In this essay I will address the subject of price war in industrialised countries. From different angles I will to try to break down and analyse the idea that ‘price war in industrialised countries ‘ is a ‘fact of life’.

The basic and underlying concept of a price war is that two or more firms in an industry lower or change their own prices with the knowledge that in an oligopolistic environment the other firms in that industry will lower theirs too so they match up. This is due to the interdependency in their interaction with all the firms in that industry. Price fixing plays a major role in a price war. My method of assessing whether said statement is true or false is to weigh up the pros and cons. From there I can make an informed decision and will be able to explain it through outlined discussions and ideas, and by visual aids if necessary.

By the end of my essay I will be able, also, to discuss, with help of oligopolistic theories, the effect that a price war has on any industry.

A price war is the concept that refers to economic activity of high competitive rivalry between a few firms in a particular industry, with complex rounds of price reductions. If one firm reduces their prices or a single price of a good, then the other firms in that industry will do the same to match that price.

In an industry, in which a state of oligopoly is apparent (i.e. only a few sellers operate), each firm is quite capable of producing enough of the industry’ total output, resulting in their ability to affect the market price.

A real world example of this is in the coffee industry where there are three major producers; Starbucks, Cafe Nero and Costas Coffee. These three large providers of coffee produce such large percentages each of the coffee industry that if, say, Starbucks were to increase their supply, the price of an average coffee would decrease considerably. An increase in output for one of the coffee providers will result in the price to decrease for the other firms in the industry.

To explain further, if Starbucks produces double its output, the price of coffee from Starbucks drops hugely. However, most people are not wholly loyal to a particular brand, so Costas Coffee and Cafe Nero drinkers will switch to the cheaper Starbucks. As a result, the price of Costas Coffee and Cafe Nero coffee drops too. These three major brands are part of a set of economic activities where each of their decisions on supple not only affects their

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own sales but also of the firms competing against them. Such strategic situations can involve competition or collusion.

Collusion= all firms in an industry agree to cut back on production by a certain amount to increase both prices and profits.

Competition= all firms in an industry try to increase production with the intent to undermine competitors and gain as many customers as can be attained.

The outcomes of both collusion and competition can be massively different for consumers and producers.

For example, collusion benefits producers most due to the fact that as long as they keep colluding, their profits will continue to increase. However, collusion has a negative effect on consumers because it results in higher prices and decreased output.