Strategies for a Price War

Prof. Shweta Jha

Price Charged by Airline X to fly from Delhi to
Mumbai is Rs. 5500. Airlines X competes with
Airline Y. Airline Y has priced the same flight at Rs.
5200. To attract customers X Airlines reduced its
price to Rs. 5000 per trip.

To retain its market share Y Airlines also reduced

its price to Rs. 4900 per trip.

Both the airlines incur losses.

 Price Wars

• Jio vs. rest

• Surf vs. Nirma

• Times of India vs Rest

• Aggregators

• E-commerce
 What’s a Price War?

A period of fierce competition in which

traders cut prices in an attempt to increase
their share of the market.
• Airlines

• FMCGs

• Telecom

• E-commerce
Where and when do price wars happen?
• Overcapacity
• High exit cost
• Marginal cost to service additional customer low
• Ambitious challenger
– Foolish
– Backed with cash
– Cost advantage
 How to fight a price war?
Two approaches

1. Don’t fight a price war

2. Avoid if you can
1. Have I misread competitor’s actions
2. Is the action temporary/permanent
AVOIDING A PRICE WAR
 Through Posturing
• "Puppy Dog Ploy“ - Competitor fights back if you play tough, so you
don't commit to playing tough. Be small and look soft.
• "Top Dog“ - You play tough, you play hard. You gamble on the
chance that your rival will cower in the corner. Be big and look
tough.
• "Fat Cat Effect“ - You play soft and easy -- because you know that
your competitor will react by taking it easy as well. Be big but look
small.
• "Lean and Hungry Look“ - Competitor will go for the jugular if ever
you show any sign of weakness (i.e. play soft), so you don't commit
to be soft. Be small but look tough

Drew Fudenberg; Jean Tirole. The American Economic Review, Vol. 74, No. 2, Papers
and Proceedings of the. Ninety-Sixth Annual Meeting of the American Economic
Association (May, 1984),. 361-366.
 Threatening

• Intent
• Depth of pocket
• Cost structure
Signaling
FIGHTING
 Understand customer

• Are customers price sensitive?

• Why do they buy my products?

• What is the switching cost?

• Are they likely to come back?

 Understand competitor

• Motive

• Cost structure (comparative)

• Source of Cash

• Short term/Long term

 Non price responses
1. Compete on Quality
▪ Add value (features..)
▪ Differentiate
2. Co-opt contributors
▪ Exclusive deal (suppliers/channel members)
 Price Responses
1. Complex pricing strategy
▪ Two part
▪ Bundling
▪ Quantity discount
▪ Promotions
▪ Loyalty discount
2. Flankers– e.g. Jio with backing from Reliance
3. Adjust prices -
Optimize costs
Exit Strategy
Thank you