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

From the perspective of customers, a price war is nearly always good. They benefit in the following ways:

Lower prices. Consumers benefit from significantly reduced prices as businesses compete to offer the best deals. This can lead to short-term savings and greater affordability.
Improved value. Businesses may enhance the quality of their offerings or bundle additional services to differentiate themselves, leading to better overall value for customers.
Market accessibility. Lower prices can make products or services more accessible to a broader audience, including those who previously found them unaffordable.

A price war can even provide advantages to some businesses, which are as follows:

Increased market share. If a business can sustain lower prices longer than competitors (e.g., through cost advantages), it may capture a larger share of the market, especially as rivals exit due to financial strain.
Efficiency improvements. A price war can drive businesses to streamline operations, cut inefficiencies, and innovate, reducing costs and improving long-term competitiveness.
Weeds out weaker competitors. Stronger companies with better financial resources or cost structures may outlast weaker rivals, consolidating the market and reducing competition over time.
Stimulates demand. Lower prices can boost demand, especially in price-sensitive markets, helping businesses offset smaller margins with higher volumes.
Creates a barrier to entry. Aggressive pricing may deter new competitors from entering the market, particularly if they lack the resources to sustain a price war.

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.