Cut-price competition (predatory pricing)
Although oligopolistic markets tend to be characterised by relative price stability in the longer term, occasionally short bursts of price warfare break out. This typically occurs when the dominant players attempt to defend and/or raise their market shares because the total level of demand in the market is insufficient to enable all to achieve their intended level of sales, and overcapacity results. Price cutting has the effect of reducing the profits of all the combatants in the short run, with consumers gaining the temporary benefit of lower prices.
However, the likely outcome is that the weakest firms, i.e. those with the highest costs, will be driven into bankruptcy, with a new era of relative price stability eventually emerging. If too many casualties are caused, consumers are likely to face greater monopoly power and possibly higher prices. Price wars have been experienced between supermarket chains in many countries. In the UK such wars have also featured in petrol station forecourts.
