Who wins in a price war?

Original source: SimoleonSense.com .

I’m hoping that serious analysts and investors are mindful of the effects of price wars. Furthermore, this is exactly why you should be doing scuttlebutt research you need to understand long term pricing power, industry dynamics, and pricing problems.

H/T Eric Barker @ Bakadesuyo

Abstract

Although retail price wars have received much business press and some research attention, it is unclear how they affect consumer purchase behavior. This article studies an unprecedented price war in Dutch grocery retailing that started in fall 2003, initiated by the market leader to halt its sliding market share. The authors investigate the short- and long-term effects of the price war on store visits, on spending, and on the sensitivity of these decisions to weekly prices and price image. They use a unique data set with consumer hand-scan and perceptual data for a national panel of 1821 households, covering two years before and two years after the price war started. Although the price war initially entailed more shopping around and increased spending, spending per visit ultimately dropped because consumers redistributed their purchases across stores. The price war made consumers more sensitive to weekly prices and price image, which helped both the chain that showed an improvement in price image (the price war initiator) and the chains that already had a favorable price image (hard discounters). The price war initiator managed to halt the slide in its market share, and its stock price improved. The losers were the rival mid-level and high-end chains. Unlike the initiator, their price image did not improve, and they suffered from increased price image sensitivity. The authors provide managerial implications for firms that are (or about to be) involved in a price war.

Source: “Winners and Losers in a Major Price War” from Journal of Marketing Research