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In the battle to capture the customer, companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice—and frequently the skirmishing degenerates into aprice war.

Creating low-price appeal is often the goal, but the result of one retaliatory price slashing after another is often a precipitous decline in industry profits. Look at the airline pricewars of 1992. When American Airlines, Northwest Airlines, and other U.S. carriers went toe-to-toe in matching and exceeding one another’s reduced fares, the result was record volumes of air travel—andrecord losses. Some estimates suggest that the overall losses suffered by the industry that year exceed the combined profits for the entire industry from its inception.

Price wars can createeconomically devastating and psychologically debilitating situations that take an extraordinary toll on an individual, a company, and industry profitability. No matter who wins, the combatants all seem toend up worse off than before they joined the battle. And yet, price wars are becoming increasingly common and uncommonly fierce. Consider the following two examples:


•In July 1999, Sprintannounced a nighttime long-distance rate of 5 cents per minute. In August 1999, MCI matched Sprint’s off-peak rate. Later that month, AT&T acknowledged that revenue from its consumer long-distance businesswas falling, and the company cut its long-distance rates to 7 cents per minute all day, everyday, for a monthly fee of $5.95. AT&T’s stock dropped 4.7% the day of the announcement. MCI’s stock pricedropped 2.5%; Sprint’s fell 3.8%.



•E-Trade and other electronic brokers are changing the competitive terrain of financial services with their extraordinarily low-priced brokerage services. Theprevailing price for discount trades has fallen from $30 to $15 to $8 in the past few years.


There is little doubt, in the first example, that the major players in the long-distance phone...