What is a Price War?

A price war is a situation in which competitors attempt to take market share from each other by reducing their prices. Eventually, the losses triggered by the price reductions cause one or more competitors to leave the market or declare bankruptcy, thereby allowing the reduced number of remaining competitors to raise their prices and reap larger profits over the long term.

Advantages of a Price War

A price war can attract more customers into a market, as lower prices make the products and services being sold more attractive to a larger audience. There may also be a short-term boost in profits after weaker competitors have been driven from the market.

Disadvantages of a Price War

A disadvantage of a price war is that new competitors are likely to appear over the long term that will drive down prices again, thereby reducing profits for those businesses remaining in the market from the earlier price war. This is especially common when there are few barriers to entry. A further disadvantage arises when few competitors decide to leave the industry because of a price war, resulting in ruinously low prices for all participants over an extended period of time.