MT Masterclass: Price wars

What are they? Oooh, nasty. The clue is in the name: it means war.

Last Updated: 09 Oct 2013

No prisoners are taken, 'victory or death', and so on. Price wars break out when businesses spot a possible weakness in the opposition, or panic that they are simply not getting enough customers to hand over the readies. A dramatic example in recent years was the slashing of the cost of newspapers. Rupert Murdoch challenged the orthodoxy - not for the first time - which held that newspapers were not price-sensitive: ie, readers were loyal and could not be lured by a drop in price. The assumption was wrong. And that war continues to this day, but with 'free' DVDs replacing the price mechanism as the weapon of choice.

Where did they come from? In his famous work The Wealth of Nations (1776), Adam Smith explains that businesses compete to make money. 'It is not,' he wrote, 'from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest.' Businesses are in it for the money. Regulators keep an eye on any possible cartels to ensure true competition, and, at its most intense, that always delivers a price war of some kind.

Where are they going? Up, up and away. In May, Ryanair said it would be offering thousands of flights to myriad destinations in Europe for the ultimate knock-down price of 1p: a million seats trying to attract a million cheapskate bums with which to fill them. This is another classic price-war scenario: both easyJet and Ryanair are looking down the barrel of reduced customer demand and struggling to deal with it. When in doubt, cut the price. But, in the words of the Oliver Wyman group's Richard Balaban, that ultimately 'teaches the customer to buy on price'. Bad news all round.

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