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me or lower price points. In their effort to capture additional market share, the premium supplier provides the new enhanced value product/ service at lower prices and starts a price war.

Why do firms avoid entering a price war?
Price is the most sensitive economic lever in business (Robert Garda, Michael Marn, 1993) and profits of firms are directly impacted by a decline in average price levels. Firms need to realize that price elasticity's arising from additional sales volume due to a decrease in the price of a good / service is not enough to compensate for the decline in prices resulting from a price war. When the fight is on price alone, this effect of additional volumes is short lived as your competitors will follow suit in cutting prices. Price wars are counter intuitive, in order to attract a pool of 'price sensitive' customers, why would firms reduce their price to levels at which economic sustainability may be tough? In such scenarios, success for a firm or its competitor is short lived if price is the only differentiating factor for the customer to decide.

Price wars invariably bring about a change in customer perception. Customer perception of a price versus the benefit derived from a good / service is instrumental in deciding the success for the firm and in turn continued customer loyalty. Low prices that result from a price war lead to a lower anchor price (reference price) in the minds of a customer. The customer gets used to being serviced at a certain low price as a result of the price war. When firms that did engage in the price war try and revert to the higher pre price war levels they face customer resistance with customers re-analyzing perceived benefits versus the new prices and seeking other cheaper alternatives . The low prices accompanying price wars influence a customer's perception of what is a 'reasonable' price long after the war ends (Garda and Marn, 1993). In the airline price wars of the 1990s, prices of air tickets were cut in an attempt to draw a greater pool of travelers. While the airline sector suffered major losses , when the same airlines tried to increase fares , a large number of customers did not accept the price rise because they had a lower 'reference price' associated with the price of air travel (Busse, 2002).

Price wars are instrumental in unbalancing the 'perceived value - price ' correlation that exists in a market. It causes customer's perception to the above becoming skewed towards price sensitivities at the cost of benefits and quality of goods/ services. In such situations industries run the risk of seeing a collapse in demand levels once prices stop falling. It is therefore in the interest of firms to emphasize the value benefit to the client instead of the price benefit. By correctly understanding the amount and value of incremental benefits being offered firms create long term financial benefits and sustainable advantage. Premium brand firms avoid entering price wars thus protecting their brand equity by using selective pricing options, loyalty programs or like McDonald by creating alternate packaging for burgers (as value meals) when threatened by Taco Bell's pricing.

Firms involved in predatory pricing employ this tactic to move towards a more monopolistic market condition where they can be the price setters and push weak competitors to exit the market. However, firms wanting to engage in price wars for this reason