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The race to the bottom
The wrong pricing strategy can destroy corporate value faster than almost any other business mistake—and there's nothing like deregulation to make this mistake more painful. When industries are about to be deregulated, managers habitually adopt ill-conceived pricing policies that are almost guaranteed to damage their companies. These flawed pricing strategies occur as managers cut prices preemptively to fend off rivals and then launch full-fledged price wars in hopes of outlasting attackers and emerging victorious from the rubble. This, at any rate, is the hope; the reality is usually quite different.
The take-away: Using four factors that inform rational pricing decisions, incumbents in deregulating markets can make reasoned choices about how to revise their pricing policies in the face of increased competition. Rather than blindly undercutting attackers, they can safely charge customers a premium that secures their business, avoids costly price wars, and preserves the market.
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