Price War, what is it good for?

Eric Weiss and Koen Pauwels, Dec 14 2020

The news coverage of conflict, including the reporting about war, is often grounded in the notion that conflict has news value. As a result, war reporting is often sensational and sexy.

—Lee and Maslog (2005, p. 311)

Wars always have casualties, but may not always have a winner. This also goes for business wars, particularly when successive price cuts have companies selling below cost. In the US, this regularly happens in industries stuck with fixed costs and faced with declining demand, such as airlines right now. United announced August 30th it would dropping its fees associated with changing flight plans. A mere 24 hours later, both Delta Air Lines and American Airlines followed suit.  In retail, Walmart, Costco, Target and Kroger have waged price wars since 2017, resulting in Walmart slashes prices to stop the growth of hard discounters Dollar General and Family Dollar in the nationally-branded food category. We analyzed such retail price war in “Winners and Losers in a Major Price War,” which showed the market effects of such extreme price competition. Now, in “Fanning the Flames? How Media Coverage of a Price War Affects Retailers, Consumers, and Investors” , we discuss the role of the media in these effects.

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Consumers first react to retail price wars by shopping around and spending more. However, as the war goes on, their spending per visit drops, and they become more sensitive to price itself and the price image of each retailer. First mover advantage applies: the conflict initiator improved its price image without sacrificing service or quality image, and gained on similar competitors. At the same time though, hard discounters were not stopped but actually benefitted from the increased price sensitivity. The graph below shows the consumer perception of each retailer’s price level, with initiator Albert Heijn as a solid line below, and hard discounters Aldi and Lidl on top.

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What role did the media play in this story? First, they covered the aggressive price cuts and retailer announcements, such as the initiator’s desire to drop its prices down to the market’s average. Next, they extensively covered how competitors followed suit within days, and how these lower prices benefit consumers, at least in the short run. Especially media articles about multiple chains at once, drove reactions by consumers (in store visits), investors (in the retailer’s stock prices) and the retailers themselves (in intensifying the price war).

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The sentiment of this media coverage mattered mostly to consumers, while other stakeholders such as investors and retailers were only affected by the volume of such messaging. Media fuels the fire of price wars as it urges new price cuts over the ones already happening. Only months into the price war did the media start covering the negative impact on retail margin and their squeezing of suppliers, leading to a loss of over $1B and more than 30,000 employees in the grocery industry losing their jobs. As the price war progresses, media coverage becomes less frequent and less favorable, which slows down the downward price spiral.

Does this fit with your experience in price wars and journalism? Let us know!