A Few Words on Price Wars

It’s a sustained period of visible and aggressive discounting aimed at stealing share, usually triggered by misread signals or structural shifts. They’re different from normal promotions because the cuts are broad, frequent, and quickly matched; competitors’ moves are clearly retaliatory, and margins fall faster than volume grows. 

Takeaway: If you see one rival running a targeted promo while others are holding steady, that’s competition. When everyone’s slashing in lockstep and your gross margin chart looks like a ski slope, you’re in war territory.

In the standard Bertrand model (identical products, no capacity limits, customers who always pick the lowest price), equilibrium price drops to marginal cost – nobody profits. In practice, this knife-edge result relies on products being perceived as identical; introducing differentiation or capacity limits breaks the zero-profit outcome.

Takeaway: If your offer looks interchangeable (same specs, same services levels, same brand signals), you’ve effectively volunteered for a Bertrand game. Your best defensive move is making sure you’re not actually selling the same thing.

Common triggers:

• Overcapacity: You or a rival need volume to keep plants, trucks, or crews busy.

• New entry: A newcomer uses low price as a battering ram.

• Misinterpreted moves: A one-off promo gets read as a permanent shift.

• Short-term targets: Sales pushes “must-hit” volume goals and reaches for price as the easy lever.

Takeaway: Most triggers are internal  problems, not customer demands. The right response often involves clarifying value, changing segments, or adjusting product design, not matching cuts across the board.

We don’t need to solve equations, but a few canonical games are useful for gut-checks (you’re going to want to click that link):

• Bertrand knife-fight (simultaneous price cuts, identical offers): Everyone undercuts until profit vanishes. Escape by differentiating the offer: bundle service, change SLAs, add guarantees, or design features competitors can’t cheaply copy.

• Cournot quantity game (competing on output, not just price): Overproducing forces prices down; underproducing slightly can keep price above cost. Here, smart capacity management and order discipline matter more than headline cuts.

• Stackelberg leadership (commitment moves): A firm that commits early (capacity, long-term contracts, exclusive access) can shape rivals’ best responses and keep prices higher.

• Repeated games (legal, non-collusive version): When you and rivals see each other’s moves regularly, overly aggressive cuts tend to be punished later. Publishing clear price lists and avoiding surprise slashing can support more stable pricing without any agreements.

• Limit pricing and entry deterrence: Temporarily setting price just low enough to make entry unattractive can protect future margin, but it’s risky, legally sensitive, and capital-intensive. Use sparingly, if at all, and stay within antitrust law.

Takeaway: In almost every lens, the profit-maximizing move is not “cut faster and deeper.” It’s to choose a game where you’re not one indistinguishable chip in a commodity casino.

Diagnose the rival’s motive. Are they clearing inventory, filling capacity, entering a new segment, or genuinely resetting the market?

Assess asymmetries. Who has the lower cost base, stronger brand, or better customer loyalty? If they’re structurally cheaper, following them straight down is volunteering to bleed first.

Design non-price responses:

1. Enhance or highlight differentiation (better service tiers, guarantees, integrations).

2. Re-segment: protect core segments with stable prices, redirect cuts (if any) to price-sensitive tails.

3. Add switching costs: loyalty benefits, onboarding support, data migration.

If you must respond on price, do it surgically:

1. Fence by segment, channel, or time.

2. Tie cuts to explicit KPIs (trial, inventory, capacity fill).

3. Pre-define exit triggers and rollback dates.

Takeaway: Unstructured responses often leave the market with lower average margins and little long-term share gain.

Matching cuts is usually a bad idea when:

• You have a clear value story (reliability, expertise, compliance) and loyal customers. 

• Your cost base is higher than the discounter’s and can’t be fixed quickly.

• The discount is limited (channel-specific, narrow window) and customers don’t expect parity.

• You can instead add value without cutting list price.

Takeaway: Holding price (and communicating why) often preserves long-run value better than diving into the fray.