Concept Of Price War And Oligopoly Theories Economics Essay

Experts argue that the idea of price warfare is a fact of life generally in most industrialised countries, evaluate the arguments for and against such behaviour. Discuss the impact of this behaviour in virtually any industry using different oligopoly ideas.

In this essay I will addresses the subject of price battle in industrialised countries. From different perspectives I will to try to break down and analyse the theory that 'price warfare in industrialised countries' is a 'fact of life'.

The basic and root concept of a price war is that two or more firms in an industry lower or change their own prices with the knowledge that in an oligopolistic environment the other companies for the reason that industry will lower theirs too so they match up. This is due to the interdependency in their connections with all the current firms for the reason that industry. Price fixing plays a major role in a price war. My method of assessing whether said statement holds true or bogus is to think about the pros and cons. After that I could make an informed decision and will be able to explain it through discussed discussions and ideas, and by aesthetic aids if required.

By the finish of my essay I will be able, also, to discuss, with help of oligopolistic theories, the effect a price war is wearing any industry.

A price battle is the concept that identifies financial activity of high competitive rivalry between a few organizations in a particular industry, with complex rounds of price reductions. If one company reduces their prices or an individual price of an good, then your other firms in that industry can do the same to complement that price.

In a business, when a express of oligopoly is clear (i. e. just a few retailers operate), each organization is quite with the capacity of producing enough of the industry' total end result, resulting in their capability to affect the market price.

A real life example of this is in the caffeine industry where there are three major makers; Starbucks, Cafe Nero and Costas Caffeine. These three large providers of caffeine produce such large percentages each one of the coffee industry that if, say, Starbucks were to increase their resource, the price of an average caffeine would decrease noticeably. An increase in output for just one of the coffee providers will bring about the price to decrease for the other organizations on the market.

To clarify further, if Starbucks produces double its output, the price tag on caffeine from Starbucks drops hugely. However, most people are not wholly loyal to a particular brand, so Costas Coffee and Cafe Nero drinkers will swap to the cheaper Starbucks. As a result, the price of Costas Coffee and Cafe Nero coffee drops too. These three major brands are part of a set of economic activities where each of the decisions on supple not only affects their

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own sales but also of the organizations rivalling against them. Such proper situations can involve competition or collusion.

Collusion= all companies within an industry agree to scale back on production by a certain amount to increase both prices and gains.

Competition= all organizations within an industry make an effort to increase creation with the intention to undermine opponents and gain as many customers as can be obtained.

The final results of both collusion and competition can be massively different for consumers and manufacturers.

For example, collusion benefits producers most due to the fact that so long as they keep colluding, their earnings will continue to increase. However, collusion has a negative effect on consumers since it results in higher prices and decreased output.

Collusion, unfortunately, is unusual and many sectors are dominated by greatly competing firms. If such collusion actually took place then government involvement may be necessary to protect consumers.

All these ideas of collusion and competition between companies in an industry are the major foundations and components of a price warfare. For a while, consumers benefit very well from such activities, due to the chance of profiting from lower prices. Also in the short run a poor impact can struck producers by the result of lower prices leading to reduced income. In the long term, the major firms in virtually any particular industry can gain from a price war with an increase of profits etc.

Price wars do seem to be to happen in every industry in some form or form. There's a reasonable amount of reason that is. To begin with there are opponents whom might wish to concentrate on a particular product and through this product try to gain market show by producing its different good at decreased prices.

There is also 'penetration pricing' where organizations may offer/provide lower prices of new brands of a good or product into an already highly founded market.

'Process search engine optimization' is also a cause in that firms might want to reduce prices alternatively than outcome with the program regulate and support the market of scale.

A big cause for price wars is 'predatory prices' (albeit outlawed). This refers to when a firm may set the purchase price extremely low, even too low, over a good, to be able to ddestroy other firms completely in that industry.

Finally and in a few ways most importantly, especially in context with this article title, is the cause 'oligopoly'. Oligopoly is where all economic activities on prices and outputs for every firm in an industry are interdependent.

Reactions to price changes and finally price wars may differ. The primary reaction to a price war price change or 'price lowering' is consideration and caution. For instance, has the rivalling firm decided whether it is doing a short-term or a long-term price


change? If its short term, a firms reaction should normally be overlooking the change. In any other case, short-term changes can be interpreted as cataclysmic changes and lead to big price wars.

However, for the long-term there is not simply a singular reaction. A company could maintain their price, split their product into reduced version and a basic. Or the most frequent highly anticipated reaction is decrease the price and keep in collection with one's challengers.

Now its quite easy to see why a price might be good and profit certain people. We can see that providers and consumers can benefit from them for some reason and at some point. But in the end gleam negative impact of price wars. As previously stated two or more firms compete within an industry and subsequently both reduce their prices. We see that one can benefit whether you are a developer or consumer anticipated to lessen prices but this is not always the situation. When these companies compete and start a price war, it is generally known that both companies lower value along with price. In the end the organizations lose income and the consumer loses value.

In my summary, I believe that price wars in the short-run can improve profits and makes it possible for consumers a small time to take advantage of lowered prices. However in the finish they cause more trouble than they may be worth. Nonetheless they also seem inescapable as nearly every single industry in an economy comes with an event of a cost war at some point. Inside the supermarket industry, Sainsbury and Tesco remain competitive in a cost conflict. O2 and T-mobile do the same in the mobile industry. Starbucks and Cafe Nero show indicators too. The list of price wars in different market sectors is long but obviously outlines that the statement 'the idea of a price war is an undeniable fact of life in industrialised countries' is just about correct.

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