My major is economics. Economics is a long debated topic as it is treated as both a social science as well as science. Economics is called as social science when it studies behaviour of groups, organizations and individuals where they can manage the use of scarce resources to produce some valuable thing. It's important to understand that economics isn't future telling. If we will consider an economic model to a point to predict future, then we will definitely fail. The meaning of economics is to establish the better source for growth.
My thesis statement is just one line, I don’t want complicated things. Just want the readers to understand everything that I want to convey. So my paper would be about “The economy that serves all with profit and fights with over prices”.
Economics is also wrongly understood as science in the history. This has also been a topic of argument, whether economics is a science or not? Economics is a science only in its methodology & an art in its application, because it has theoretical as well as practical aspects. Science is nothing but an organized system of knowledge ascertainable by experiment and observation. It is a body of principles, laws, generalizations or theories which find out a casual relationship between results and causes whereas, the art is defined as the practical application of scientific principles, theories and laws. Economics is a positive science because:
- Economists search for fact only.
- They analyze them & then evaluate the result.
- They determine the relationship between facts & results.
- Finally they give a title to the bosomed relationship.
For example: When a problem of overpopulation is faced by the economy, the economists explain its causes to be religious considerations, sociological, reduced death rates, child marriages, illiteracy, many cultural setups, and desire of having a good number of children, lack of access to birth control centres, etc. This type of economic views makes it be a science also.
When economist suggesting control the birth-rate by late marriages, education, changing social & cultural setup, higher standard of living by having less number of children, providing door to door birth control facilities, etc. When government implement all this suggestions & people act upon & take care by different means & actions, it becomes art.
Another one amongst the most controversial topics in economics one is the "Price War"(E Margaret Slade, 524-537).
It is defined as a commercial competition in which the prices are repeatedly reduced in comparison with the other market competitors. This result in a situation, where other competitors will also tend to lower the price of commodities, if any one of them reduces price again, the other will also reduce it again & in this way a new round of reduction starts. In the short term, the price goods are good for buyers, who can take advantage of lower prices. Often they are not good for companies involved because the lower price reduce the profit margins & can threaten their survival.
The medium and long term wars of prices can be beneficial for the companies who dominate the industry or market. In such situations of price wars typically, the smaller companies, firms with more margin cannot compete & hence they have to shut down. Then the bigger firms who are able to survive in the market pretty well absorb the shares of these smaller closed firms. In this situation, the ultimate victim becomes the marginal firms & their investors. In the long run it might happen that the customers will also be lost. And with fewer firms in the industry, price might tend to increase to such an extent, that sometimes the price before the price war will be realise to be lesser when taken in account.
The main cause of the price war can be many out of which one is product differentiation in the market where some products are rarely treated as commodities. For e.g. if a merchant enters an established market, it may enter with the reduced prices than the already active brands. One of the major reasons of price war could also be Bankruptcy. As it company may be forced to reduce the prices at times, by any effect, to increase their sales volume and thereby provide a good amount of liquidity to survive. A merchant who is having a high bank balance may deliberately price new or the products already existing & have an attempt to rise through the existing merchants in the market. In some cases competitors can target any single product of a brand and can sell its substitute at a very low price. Some of the companies think that it is better to introduce a new product or brand in the market instead of trying to match the price of other rivals (A supergame-theoretic model of price wars during booms, 387-415)
Reactions of price wars are adverse of the employees sometimes they even lose their job. In case of short term price reduction response is often very simple and just to ignore the challenge. But it the change seems to be a long term move then there can be various reactions such as:
- Reduce the price: The most obvious, & most popular, reaction is to match the competitor's move. This maintains the status quo. If this route is to be chosen it is as well to make the move rapidly & obviously, never your competitor should come to know about your intended game plan. One option can be to hope that the competitor might have made some mistake.
- Splitting the market i.e. branching products into two, selling one as a premium & other as a basic one.
- Only reducing prices is not the ultimate remedy. Other tactics can also be used to great effects like improved quality or increased promotions.
Avoidance is by far the best policy, but it is advice that may not always be taken if the benefits are attractive. In the markets of oligopoly the prices can be sticky, because when there is rise in the prices the competitors do not follow them. Some of the companies even lose their share of the market for the low prices of the competitors (Price wars caused by switching costs," 405-420). The sticky price also remains intact in the cases where companies understand that they would not get any profit, if they lower their prices any further.
- For examples : Just a day after Air India declared many discount offers on bookings, it's rival Spice jet & Indigo also launched an aggressive price war offering massive discounts on 60- 90 day’s advance bookings. Later Air India kicked off festival sales & deep rebates on bookings was provided. While Air India did not confirm the development, travel agents & ticketing portals said the national carrier has also got into a price war offering discounts on all domestic routes.
STRATEGY AGAINST A PRICE WAR
What’s the best strategic response for winning the price war?
If you are going to win a price war, don’t get into one. The best way to win a price war is to avoid it.
It can be simply explained as, when a company lowers the prices in order to dominate the market or attract the customers, the one should not slash their own prices. Instead the company should bring product with improved quality. Some of the strategies for following superior or improved value are:
- The market must be retargeted: The three categories in which the market is divided are the upper class, middle class and the lower class. If a person goes on competing with the rival y lowering the price, then it would lead him to the lower class. In which quality of the product is hampered. If you decide to reduce the price to the lower class, then it indicates that you have to be prepared to loss the customers from upper class and middle class. As soon as you start lowering your prices, your product becomes appealing to the lower class and the other classes will find it uninteresting. The lower class for the majority of the market, which makes them the largest section of buyers. Upper class is the minority of the market while middle class forms the second segment of the market. Until and unless, the lower class is the targeted customer, the one should not jump into price wars with the competitors.
- Product Differentiation: The product or the service must be differentiated from that of the competitors if one wants to target the upper class and middle class segments of the market. The branding is all about the product or service being offered. Branding is considered to be the most intelligent effort to target the desired market. While the competition is considered as offering you product or service with few special qualities. The branding must communicate the usefulness, quality and uniqueness of the product. The market pays the price only when your product justifies the emotional and logical reasons. Branding is the best source to achieve the desired success without entering the price war.
- Benefiting product or services: The large number of people in the market looks out for the product or services that can fulfil their requirements. Such people do not consider the vale or the price. Their purpose of buying a product is to get quality and self satisfaction with that product. So the company should target such people and instead of pricing they should incorporate for benefiting features in the product or service.
The conclusion of the whole argument is that if we want to achieve success by getting the targeted market, we must not fight over the price with the competitors. It will not only hamper the product quality but also will lead to loss of the customers. The companies who do not want price war than they should higher the quality with the price.
Slade, Margaret E. "Strategic pricing models and interpretation of price-war data." European Economic Review 34.2 (1990): 524-537.
Rotemberg, Julio, Garth Saloner, and Repeated Oligopoly. "A supergame-theoretic model of price wars during booms." New Keynesian Economics 2 (1986): 387-415.
Klemperer, Paul. "Price wars caused by switching costs." The Review of Economic Studies 56.3 (1989): 405-420.
Hotelling, Harold. Stability in competition. Springer New York, 1990.
Sutton, John. Sunk costs and market structure: Price competition, advertising, and the evolution of concentration. MIT press, 1991.