THE EFFECT OF A PRICE WAR IN A DUOPOLY

When two competitors dominate a given market, there is always a temptation for one competitor to cut the price in order to improve his/her performance, for example to capture a higher market share and increase revenue. The result of such action affects the volume sold by the other competitor, who then takes retaliatory action. After a succession of actions and reactions of this kind, a new equilibrium between the two competitors is arrived at. The paper explores the results obtained when the competitors seek three alternative performance criteria: to maximize revenue, profit or profit margin. Circumstances are highlighted under which competing strategies can lead to a deterioration in performance for both competitors.