Economics Oligopoly Questions Medium
In oligopoly, a price war refers to a situation where competing firms engage in aggressive price reductions in order to gain a larger market share or to drive competitors out of the market. It is a form of intense competition characterized by a series of price cuts and counter-cuts among the firms involved.
Price wars typically occur when there are a limited number of firms in the market, each having a significant market share. Due to the interdependence among these firms, any change in price by one firm can have a significant impact on the others. This creates a strong incentive for firms to match or undercut their competitors' prices in order to attract more customers.
The primary objective of a price war is to increase market share by offering lower prices than competitors. This can lead to a downward spiral of prices as each firm tries to outdo the others. However, price wars can be detrimental to all firms involved, as they often result in lower profit margins and reduced profitability for the industry as a whole.
Price wars can also have negative consequences for consumers in the long run. While initially benefiting from lower prices, consumers may experience reduced product quality, limited product variety, or even the exit of some firms from the market, leading to less competition and potentially higher prices in the future.
To avoid price wars, firms in oligopoly often resort to non-price competition strategies such as product differentiation, advertising, or offering superior customer service. These strategies aim to create a perceived value for the product or service that goes beyond price, allowing firms to maintain their market share and profitability without engaging in destructive price competition.