Price Competition 375Strategic Price Cuts. Increased competition from competitors—whether in
the form of advertising, quality improvements, or aggressive pricing—can be
expected to have an adverse effect on the firm’s demand and, therefore,
might call for price cuts in response. For instance, Neiman Marcus Group,
Gucci, Hermes, and several top fashion houses were compelled (albeit belat-
edly) to follow Saks’s price discounting strategy. Major airlines routinely meet
the challenge of a rival introducing additional flights along its routes by offer-
ing fare discounts.Boosting Sales of Related Products. When a firm sells complementary prod-
ucts, cutting the price of one spurs the demand for another, and more impor-
tantly, is the path to maximizing the firm’s total profit. Gillette is happy to give
away its multiblade razors at minimal cost because the company generates its
real profit by selling packs of replacement blades at a price upward of $2 per
blade. As long as a consumer is locked into his favorite shaver, the money from
blade purchases will keep on coming. Microsoft has long underpriced its Win-
dows operating system because that platform generates significant demand for
its applications software such as Microsoft Office. Google generates so much
revenue (some $30 billion in 2010) from Internet advertising that it makes
sense to tie consumers to Google by giving away free such key online features
as e-mail, Google Maps, and its Chrome browser.The Kindle Once Again. As we saw in Chapter 3, since introducing the Kin-
dle in 2007, Amazon has repeatedly cut its price—from $399 to $259 to $189
to $159. Each of the factors listed above has a bearing on this pricing strategy.
A skimming strategy certainly makes sense—setting high prices to hard-core e-
gadget aficionados and subsequently lowering prices to enlist the less sophisti-
cated mass market of buyers. So too has there been a steep learning curve,
lowering the production cost of the Kindle over time.
Moreover, as noted in Chapter 6, Amazon has an obvious incentive to
lower the Kindle’s sale price in order to boost the lucrative tiedsales of its e-
books. Additional e-book sales translate directly into greater total profit.
Cutting price is also a logical competitive response. Facing increased price
competition from Barnes & Noble’s Nook reader and the threat of losing
users to Apple’s multipurpose iPad, Amazon’s Kindle price cuts make sense
as a profit-maximizing countermove. Of course, a less charitable interpreta-
tion suggests that Amazon might be on the verge of becoming ensnared in a
destructive price war. Finally, some book publishers have claimed that
Amazon CEO Jeff Bezos’s real goal is to obliterate the hardcover book mar-
ket altogether and, simultaneously dominate the emerging e-book market.
Such an extreme strategy could mean selling the Kindle at a loss and might
be far from optimal. In other words, this last price-cutting explanation owes
more to psychologically driven (perhaps irrational) behavior than to profit
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