It is true that firms competing for differentiation may resort to price wars, which can significantly decrease profits. Such competitive behavior, including predatory pricing, can endanger businesses and impact workers negatively, while potentially offering temporary benefits to consumers.
It is true that two or more firms competing for differentiation may engage in price wars that drive profits to very low levels. Firms strive for differentiation by offering unique products or services, but when they also compete on price, it can lead to aggressive price cuts. This can reduce a business's profits to minimal levels, potentially threatening its survival and affecting employees' incomes and job security. Competitive strategies may include differentiation or cost leadership, but when competition becomes focused on price, profit margins can shrink dramatically across the industry.
One example of such competitive behavior is predatory pricing, which is when established firms lower prices below their average variable cost to drive competitors out of the market. This can be a risky move as it may push the firm itself into loss-making territory if sustained for too long. Moreover, in situations like these, the benefits for consumers in terms of lower prices might be temporary if the aggressive pricing strategy leads to less competition in the long run.
Overall, while differentiation strategies aim to provide unique value to customers, when they result in price wars, the effects can be harmful to businesses and employees alike. Understanding the nuances of these strategies is crucial for properly managing competitive dynamics and maintaining healthy profit levels.