Mobile phone service provides Digicel and LIME are currently engaged in a new round of price wars that have heated-up in the last week or so. The question is who benefits in the long and short term and how long can this continue?

A price war is a business concept that describes intense rivalry between companies accompanied by several series of price reductions.  In the beginning one of the companies reduces its prices, and then other companies do the same to match the lower price. When the first company that reduced its prices starts a new series of price reduction, a new round of price reduction begins.

On June 21, Digicel announced that Digicel to Digicel calls would cost $2.89 billed per minute and cross-network rates would be reduced to $6.99 per minute. This came after LIME’s announcement the previous week of new mobile rate cuts of between 40 and 62 percent. LIME’s cross-network rate dropped from $12 to $6.99 for prepaid and post-paid. On-network rates dropped from $8 to $2.99 and $1.99 for prepaid and post-paid, respectively.

In the case of LIME, cuts of this magnitude will most certainly still lead to a loss, even if customer base is doubled and revenue per customer remains the same.  A bold and aggressive pricing strategy also did not work for the now-defunct Claro which was eventually bought out by Digicel.

As an example, it was estimated that the losses caused by the 1992 US airline price war were greater than the combined profits made by the entire industry since it started!

Companies resort to price wars for many reasons. As in this case, it is a response to the competition. Sometimes companies choose to lower prices to their existing brands/products in an attempt to gain additional market share for a given product category.

It appears that LIME is seeking to maximize the quantity of products/services sold or the number of customers as a last gasp effort to survive.  According to business strategy, whenever the market situation is in decline or at overcapacity, a company may choose a pricing level that covers the costs and allows it to remain in the market even though the profits may be affected. This is usually a short-term strategy however.

In the short-term, price wars are beneficial to the consumers because they can take advantage of the low prices. However, price cuts are not as beneficial for companies because they lower their profit margins, thus threatening their existence.

Digicel has a much larger customer base than LIME, even though both numbers have been contested, and if a price war were to continue, one can rationally assume that Digicel would be in a significantly better position to maintain the new lower prices for a longer period than LIME. This could potentially lead to the shuttering of LIME and back to an arrangement which consumers were happy to see pass – a monopoly.

With less competition than before the price war, the survivors (often the large companies with deep pockets) could conceivably start putting prices back up again. Sometimes to an even higher level than they were before the price war.

The best option or more suitable alternative for one or both would be to put their efforts into showing their value and how much it is worth and staying out of a price war. Show consumers what they get for their money both in a tangible and intangible way.

Otherwise all parties, including the consumer, could lose out in the long run.

August 2013