Fundamentals of Business

The main reasons that price wars occur are

The main reasons that price wars occur are:
√ To utilize excess plant capacity. Rather than run a plant at well below its optimum capacity, firms reduce their prices so as to sell enough to keep the plant running at its optimum level.
√ Bankruptcy and survival. Companies near bankruptcy may be forced to reduce their prices so as to increase sales volume and thereby provide enough liquidity for survival.
√ Response to a competitive attack. A competitor might target your product and attempt to gain share from you by selling a product at a low price. Rather than retaliate with a matching price cut, it is usually better to introduce a fighting brand.
√ The nature of the product. Some products, such as commodities, are very difficult to differentiate.
√ Without unique product features, price becomes the main basis of comparison.
√ Penetration pricing. If some of the firms are employing a penetration pricing strategy, their prices will be relatively low.
√ Oligopoly. If the industry structure is oligopolistic (that is, few competitors), the players will closely monitor each others prices and be prepared to respond to any price cuts.

Threat of new entrants

New entrants pose a threat only if they will be offering a substitute to an enterprise's products or services. There are more new entrants when barriers to entry and exit are low.

For example, On the high street, there are many small retail shops that have been opened and not last for even a few months. The fact that one good is substitutable for another has immediate economic consequences: insofar as one good can be substituted for another, the demand for the two kinds of good will be bound together by the fact that customers can trade off one good for the other if it becomes advantageous to do so.

Thus, an increase in price for one kind of good will result in an increase in demand for its substitute goods, and a decrease in price again will result in a decrease in demand for its substitutes. Thus, economists can predict that a spike in the cost of wood will likely mean increased business for bricklayers, or that falling mobile phone rates will mean a fall off in business for public pay phones, it is evident in UK now, off how many BT telephone booths/kiosks have been removed.

Extract from the Dailystar UK newspaper

GLAXO JOBS PURGE
Job loses at GlaxoSmithKline, 25th October 2007, By Bill Martin GlaxoSmithKline is to axe thousands of jobs after profits fell in the face of stiffer competition, a weaker dollar and tumbling sales of diabetes drug Avandia.
Jean Pierre executive Chief Garnier said the drugs giant would cut £700million a year in costs for a one off hit of £1.5billion spread over the next three years.
The axe will fall heaviest in manufacturing, sales and admin. However, around a fifth of savings will come from research and development, the division responsible for generating blockbuster drugs of the future. The restructuring was announced as the company unveiled a 7% drop in pre tax profits to £1.9bn on turnover down 3% to £5.5bn for the third quarter to June.
Sales in Avandia, one of Glaxo's best selling drugs, dropped by 38% to £225m, wiping out strong gains in the company's vaccines division.
The shares fell as analysts also expressed concerns another top selling drug, asthma treatment Advair was facing tough competition from AstraZeneca's Symbicort.
But the company said the restructuring was because it was facing stronger competition from generic drug makers, who make cheap versions of treatments no longer covered by patent protection, and a tougher stance from regulators.