What it is:
A price war is an event whereby two or more companies continually lower prices to undercut each other.
How it works (Example):
Airline companies are famous for their price wars. If Airline XYZ cuts the price of a flight from Los Angeles to New York from $800 to $700, Airline ABC, which is competing for business on that route, might cut its fare to $650. Airline XYZ might respond by lowering its fair to $625, and so on.
Why it Matters:
Engaging in a price war is a competitive strategy, usually to capture market share. Falling prices tend to attract more customers. Some companies may choose to sell a product or service at a loss, however, in order to capture market share and outwin competitors. In some cases, this might lead to antitrust violations.