The first step to fight a price war, then, is diagnosis. Consider a small commodities supplier that suddenly found that its largest competitor had slashed prices to a level well below the small company’s costs. One option the smaller company considered was to lower its price in a tit-for-tat move. But that price would have been below the supplier’s marginal cost; it would have suffered debilitating losses. Fortunately, a few phone calls revealed that its adversary was attempting to drive the supplier out of the local market by underpricing its products locally but maintaining high prices elsewhere. The supplier correctly diagnosed the pricing move as predatory and elected to do two things. First, the manager called customers in the competitor’s home market to let them know that the price-cutter was offering special deals in another market. Second, he called local customers and asked them for their support, pointing out that if the smaller supplier was driven off the market, its customers would be facing a monopolist. The short-term price cuts would turn into long-term price hikes. The supplier identified solutions that eschewed further price cuts and thus averted a price war.
Intelligent analysis that leads to accurate diagnosis is more than half the cure. The process emphasizes understanding the opportunities for pricing actions based on current market trends and responding to competitors’ actions based on the players and their resources. Not only is it necessary to understand why a price war is occurring or may occur, it also is critical to recognize where to look for the resources to do battle. Good diagnoses involve analyzing four key areas in the theater of operations. They are customer issues such as price sensitivity and the customer segments that may emerge if prices change; company issues such as a business’s cost structures, capabilities, and strategic positioning; competitor issues, such as a rival’s cost structures, capabilities, and strategic positioning; and contributor issues, or the other players in the industry whose self-interest or profiles may affect the outcome of a price war. Companies that step back and examine those four areas carefully often find that they actually have quite a few different options—including defusing the conflict, fighting it out on several fronts, or retreating.(via)