![]() Price wars are usually pursued by the dominant firm in a market with the lowest production costs due to its larger size and better economies of scale. Price wars that drive firms out of business can raise average prices in the long run due to reduced competition. While this may seem great for consumers enjoying regular discounts, it can harm the market overall if it ends up driving some firms out of business. The process can continue in a perpetual downward slide in prices. This can result in the initial price-cutter reducing its prices even further, hoping to continue luring away customers from rivals. Price wars typically occur when one firm lowers its price and customers abandon rival firms to seek the lowest price.īecause rivals are losing customers, they also have little choice but to reduce their costs. GM tries to maintain the same proportionality for models above the base model.Ĭompetition-based pricing is only successful if the firm can compete with its rivals on production costs. To price competitively, GM decides to set the price of its new base model SUV at 80 percent of the cost of the latest base model Ford Bronco. GM analysts determine that the base model of its new SUV offers 85 percent of equal parts to the base model Ford Bronco and 75 percent of similar features to the base model Jeep Wrangler. To engage in competition-based pricing, it compares the features it will offer on its new SUV with the costs and features of its substitutes, the Jeep Wrangler and the Ford Bronco. Of course, GM does not want to charge only the minimum price. GM looks at production costs for its new SUV, determines the minimum price it can charge, and receives a sufficient return on investment (ROI). Since it has been many years since GM produced a similar SUV, analysts assume that buying decisions will primarily be made on price rather than brand loyalty. Is the market is dominated by larger competitors with lower prices? If yes, the company can target underserved market niches by offering value-added products and services at higher costs.īy mastering the competition-based pricing method, businesses can effectively position themselves within the market and attract customers seeking the best value for their money.įor example, assume that General Motors (GM) is ready to release a small SUV designed for off-road use, which will compete directly with the existing Jeep Wrangler and Ford Bronco. Is the company facing numerous competitors with high prices relative to the value they offer? If yes, the company can adopt lower pricing to force less capable competitors out of the market. If the product is seen as less valuable, the company can either reduce the price or work to change customer perceptions to justify a higher cost. ![]()
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