When faced with a competitor that could take away a firm’s current customers, the firm should immediately launch a price war. True False
The correct answer and explanation is:
Correct Answer: False
Engaging in a price war is not always the best or immediate response when a firm is faced with a competitor who could take away its current customers. A price war involves repeatedly lowering prices in response to a competitor, and while it may attract price-sensitive consumers in the short term, it often causes long-term harm to profitability, brand value, and industry stability.
Lowering prices can reduce the firm’s profit margins significantly, especially if both competitors continue to undercut each other. In industries with high fixed costs or low product differentiation, such a strategy can be financially damaging. A price war may also erode brand perception, making it difficult for the firm to justify premium pricing in the future.
Instead of rushing into a price war, a firm should first evaluate other strategies. One alternative is to enhance product or service quality to differentiate from the competitor. Strong customer service, unique features, or better user experience can give the firm a competitive edge without cutting prices. Another option is to increase customer loyalty through programs or targeted marketing. The firm can also explore partnerships or innovation to create value that competitors may not be offering.
Strategic responses should be based on analysis of market position, customer needs, cost structure, and the competitor’s capabilities. Sometimes, matching the competitor’s value rather than price may be more effective.
In summary, while a competitor’s entry is a valid concern, an immediate price war can be destructive. The firm should respond with strategic thinking rather than panic, focusing on sustainable ways to retain customers and maintain profitability.