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A Small Step from Price Competition to Price War: Understanding Causes, Effects and Possible Countermeasures

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  • Andreas Krämer
  • Martin Jung
  • Thomas Burgartz

Abstract

The first part of this paper describes the characteristics of price wars, pointing to recent examples that have caused a stir among the public as well as in the respective industries. A new, concise definition of the term price war is suggested. In the second part drivers for price wars are discussed and explained based on behavioral economics (understanding the competitor’s strategy as well as a company’s own cost situation). Particularly in industries that are characterized by a high proportion of costs that are unchangeable in the medium-term and low variable costs there is a substantial risk for unintended price competition possibly ending in a price war. Even slight price reductions can have fatal consequences when decision makers mistakenly estimate the price elasticities too high. In the third part a case study of a price war is presented by focusing on the market of long-distance bus journeys in Germany. Since the market for intercity bus connections was liberalized in 2013, the newly created market segment faces a very strong growth and intensive competition. Using a multi-source-multi-method-approach it is shown how the market entry of UK-based company Megabus affected price levels for bus journeys und initiated competitive reactions of the German railway operator Deutsche Bahn. The interaction of various parameters (low barriers to enter the market; high similarity of products/services; fixation on market share and capacity utilization) leads to a ruinous price competition and leaves few chances for a sustainable profitability. Measures to avoid an impending or to terminate an ongoing price war are presented.

Suggested Citation

  • Andreas Krämer & Martin Jung & Thomas Burgartz, 2016. "A Small Step from Price Competition to Price War: Understanding Causes, Effects and Possible Countermeasures," International Business Research, Canadian Center of Science and Education, vol. 9(3), pages 1-13, March.
    • Handle: RePEc:ibn:ibrjnl:v:9:y:2016:i:3:p:1-13
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    References listed on IDEAS

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    1. Andreas Kramer & Thomas Burgartz, 2015. "Customer Value Controlling ¨C Combining Different Value Perspectives," Business and Management Studies, Redfame publishing, vol. 1(2), pages 11-19, September.
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    Cited by:

    1. Liozu, Stephan M., 2019. "Make pricing power a strategic priority for your business," Business Horizons, Elsevier, vol. 62(1), pages 117-128.
    2. Rick Cardot & Dick Boland & Stephan M. Liozu, 2021. "Factors that contribute to managers becoming engaged in unintentional price war," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 20(4), pages 410-419, August.
    3. Andreas Kramer, 2016. "Using Experimental Survey Designs to Support Pricing Decisions," Business and Management Horizons, Macrothink Institute, vol. 4(1), pages 22-38, June.
    4. Vik Pant & Eric Yu, 2018. "Modeling Simultaneous Cooperation and Competition Among Enterprises," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 60(1), pages 39-54, February.
    5. Živilė Tunčikienė & Rolandas Drejeris, 2017. "Assessment of business conditions benevolence: case of occupational safety and health services," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 18(3), pages 505-520, May.

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      More about this item

      Keywords

      price competition; price war; signaling; cost-structure; long-distance bus connections; VUCA;
      All these keywords.

      JEL classification:

      • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
      • Z0 - Other Special Topics - - General

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