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1.1 Introduction of Price War:
Modern marketing begins and ends with the customer needs. Satisfaction of customer
need is the function and goal of marketing. Marketing management continuously
endeavors to improve the quality of life of the people by providing them better products
and services at affordable price. Marketing is an ongoing and dynamic process involving
a set of interacting activities between producers and consumers, meeting the consumer
demands and expectations in a fair manner. Besides quality, price is a critical component
in the marketing of any product or services. Pricing has an important bearing on the
competitive position of a product. The consumers support directly depends on the price
fixed. The marketing manager often uses pricing as a tool for achieving the targeted
market share or sales volume. The marketing managers of different and competing
business enterprises/industries dealing with same and /or similar kind of products often
resort to competitive pricing in order to capture major market share or out beat the
competitor in the market, which often leads to price war in the market field.
Price war is a term used in economic sector to indicate a state of intense competitive
rivalry amongst suppliers of goods and services, accompanied by a multi-lateral series of
price reduction. One competitor lowers its price, and then others will lower their prices
to match. If one of them reduces the price again, a new round of reductions starts. In the
short-term, price wars are good for consumers, who can take advantage of lower prices.
Often they are not good for the companies involved. The lower prices reduce profit
margins and can threaten the survival of supplier companies. In the medium to long term,
they can be good for the dominant firms in the industry.
Typically, the smaller, more marginal firms cannot compete and must close. The
remaining firms absorb the market share of those closed. The real losers then, are the
marginal firms and their investors. In the long term, the consumer may lose too. With
fewer firms in the industry, prices tend to increase, sometimes higher than before the
price war started. Price wars are characterized by competing firms struggling to undercut
each other‟s prices. Urbany and Dickson (1991) refer to a “price-cutting momentum,”
the downward price pressure that drives other competitors to follow the initial move.
Price is the logical weapon of choice: it is easy to change fast. Unlike typical intense
price competition, price wars lead to prices that are not sustainable in the long term.
Based on an extensive review of business press articles and academic literature, define a
price war to require one or more of the following conditions: a strong focus on
competitors instead of on consumers, the pricing interaction as a whole is undesirable to
firms, the competitors did neither intend nor expect to ignite a price war, the competitive
interaction violates industry norms, the pricing interaction occurs at much faster rate than
normal, the direction of pricing is downward, and the pricing interplay is not sustainable.
Price wars have become a fact of life in a wide range of industries. Business press and
academic papers report on price wars in industries ranging from electricity, airlines, fast
food to groceries. Price wars erupt at various levels in the distribution channel, and with
growing frequency and intensity. This leads to conclude that “If you’re not in a battle
currently, you probably will be fairly soon”.
Price war is "commercial competition characterized by the repeated cutting of prices
below those of competitors". One competitor will lower its price, and then others will
lower their prices to match. If one of them reduces their price again, a new round of
reductions starts. In the short term, price wars are good for buyers, who can take
advantage of lower prices. Often they are not good for the companies involved because the lower prices reduce profit margins and can threaten their survival.
In the medium to long term, price wars can be good for the dominant firms in the
industry. Typically, the smaller, more marginal, firms cannot compete and must close.
The remaining firms absorb the market share of those that have closed. The real losers
then, are the marginal firms and their investors. In the long term, the consumer may lose
too. With fewer firms in the industry, prices tend to increase, sometimes higher than
before the price war started.
Companies continuously lower their prices to undercut the competition. A price war may
be used to increase revenue in the short term or as a longer term strategy to gain market
share. Price wars can be prevented through strategic price management (with nonaggressive
pricing), thorough understanding of the competition, or even communication
with competitors.
1.2 DEFINITION OF 'PRICE WAR':
A period of fierce competition in which traders cut prices in an attempt to increase their
share of the market. - Google defn
Investopedia explains 'Price War'
When a company wants to increase market share, usually the easiest way is to reduce
prices, which increases product sales. The competition may be forced to follow suit if its
products are similar. As prices get lower the quantity of sales increases and customers
receive the benefits. Eventually, a price point is reached that only one company can
afford. Some companies will even sell at a loss in an attempt to eliminate the competition
completely.
“A situation in which companies or stores compete with each other by lowering their
prices on goods or services in order to attract more customers.”
Merriam Webster defines Price war as:
“Commercial competition characterized by the repeated cutting of prices below those of
competitors.”
Business Dictionary definition:
“Market situation in which (usually two) powerful competitors try to usurp each other's
market share by progressively reducing prices until one of them retreats, at least
temporarily.”
Cambridge Dictionary defines:
“A situation in which different companies compete with each other by reducing prices.”
1.3 OBJECTIVES OF STUDY:
1) To study the present price war in the market with reference to mobile
industries.
2) To find out how customers are benefited due to price wars among mobile
companies.
1.4 SCOPE OF THE STUDY:
In today‟s modern world many people use mobiles. There is craze among the young
generation of mobiles. So there is ready market for all the mobile companies. To capture
the market share every company tries to reduce their prices; this leads to the
consequences of price wars. There is scope for the study to how the price war occurs and
what is their impact on consumers spending and their purchasing behavior.
1.5 RELEVANCE OF THE STUDY:
The present study is based on the primary and secondary data collection. Researcher has
done the survey of consumers or people. The outcome of the study will definitely useful
in the marketing field to take appropriate marketing decisions. It may be consider as one
of the important tool of Marketing Information System.
The study of price war helps to understand the pricing strategies implemented by various
companies to attain its goal. The study has relevance from the point of view of
manufacturer as it clearly gives the picture of effects of price war on concern industry.
The study also helps to understand how price war brings down the cost of product and
ultimately helps the final consumer.
1.6. RESEARCH METHODOLOGY:
The project data is based on the primary as well as secondary data.
1.7. POPULATION AND SIZE
From 1000 mobile users the researcher has taken 25 people for sample survey.
1.8 CAUSES PRICE WARS:
The main reasons that price wars occur are:
Product Differentiation: Some products are, or at least are seen as, commodities.
Because there is little to choose between brands, price is the main competing
factor.
Penetration Pricing: If a merchant is trying to enter an established market, it may
offer lower prices than existing brands.
Oligopoly: If the industry structure is oligopolistic (that is, has few major
competitors), the players will closely monitor each other's prices and be prepared to respond to any price cuts.
Process Optimization: merchants may incline to lower prices rather than shut
down or reduce output if they wish to maintain the economy of scale. Similarly,
new processes may make it cheaper to make the same product.
Bankruptcy: Companies near bankruptcy may be forced to reduce their prices to
increase sales volume and thereby provide enough liquidity to survive.
Predatory Pricing: A merchant with a healthy bank balance may deliberately
price new or existing products in an attempt to topple existing merchants in that
market.
Competitors: A competitor might target a product and attempt to gain market
share by selling its alternative at a lower price. Some argue that it is better to
introduce a new rival brand instead of trying to match the prices of those already
in the market. 7
1.9 REACTIONS TO PRICE CHALLENGES:
The first reaction to a price reduction should always be to consider carefully. Has the
competitor decided upon a long-term price reduction? Is this just a short-term promotion?
If it is the latter, then the reaction should be that relating to short-term promotional
activity and the optimum response is often simply to ignore the challenge. Too often,
price wars have been started because simple promotional activities have been
misunderstood as major strategic changes.
But if it seems that it is a long-term move then there are many possible reactions:
Reduce price: The most obvious and most popular reaction is to match the
competitor's move. This maintains the status quo (but reduces profits pro rata). If this route is to be chosen it is as well to make the move rapidly and obviously - not
least to send signals to the competitor of your intention to fight.
Maintain price: Another reaction is to hope that the competitor has made a
mistake, but if the competitor's action does make inroads into a merchant's share,
this can soon mean customers lose confidence and a subsequent a loss of sales.
Split the market: Branch one product into two, selling one as a premium and
another as a basic. This effective tactic was notably used by Heublein, the former
owner of the Smirnoff brand of vodka).
React with other measures - Reducing price is not the only weapon. Other tactics
can be used to great effect: improved quality, increased promotion (perhaps to
improve the idea of quality). 8
1.10 EFFECTS OF PRICE WAR ON CONSUMER SPENDING:
In the absence of a strong and sustainable cost advantage, price wars are “good for
absolutely nothing” and may lead to dramatic losses for the market players involved.
Price wars affect consumer spending, leading to negative impact on some market players
and a positive impact for others.
By definition, price wars constitute market disruptions: market players announce major
strategy changes, and formulate unprecedented claims on reduced prices. For instance,
the two major high-service/high price Dutch retailers stated that shopping in their chain
allows for “dramatic savings” on grocery spending and that “gigantic” benefits are to be
reaped from permanent price reductions. Such widely publicized claims may shake up
consumers‟ former beliefs about the market, and lead them to reconsider their established
purchase patterns, both in terms of store visits and spending.
In the short term, i.e., right after the start of the price war, consumers face increased uncertainty about which stores offer the best value for money. As a result, they are likely
to adopt risk-reducing strategies, engaging in comparison shopping in order to update
previous information. In other words, they will visit more chains, at least to check out the
new prices in these stores.
At the same time, the price war‟s influence on spending is subject to three forces. First,
the price war leads to lower prices, and as a result spending reduces even when quantities
remain the same. In our approach we focus on the impact of the price war on spending
controlling for these price-driven changes. This impact may be negative due to the second
force: consistent with the argument on uncertainty, consumers may split their total goods
spending across more stores, thereby reducing the probability of systematically getting
the worst deal. So while visiting more stores, shoppers would spend less per store.
Conversely, the short-term impact of the price war on spending may be positive due to
the third force: the sudden and heavily publicized price drop may create an unexpected
“psychological income” or “windfall” effect. For instance, one field experiment found
that, when given a monetary award before entering a store, shoppers spend more in the
store – in excess of the monetary award. In a similar vein, the price war‟s sudden
promise of “dramatic savings” may induce consumers to “burn a hole in their pockets,”
that is, to disproportionally increase their spending, as the savings enable them to afford
better quality brands and to enjoy the transactional utility of getting a great deal.
1.11 CONSUMERS AND PRICE WARS
On the surface, lower prices mean a better deal for consumers. However, in some
situations it can work the other way. If a large firm can drive competitors out of business
through aggressive price cutting, then consumers are left with fewer choices in the end.
The remaining firms gain more pricing power over time, since there is no longer an
established set of competitors.
PRICE WAR BETWEEN NOKIA AND SAMSUNG
Nokia Declares War on Samsung with Exciting New Android Smartphones at
Stunning Prices.
Today Nokia introduced a rather stunning lineup of smartphones that are Android based.
The new designs introduce a fresh hybrid UI resembling the Windows Phone OS with
bright icons along with integrated Microsoft services like Skype, One Drive and more.
The pricing for their new smartphones is jaw dropping. It's clear that Nokia is declaring
war on the current Android OEM leader Samsung. In fact, no matter what Samsung
introduces later today, Nokia's bombshell will likely be the smartphone to watch for this
year. If Microsoft is looking to become a real player in the smartphone market in 2014,
then Nokia's latest round of Android phones are bound to chalk up some serious market
share gains.