Final answer:
Sony lowered the price of its Reader to match Amazon's Kindle after Amazon's cost-efficient production model enabled it to set lower prices. Sony's adjustment aims to retain competitiveness in a market transformed by Amazon's pricing strategies.
Step-by-step explanation:
A price war is a form of market competition in which companies within an industry engage in aggressive pricing strategies, “characterized by the repeated cutting of prices below those of competitors”. This leads to a vicious cycle, where each competitor attempts to match or undercut the price of the other. Competitors are driven to follow the initial price-cut due to the downward pricing pressure, referred to as “price-cutting momentum”.
After Amazon lowered the price on Kindle e-readers, Sony eventually lowered the price on its Reader primarily to match the competitor's price. This move was necessary for Sony to maintain a foothold in the market. Given that Amazon's efficient production model and cost structure have allowed it to significantly undercut competitor's prices, including the cost of shipping, competitors like Sony must respond accordingly to remain competitive.
The strategy used by Amazon emphasizes not just cost leadership but also the importance of scale and innovation in determining market prices and sustaining market presence. In essence, Amazon's approach has transformed how products are sold, demanding responses from competitors seeking to preserve their market share.