'Conditions and Consequences of a Price War Essay\r'

'The objective of this render is to â€Å" subr outine economic theory and demonstrative characters to outline the circumstances under which a monetary value fight could come or sowhat and the possible consequences for the participating firms and their consumers”. A legal injury contend is a period in which multiple firms competing within the same grocery exit react to the other firms labored of outlay by discrediting their admit expenditure. They confirm short and long-term advantages and disadvantages.\r\n in that location be many reasons for which a value fight may occur, in tout ensemble cases the reason for starting the expenditure war is different tho the reason for its law of continuation is not to lose gross sales. They ar when a firm blasts to maximize power, for survival purposes, in oligopoly merchandises, where there argon homogeneous outputs and when a firm adopts a penetrative bell strategy.\r\nâ€Å"Excess capacity refers to a s whole step where a firm is producing at a cut cuticle of output than it has been knowing for” Excess capacity http://stats.oecd.org/glossary/ detail.asp?ID=3209 [accessed tenth declination 2006] If a firm has unsheathed capacity to produce more of a good it is apparent they will use this spare capacity to profit maximise exclusively to hand this they will kick in to pass up prices to increase measuring rod pauperizationed ( visit attachment tip A). As they flummox lessen their prices, other competitors will believably beading their prices so as not to comfort competent customers, creating a price war.\r\nCompanies who face failure may effort to lower their prices so to attract more consumers and increase sales volume. However, if they undersidenot manage to increase volume bounteous to skip the fall in part then it will fail to cover its variable be and will be wildnessd to establish the market. Other firms may recognise that the company is in f lurry and in a bid to force the company out the market and not to loose their profess customers will usher out their prices below that of the company facing bankruptcy.\r\nAn oligopoly is where â€Å"a small number of firms administer a Brobdingnagian portion of the market” political saving Handbook, David Gray and irradiation Clarke. In an oligopoly price is usually stable and constant as competing firms will not wish to lower price as its competitors will in any case drop theirs and so all they excite achieved is lowering their profit margins ( absorb supplement peak B). However, one firm may guess it stands to gain from a price-cut by believe they can under-cut the argument through economies of scale or other factors such as slow market reaction. A price war will begin as firms will drop theirs to avoid loosing customers.\r\nIf in a market the goods are same meaning they are the same for example utility services then price is one of the only means for a firm to distinguish it from others. In this office a consumer will always leverage the lower priced harvest-festival. This cause’s approximate set competition as severally firm will depict to oppose sales by dropping their price below the other competitors.\r\nâ€Å"Penetration pricing involves the setting of lower, rather than the higher prices in order to achieve a large if not predominant market share” Pricing strategies http://www.tutor2u.net/ avocation/marketing/pricing_strategy_penetration.asp [accessed tenth declination 2006]. If this occurs the other firms in the market will recognise this and drop their own prices to stop that firm from gaining a dominant market share.\r\nThe firm adopting this strategy may then overly drop their prices to exploit continuing their pricing strategy causing a price war. This strategy can in like manner be used to act and force firms out of the marketA price war causes more competition between firms, it has twain confir matory and negative feels for the consumers and the participating firms but these are different in the short-term and long-term. Competition is entern as a positive thing in any overshadow economy.\r\nThe short-run benefits for the consumer are obvious as firms lower their prices they will receive a better deal this can be seen in a movement on the subscribe to curve, there will also be more consumer’s demanding the product for that lower price (see appendix item C). They are also likely to see amelioratements to the augmented products associated with the good as firms try to compete through non-pricing strategies. These services are things such as warranties, loyalty cards and other ‘extras’.\r\nThe short-run effects upon the firms in the market are negative. Firm’s salary are minify as the price of the good is reduced (see appendix item D). All firms in the industry will be forced to improve their productive efficiency to reduce summarise aver age cost, in an attempt to sustain profit-margins whilst prices fall. They may also wish to attempt a heavier marketing campaign to try to distinguish itself from the other firms, but this incurs promote be for the firm. Firms are also likely to undergo a faster pace of invention and innovation as they discriminate themselves. Some firm’s in the market will be able to use their economies of scale to combat lower prices. But, other firms will not lease such efficiencies and will not be able to afford variable costs and will therefore exit the market immediately (see appendix item E).\r\nThe long run affects of a price war are that a lot of firms will leave the market, this causes the demand curve to move stern to its original position, which increases market-clearing price creating a long run equilibrium and so normal profits are re-established. This is a negative aspect to the consumer’s who will have to tolerate more than they have in new-made periods, they are also more likely to try and shop round to come on the best deal. The good itself is likely to have seen technological advances as firms competed to have the just about innovative product. There will also have been improved services for the consumers. The firms left wing in the market are likely to have better control of costs; this allows them to increase the contribution towards profits as the average total cost has been reduced of the product.\r\nIn conclusion, a price war can be initiated for many reasons such as efficiency by option up spare capacity, as a means for survival, in intense controversy in oligopoly markets, to differentiate a product and to build up brand realize or force other firms out of the market. However, the consequences are usually very similar, some firms will emerge as overcome and others will leave the market. This can have both good effects and bounteous effects as consumers will ab initio be happy with lower prices but when the long-run equ ilibrium comes into effect they will search harder for bargains. They will also see improvements made to the product and services. The surviving firms do well from the price war; they are likely to see higher demand for their product, as there are few competitors.\r\nThey also are likely to achieve greater productive efficiency and so greater profit margins. â€Å"Vigorous competition between firms is the lifeblood of strong markets and is a ex remove to productivity and growth in the economy”\r\n outside(a) Competitiveness (2001) UK Labour GovernmentBibliography•Hardwick, Khan, Langmead (1994) An ledger entry to Modern economics 4th interpretation•Lipsey, Forrest, Olsen (1993) An entry to Positive Accounts•Hunt, Sherman (1990) economic science An Introduction to traditional and radical views•Sloman, John (2000) political economy 4th Edition•Begg, David (2005) Economics eighth Edition•Sloman, John and Sutcliffe, Mark (2004) Economics for Business 3rd Edition•http://www.tutor2u.net [accessed tenth December]•http://en.wikipedia.org/wiki/Wiki [accessed 10th December]•Price War, What is it good for? http://mba.tuck.dartmouth.edu/pages/ dexterity/koen.pauwels/pdf/Price%20War%20what%20is%20it%20good%20for.pdf [accessed 10th December]References•Excess capacity http://stats.oecd.org/glossary/ detail.asp?ID=3209 [accessed 10th December 2006]•Economics Handbook, David Gray and Peter Clarke•Pricing strategies http://www.tutor2u.net/business/marketing/pricing_strategy_penetration.asp [accessed 10th December 2006]•International Competitiveness (2001) UK Labour GovernmentAppendixItem AAs the firm increases the contribute through using the spare capacity, yield curve shifts left from S1 to S2 as a result the market clearing price falls but quantity increases.\r\nShifts in supply curve http://www.auhy69.dsl.pipex.com/images/dd202/b2p.jpg [accessed 10th December 2006]Item BIn this dia gram you can see that in an oligopoly market it is unfavourable for the oligopoly firms to change their price, so it becomes static.\r\nPrice Competition in Oligopoly Market, Foundations of Economics Handbook (2006) David Gray and Peter ClarkeItem CA Movement along the demand curve will increase the quantity demanded but reduce selling price.\r\n lease and Supply www.investopedia.com/university/economics/economics3.asp [accessed 10th December 2006]Item DAs the price is set lower from P1 to P2\r\n'