IN THE recent past some sectors in the country have seen stiff competition, with most of the firms in these sectors appearing to be aggressively competing on price.
There are short-term positive effects of firms competing on price.
However, this competitive behaviour could lead to price wars and be wasteful to the economy in the long-run.
Today, we look at price wars and their effects on businesses. A price war is a form of competitive strategy which results in one firm competing against another, by cutting its prices while the other
competing firms retaliate leading to a protracted price war in the industry.
Additionally, price wars entail that one competitor reduces price to punish a rival for violating a norm of competitive conduct.
Consequently, the intended victim retaliates, prompting further retaliations.
To discuss this topic further, we would like to exemplify a few global and Zambian industry scenarios of price wars.
Yes, price wars represent one of the extreme forms of competitive behaviours in the market place, causing great losses to the industry and the entire supply chain.
Companies may forego their competitive advantage, fall victim to substitutes, and even face bankruptcy.
On the other hand, consumers benefit from lower prices in the short run.
In the long-run, however, they may develop unrealistic reference prices and suffer from lower quality products.
In a broader contest, the economy takes a heavier blow from the suboptimal allocation of resources.
There are a number of factors that fuel price wars, but for this article, we will only discuss two of them:
Price wars can be fueled by the nature of the product in question and the market characteristics.
The higher a product’s strategic importance to a company, the higher the likelihood of a price war; the more commodity-like the products in a market, the more likely a price war.
The more premiums a product has, the lower the likelihood that a price war erupts; and the introduction of head-to-head products increases the likelihood of a price war.
In our local scenario, industries which produce products like sugar, lime, cement and the mobile telephony services, and the money transfer businesses are among the industries that in theory need to look out for competitive traps for price wars.
Leading  business researchers and authors  propose that the lower the brand loyalty in a market, the more likely an outbreak of a price war; and the higher the consumers’ price sensitivity, the higher the
likelihood and intensity of price wars.
Additionally, we have seen from our local industries that as firms enter the market and an entrant gains sizable market position, a price war becomes more likely.
If an industry possesses excess capacity, the emergence of price wars is more likely. Price wars are more likely to occur and to be more intense in markets with marginal growth.
In July 1991, the British subsidiary of Ford Motors reduced the price of its Ford  Fiesta, Escort,Orion,and Sierra models  by £1,000 , while luxury models such as Granada and Scorpio were reduced by £2,000.
Other auto manufacturers were under pressure to follow suit: Nissan UK soon announced price cuts and Vauxhall, announced that it would reduce its prices.
Many firms have entered the Zambian business sector with a cost leadership approach by lowering their prices to capture a portion of the market share.
The competing firms usually retaliate by also cutting their prices leading to protracted price wars.
We have recently seen aggressive marketing promotions by mobile telecommunication companies.
One such promotion has been the generous bonus air time credit offered to customers who purchase selected amounts of airtime credit.
Competitors have retaliated by staging similar promotions. These promotions are literally a form of price or tariff reduction. The retaliation denotes some characteristics of a price war.
We have also noticed the recent price cuts and retaliations in the money transfer business with drastic transfer fee reduction from a minimum of about K18 to K6.
The cost of price wars is enormous.
Competing firms do not just consist of the firm itself but also its stakeholders such as suppliers, distribution channels, shareholders, and customers.
Often, in the short-term, price wars appear to lead to profit erosion.
However, in the longer term, such warfare may also tarnish the corporate image and even cause the firm to go bankrupt.
In conclusion, it is clear that price wars exist and have devastating effects on the competing firms and the entire economy at large.
It is imperative on firms to devise alternative strategies and also harness business strategy consultants to help them craft alternative versatile strategies to create uncontested markets.
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