Although I was hesitant at first to write about the current book price war between WalMart/ Target/ Amazon.com due to my own personal history in the book business and my desire to write about more of a variety of topics, I have to admit that such a compelling and interesting story of pricing does not happen terribly often.Whoever starts a price war better be sure about what they’re doing. This is a strategy that is difficult to get out of once you start it, and only those with strong operations and balance sheets with survive. Usually, the goal is to force others out of the market and gain market share. The problem is that market share does not automatically lead to profitability, which is why this move is often a mistake.
What happens:
Company A lowers prices. Company B needs to compete, so it lowers its prices as well.
Repeat until one company either
• Loses so much money in the price cuts that it can’t stay in the business
• Has to raise prices back up to account for lost profits, and likely loses customers and subsequently withdraws from the business
• Prices remain at the lower price as the new market standard, forcing out any companies who can’t sustain it and making it more difficult for new companies to enter the market.
If the price war ends and the “losers” are forced out, the “winners” can then raise prices again, sometimes to an even higher level than before, depending on who is left in the market.
Illustration—the “Prisoner’s Dilemma”
Neither company wants to be the first to climb out of the hole because they would lose (by falling into quadrant II or III). Both companies have to come out at the same time to get back to quadrant I, and they can’t legally communicate with each other directly on their pricing, so no one wants to budge, and they both end up losing (staying in quadrant IV).
Market competition is healthy—it forces companies to find the best ways to meet consumer needs to compete for their business. And usually, since for-profit companies are interested in making money, they would be interested in finding the appropriate price that would meet demand and consumer willingness-to-pay, which would be comfortably high enough to make money and low enough to draw consumers. However, before the average consumer gets too excited about falling prices on their favorite products, there are several things to consider:
Why a price war is bad
1. Once companies get involved with a price war, it’s difficult to get out of it. If it withdraws and raises prices back up, it loses business to the company that still has the lower prices. If it stays in, however, it could potentially lose a lot of money with cut prices that often go below costs and has to hope it is the stronger company to win the war.
2. Usually the price war affects a lot more down the supply chain than Joe Consumer realizes. In the case of the book price war, publishers and even authors get less money because there is a smaller pie to pass out. This might mean that some publishers may go out of business, and some authors may not be able to write as much and need to find other income sources. Because of reduced funding, other activities such as book tours may be reduced or eliminated.
The Book Price War
In the case of the current book price war, it is difficult to say what exactly will happen. The major players involved did so to try to lure in customers to the rest of their products, and used books as a sacrificial lamb. They are most likely losing money on the lower-priced books, but hope that interested customers will make up the difference in purchasing other products. That means that—you guessed it—prices are likely a bit higher on those other products, or at least their profits are a bit larger. Since the selection of books at WalMart and Target is lower than at major booksellers like B&N and Borders, the large chains will probably take a hit, but not be forced out of business (although those reduced-price blockbusters do bring in a big chunk of the business). Small booksellers will have a harder time holding steady, though, because they usually can’t cut prices as much and are already at a disadvantage in selection. Amazon.com has the advantage of the broad selection as well as the ability to cut prices in a sacrificial category, so I predict that they will come out on top, however it plays out.
Predicted winner: Amazon.com
Why a price war is bad
1. Once companies get involved with a price war, it’s difficult to get out of it. If it withdraws and raises prices back up, it loses business to the company that still has the lower prices. If it stays in, however, it could potentially lose a lot of money with cut prices that often go below costs and has to hope it is the stronger company to win the war.
2. Usually the price war affects a lot more down the supply chain than Joe Consumer realizes. In the case of the book price war, publishers and even authors get less money because there is a smaller pie to pass out. This might mean that some publishers may go out of business, and some authors may not be able to write as much and need to find other income sources. Because of reduced funding, other activities such as book tours may be reduced or eliminated.
The Book Price War
In the case of the current book price war, it is difficult to say what exactly will happen. The major players involved did so to try to lure in customers to the rest of their products, and used books as a sacrificial lamb. They are most likely losing money on the lower-priced books, but hope that interested customers will make up the difference in purchasing other products. That means that—you guessed it—prices are likely a bit higher on those other products, or at least their profits are a bit larger. Since the selection of books at WalMart and Target is lower than at major booksellers like B&N and Borders, the large chains will probably take a hit, but not be forced out of business (although those reduced-price blockbusters do bring in a big chunk of the business). Small booksellers will have a harder time holding steady, though, because they usually can’t cut prices as much and are already at a disadvantage in selection. Amazon.com has the advantage of the broad selection as well as the ability to cut prices in a sacrificial category, so I predict that they will come out on top, however it plays out.
Predicted winner: Amazon.com
Further Reading
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