pricecutting

Price cutting refers to the practice of reducing the selling prices of goods or services below the prevailing market levels or below a firm’s own previous prices, with the aim of attracting customers, increasing market share, clearing excess inventory, or responding to competitive pressure. It can be executed through temporary promotions, discounts, couponing, bundling, volume pricing, or permanent price reductions. In competitive markets, price cutting is a common tactic used by firms in response to demand downturns or competitive threats; in oligopolies it can trigger price wars where rivals repeatedly lower prices.

The short-term effects typically include higher quantities sold and a larger share of customers, but they often reduce profit margins and can erode brand value if perceived as low quality. Over time, persistent price cutting may train consumers to expect lower prices and can squeeze competitors, potentially altering market structure. On the other hand, price reductions can benefit consumers through lower prices and greater access.

Legal and regulatory considerations vary by jurisdiction. Normal competitive price cutting is legal in most markets, but practices intended to eliminate competition or to recoup losses through higher prices later (predatory pricing) can raise antitrust or competition concerns and are prohibited in several jurisdictions. Firms may also retaliate through non-price competition, such as service quality or product differentiation, to sustain advantages without ongoing price declines.

Economists analyze price cutting in terms of demand elasticity, marginal cost, and strategic interaction in game-theoretic models. See also predatory pricing, price wars, and loss leaders.