates into a price war.
Creating low-price appeal is often the goal, hut the result of one retaliatory price slashing after another is often a precipitous decline in industry profits.
Look at the airline price wars of r992. When American Airlines, Northwest Airlines, and other U.S. carriers went toe-to-toe in matching and exceeding one another's reduced fares, the result was record volumes of air travel-and record losses. Some estimates suggest that the overall losses suffered hy the industry that year exceed the combined profits for the entire industry from its inception.
Price wars can create economically devastating and psychologically dehilitating situations that take an extraordinary toll on an individual, a com-

HARVARD BUSINESS REVIEW

March-April 2000

107

How to Fight a Price War

pany, and industry profitability. No matter who wins, the comhatants all seem to end up worse off than before they joined the battle. And yet, price wars are becoming increasingly common and uncommonly fierce. Consider the following two examples:
• In July 1999, Sprint announced a nighttime longdistance rate of 5 cents per minute. In August
1999, MCI matched Sprint's off-peak rate. Later that month, ATikT acknowledged that revenue from its consumer long-distance business was falling, and the company cut its long-distance rates to 7 cents per minute all day, everyday, for a…...

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