Competing on the basis of low prices is commonplace. But price wars are more than just trying to get an edge, observes Patrick Reinmoeller, writing for MIT Sloan Management Review.
Companies engaging in price wars can be accused of self-destructive behaviour, initiating downward pricing spirals that can damage the whole industry. In fact, there is research that strongly suggests there are no winners in price wars, with companies either forced out of business or suffering a long-term reduction in profitability.
However, Reinmoeller begs to differ. He researched price wars that took place between 1980 and 2013 in various industries, including air travel, telecoms and financial services. Contrary to the majority of studies, Reinmoeller discovered that “under the right circumstances, it’s possible for a company to win a price war by leveraging a specific set of strategic capabilities”. These include: