Gerra De Precios

The Art of Price War: a Perspective from China

Z. John Zhang and Dongsheng Zhou1

A price war is something to be avoided in the West. However, Chinese companies have earned a reputation for starting price wars. Many US companies know too well that the first sight of a Chinese company in a US market means a price war is coming: it always offers a price that is 30-50% lower than its closestcompetition (BusinessWeek 2004). By now, many US companies have a taste of that terrifying “China Price.” Many practitioners and experts question the rationality for Chinese companies to start price wars. “Why can't they just lower the price by 10% or even 20%,” many wonder aloud. “That way, they can still keep their damned price advantage and do much better for themselves, too?” In the West,academic researchers and practitioners alike know that the outbreak of a price war means disastrous consequences for firms involved and hence they all view price wars in an industry as the failure of managerial rationality. A Fortune magazine article captures this prevailing view accurately. “What are price wars good for?” the article asks (Henderson, 1997). In the same breath, the author answers thequestion definitively: “Absolutely nothing.” If price wars are good for “absolutely nothing,” of course, no firm should ever initiate them. If a firm does, it must be driven by insanity. In

Z. John Zhang is an Associate Professor of Marketing at the Wharton School in Philadelphia. Dongsheng Zhou is a Professor of Marketing at the China Europe International Business School (CEIBS) in Shanghai. Wethank Eric Bradlow, Christophe van den Bulte, Raghu Iyengar, and Dave Reibstein for their helpful comments. We also want to thank the participants in the Wharton executive education program on pricing and the EMBA’s at CEIBS for their enthusiastic participation in the discussion of price wars. For correspondence, please send email to zjzhang@wharton.upenn.edu or call at 215-898-1989.

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1that case, “[t]he best way to escape a damaging price war is not to jump into the fray at all” (Rao, Bergen, and Davis, 2000). Chinese companies obviously do not share the same code of business conduct. They are not just “war mongers” in the US markets. They also take their gloves off in their own domestic markets and have no hesitation to start a price war if it is deemed necessary to achievetheir sales and profit objectives. In the past ten years, firms in China have fought large-scale price wars in a wide range of industries, including consumer electronics, home appliances, personal computers, mobile phones, telecommunications, cables, and, most recently, automobiles. It is in their domestic markets where they hone their skills in waging price wars. Indeed, price wars are widelyconsidered as a legitimate, effective marketing strategy by executives and business thought leaders in China. It is not uncommon for today’s executives to talk about the “business arena” as the “battleground,” and they do not just talk about it metaphorically, either. In fact, strategy in Chinese, “zhanlue,” literally means “battle plans” or “combat strategies.” The rub is that while Western companiesseem to suffer whenever they start, or they are caught in, a price war, Chinese companies seem to thrive on price wars they start and many emerge from them stronger, bigger, and more profitable. Like any other war, victories in price wars also produce many legendary “generals” in China. Some of them become idols for aspiring managers and some even become national heroes thanks to the extensivemedia coverage of price wars in China.2

A keyword search of “price war” in one Chinese newspaper database, for instance, generated more than 13,000 articles in the past decade, some of which hail the initiators of price wars as courageous, decisive “generals.”

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In 1995, for example, IBM, Compaq, and HP were the three best selling PC brands in China, but three years later, the top 5...