As we have discussed in one of our earlier classes, a price war is where companies compete by changing their price in order to obtain customers. Using Lieber Light case as an example, since Vancouver Light is selling their products at a low price, one option of Lieber Light is to endure a price reduction and allow their revenue and profit to drop in order continue to compete in the skylight market.
What are the benefits of a price war? Continuing on with the Lieber case, there is no benefit for Lieber Light Company. But Vancouver Light is able to bankrupt competitors or sufficiently reduce their competition’s capabilities. The price war here benefits one group while hurting the other group. However there is a time when everyone can benefit from a price war. The factors that influence it are market and product type.
Business in China is influenced by its culture, norm, traditions, and pride, which are also all factors that have helped lead to their many reverse price wars. The Liebar Light vs Vancouver Light would be a regular price war, but in China, when someone wants to pull out ahead, all they need to do is increase their price and make it seem that their products are social status boosters. In a country where price and brand represents quality and status, the more expensive a similar good seems, the more beneficial it becomes.
Why is it that when you put a brand on a $20 purse, it can jump up to $2000? Are there humans so tempted to gain status that they try to achieve these means through any cost? It is because of these factors that a reverse price war can exist.
Everyone can win in a reverse price war. This is probably the only time a price war can be beneficial to everyone. The reason is, when one person manages to increase the price for their products, other companies are also allowed to follow suit, as long as the quality of the good is similar and the status boosting ability is the same. Everyone can gain an increase in profit and revenue.
http://blogs.hbr.org/cs/2010/03/chinas_reverse_price_wars.html