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Saturday, November 19, 2011

All is fair in Price Wars

Price wars, are an economic term to indicated a state of extreme price rivalry within a sector. Price wars are battled by competitors through a series of price reductions in aims of undercutting competitors.  Price wars are enticing at first to consumers who can be lured in to shopping for obscure items at the premise of a sale. Once the novelty of the war has subsided consumer feel remorse or dissatisfaction toward the "super low priced product/service," they've purchased.

Price wars are a bullying strategy enacted by massive corporations. Companies like Wal-Mart, Target, Sara Lee, Coke, Pepsi, The Marriott, etc...Can afford to drop their prices/rate below or equal to the cost; The industry bullies can afford to eliminating short run profits. These massive corporations have a large bargaining power with suppliers which enables them to reduce their production/service costs while fighting a price war. The competitors with more modest bargaining power do not have the ability to reduce inventory, product, or service costs; nor can the scrawny small business afford to operate on a skimpy diet: short run negative cash flows.

An easy way to understand price wars is to think about a party being thrown by a very likable but somewhat dorky dude. You want to go to his party cause you like him, and you know it will be fun; but at the last minute as you leave the house you get an invite to the coolest party ever with Cirque Du Soleil performers and houte couture goody-bags. The choice is simple; you attend the glamorous event.

The trouble of price wars, is that they are all in fact an illusion. The prices are cut temporarily to gain customers and to eliminate competition. Once the war has proven victorious the winning entity raises prices, without raising the service or quality.

Price wars are a dangerous tactic that make numerous casualties of small and locally owned business. This in turn increases an areas unemployment and reliance on credit. Ironically the victor of a price war is supported and raised to a monopolistic leadership position through the purchasing votes (dollars) of the people (consumers). As consumers we perpetuate the growth of multi national organizations by allowing ourselves to be bought by the premise of "everyday low prices." The concept spawns the occupy movement. If consumers shop at only 1% of the businesses of course that 1% is going to grow and account for 99% of the market.

As a civilian in a price war; ask your self what are the hidden costs, and opportunity costs associated with the battle.

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