Price Wars In Oligopolistic Markets: A Perspective From China

This paper investigates the phenomenon of price wars in oligopolistic markets. Basic oligopoly models are summarized in order to explain the nature of competition in markets that are characterized by strategic interdependencies. In particular, the paper describes how firms avoid price wars by cooperating with each other. Furthermore, it discusses the main influence factors on the likelihood of price wars. These influence factors are derived from the industrial economic models introduced in this paper as well as empirical observations. They include government intervention, market conditions, customer behavior, and firm-specific characteristics. They explain why price battles are more likely to emerge in a particular business environment and why they can be a profitable strategy under some conditions. The perspective from China is used to illustrate how different preconditions in mature markets and dynamic developing economies may make price wars less attractive in Western markets and more attractive in China. While price wars are avoided in Western markets, they are appreciated as a legitimate and effective business strategy by many Chinese firms. Managers in China will almost for sure have to deal with a price war at some time in their careers. Therefore, this paper proposes a general management framework for price wars and gives some insights about what managers must expect in China. At first, managers must always analyze the battleground. Then, they can find ways to stop a price war before it starts, initiate a price war, defend its market position by avoiding direct price competition, defend its market position by fighting back, or retreat. A small case study is used to apply the analysis proposed here and to demonstrate how a Chinese firm formulates its price war strategy in a highly competitive market.