What is a 'Price War'

A price war is a competitive exchange among rival companies who lower prices to undercut each other. A price war may be used to increase revenue in the short term or as a longer term strategy to gain market share. Price wars can be prevented through strategic price management (with non-aggressive pricing), thorough understanding of the competition, or even communication with competitors.

BREAKING DOWN 'Price War'

When a company wants to increase market share, usually the easiest way is to reduce prices, which increases product sales. The competition may be forced to follow suit if its products are similar. As prices get lower the quantity of sales increases and customers receive the benefits. Eventually, a price point is reached that only one company can afford. Some companies will even sell at a loss in an attempt to eliminate the competition completely.

What Can Trigger a Price War

Price wars may be driven by competition among companies that are local to each other and want to dominate the geographic footprint they mutually occupy and serve. With online businesses, price wars might be started with online as well as offline companies that want the same demographic of customers.

Companies that engage in price wars make a choice to diminish or even eliminate their current profit margins to attract more customers. In order to mitigate these effects, a company might have an arrangement with its suppliers to procure materials or finished products at a deep discount compared with its rivals. That would enable the company to cut its prices to customers much lower, and for longer periods than compared with rivals. In such instances, the supplier might actually suffer the loss rather than the company that is engaged in the price war. Businesses that move large quantities of products may have the buying power to leverage such agreements.

For example, a national big box retailer who sells vast volumes of a product through its locations across country might have a deal with the supplier to fill its inventory at a discount. That would let this major retailer sell the product below market prices. In response, local retailers who compete with the big box retailer may try to offer short-term discounts to customers. The big box retailer could escalate the situation to a price war, cutting its prices even lower than the local retailers can afford to match. Such practices, if maintained for extended periods, could eventually force local retailers to go out of business.

RELATED TERMS
  1. War Chest

    A war chest describes cash reserves set aside for a business ...
  2. War Economy

    War economy is the organization of a country's production capacity ...
  3. Competitive Pricing

    Setting the price of a product or service based on what the competition ...
  4. War Babies

    A name given to securities in companies that are defense contractors. ...
  5. Bidding War

    A situation where two or more buyers are so interested in an ...
  6. Black Tuesday

    Black Tuesday, October 29, 1929, was when the DJIA fell 12 percent, ...
Related Articles
  1. Investing

    Government Debt: From Billions To Trillions

    The national debt has been growing in leaps and bounds. Find out why.
  2. Investing

    War's Influence On Wall Street

    Blitzkrieg? Dawn raids? Sounds like the markets and the battlefield have a few things in common.
  3. Investing

    Can ETFs Help You Benefit From a Trade War?

    Trade has become a major concern for the market. Can ETFs help investors stay on top of the fracas?
  4. Investing

    US Telecom Price War: T-Mobile Vs. Verizon Vs. AT&T (VZ, T)

    Find out how T-Mobile, Verizon and AT&T are waging an intense price war among mobile network providers and why investors are coming up short.
  5. Insights

    Apple is Now Bigger Than These 5 Things

    As the first company to cross a market cap of $800 billion, Apple is now larger than the GDP of Saudi Arabia, the U.S. Budget Deficit and the cost of the Vietnam War.
  6. Investing

    Are These the Top 4 Game & Toy Stocks of 2016?

    These four toymaker stocks have the potential to deliver moderate to significant stock appreciation plays in 2016.
  7. Insights

    Disney CEO Reveals Star Wars Plans For 2019 And 2020 (DIS)

    Disney CEO Bob Iger revealed the studio's plans for the Star Wars franchise in 2019 and 2020 at Goldman Sachs' conference.
  8. Investing

    'The Last Jedi' Has Second-Highest US Opening Ever

    The latest Star Wars film raked in $220M at the North American box office in its opening weekend.
  9. Insights

    CEO Optimism Soars as CFOs Fear Trade War

    CEOs are optimistic about Trump's policies, but nearly all CFOs fear a China trade war.
RELATED FAQS
  1. Who are Target's (TGT) main competitors?

    Take a look at the battle of discount retailers. How Target is different from its competitors such as Walmart and Costco. Read Answer >>
  2. What factors are the primary drivers of share prices in the retail sector?

    Find out which factors investors need to consider when evaluating companies in the retail sector, including the basic fundamentals. Read Answer >>
  3. How long has the U.S. run fiscal deficits?

    Read about the history of deficit spending in the United States, dating back to 1789, and learn about then-Treasury of the ... Read Answer >>
  4. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center