Business Economics

Business Economics


Institution + City




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Business Economics

In harsh economic situations, price becomes an imperative element in determining purchasing decisions. In fight for existence of establishments, price wars emerge and consumers reap great benefits. Examples of recent price wars include e-book reader market price wars, which was caused by emergence of new firms. Recent prices wars in the mobile phone industry and supermarkets have lead to a rapid decline of prices in the industries. Price wars are usually reactions to competition (Wallner 2011, 52). These two industries are prone to massive competition and numerous comparable products (Wallner 2011, 62). Under such circumstances, mobile phone industry and supermarkets are faced with huge incentives to reduce prices in order to acquire larger market share. If price wars are left unchecked, they may lead to the formation of a series of ever-lower price cuts that lessen profit margins. Establishments with lesser economic resources may even be locked out of the market.

Price wars are manifested in form of repeated reduction of prices below that of the rival firm (Threlfall-Holmes 2009, 23). When one rival establishment lowers its price, another establishment will lessen its price to match. If one of the firms reduces its price, a new phase of reactions begins. In the long run, the dominant supermarket is left in the industry (Shankar & Carpenter 2009, 65). Price wars lessen the alleged value of products or brand. Consumers anticipate a reduction in price. Consumers postpone their sales rather than paying for the present price. Consumers will continue to enjoy lower prices for a long duration. The lowered prices are difficult to restore to the position they were before the occurrence of price wars (Schliephake 2010, 76).

In the mobile phone and supermarket industries, price wars are used as marketing strategies (Price 2011, 14). Consumers directly benefit since they have possibility of paying low prices alongside purchasing more alternative products. Some effects of price wars are immediate to consumers. Price wars lead to a decrease in price of commodities. The purchasing powers of consumers are increased due to the lessened price. The quantity of goods purchased with the same amount of money increases (Price 2007, 14). Moreover, price wars may lead to provision of high quality products to consumers. Competition on encourages entry of new firms hence the high quality of products provided. Further, price wars lead to an increase in quantity supplied in the general economy.

Price wars necessitate sensitivity to price. Consumers react to changes in prices (Price 2014, 24). Price wars result in more advertisement and marketing. Consumers readily gain product information. Further, price wars lead to provision of dissimilar products that that are less expensive. In addition, the products offered are of high value as supermarkets attempt to make themselves unique in order to attract more customers (Peter & Olson 2010, 54). Further, customers gain from unique customers experience. Furthermore, price wars result in more efficiency in market operations. Firms respond more quickly to customer tastes and preferences (Harris 2012, 65). Supermarkets that cannot rapidly respond to customer needs are locked out of the market (Price 2014, 14). Price wars occurrence minimizes the chances of a reduction in reduction of output. Merchants are forced to reduce price rather than lessen output in order to ensure economies of scale. Customers gain from this as they purchase the right quantity of goods at relatively lower prices.

Lower prices are beneficial to consumers (Fishman 2010, 43). However, in some situations they may be the other way. In the event that a greater firm locks out competitors through aggressive price cutting mechanism, then consumers are left with little options. The dominating firm gain more market power over time due to the absence of potential competitors (Pearson 2011, 15)

Lower costs of production increases the quantity that producers are ready to produce and supply into the market at any time (Fershtman & Pakes 2009, 56). Producers produce more than their normal production level to take advantage of the lower cost. Thus, they will supply more of the product to the market at a given price (Harris 2012, 111). More production of the products will result in more supply that demand since the product supplied will exceed the equilibrium level (Crespo et. Al., 2009, 77). Producers will lessen their prices to attract more customers. A decrease in price attracts more consumers. Hence, the products will be more affordable at the lower prices and a larger segment of the market will possesses the mobile phones. The above explanation can be represented graphically as illustrated below.

An augmentation of quantity of goods produced leads to the shift of the supply curve from S1 to S2 at initial price. Quantity supplied increases from Q to Q1. At this point, the equilibrium quantity exceeded (Pearson 2011, 100). When quantity supplied exceeds Q1, price will reduce to retain the equilibrium status. A reduction in price leads to an increase in the quantity demanded (Bello 2009, 67).

The most suitable way to react to price wars is adopting dissimilar strategies. For instance, a firm may differentiate its products by offering superior or unique products. This will maintain its pricing power. Healthy competition is the most appropriate way. Excessively aggressive price wars yield negative long-term effects for both customers and establishments. There will be a place for a low cost establishment. However, other establishments should react to price wars by offering superior products alongside differentiating them.










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