1 ) Under what environmental conditions are selling price wars most likely to occur within an industry? Exactly what are the effects of selling price wars for the company? How should an organization try to handle the menace of a price war?
Cost wars are likely to occur if the following circumstances are present in an industry: the merchandise is a asset, exit boundaries are significant, excess capacity exists, the industry is consolidated, and demand can be declining. A price war constitutes a strong threat. It is difficult for companies that market commodity-type products to develop brand commitment; therefore , competition tends to focus on price. Excessive exit obstacles make it hard for firms to eliminate excessive capacity through plant closings. In turn, the persistence of excess ability leads to price cuts, as companies strive to generate enough demand to make use of their ideal capacity and cover fixed costs. Within a consolidated market, interdependence implies that one company's price cuts will generate a response from its rivals, creating a downward spiral of costs. And it is decreasing demand that produces extra capacity and sparks away a price war in the first place. In the event that all these conditions are present, a severe cost war is probably.
Survival depends on a company's ability to reduce operating costs and build brand loyalty in order that it can keep its customers and still generate profits when ever those of their competitors have got dried up. Furthermore, the risk of a damaging price war can be lowered if the business can effectively enter into tacit price negotiating with its opponents and if it may stress non-price factors once competing. Because demand diminishes, however , tacit price deals can be challenging to maintain. Finally, if surplus capacity is the major basis for a price warfare, capacity decrease agreements among competitors, or perhaps mergers among competitors accompanied by the removal of surplus capacity, might be suitable techniques for attacking this challenge.