Anatomy of a Price War

With the recent Amazon–Walmart price war on books and the 1992 air­line industry price war as the back­drop, James Surowiecki takes a look at how price wars start, how they can be avoided, and how to (pos­sibly) win at them.

The best way to win a price war, then, is not to play in the first place. Instead, you can com­pete in oth­er areas: cus­tom­er ser­vice or qual­ity. Or you can col­lude with your putat­ive com­pet­it­ors: that’s why car­tels like OPEC exist. Or—since overt col­lu­sion is usu­ally illegal—you can employ subtler tac­tics (which eco­nom­ists call “sig­nalling”), like mak­ing pub­lic state­ments about the import­ance of “stable pri­cing.” The idea is to let your com­pet­it­ors know that you’re not eager to slash prices—but that, if a price war does start, you’ll fight to the bit­ter end. One way to estab­lish that peace-pre­serving threat of mutu­al assured destruc­tion is to com­mit your­self before­hand, which helps explain why so many retail­ers prom­ise to match any com­pet­it­or’s advert­ised price. Con­sumers view these guar­an­tees as con­du­cive to lower prices. But in fact offer­ing a price-match­ing guar­an­tee should make it less likely that com­pet­it­ors will slash prices, since they know that any cuts they make will imme­di­ately be matched. It’s the retail ver­sion of the dooms­day machine.

These tac­tics and deterrents don’t always work, though, which is why price wars keep break­ing out.

Surowiecki men­tions that there’s appar­ently a big banana price war going on in the U.K. at the moment! News to me.