EDGEWORTH PRICE CYCLE

In markets with homogenous goods, a sequence of rapid, incremental price cutting among competitors that lowers the retail price until it reaches the cost of the good. Eventually, competitors reset prices to their previous levels (allowing a normal retailer profit) and other competitors follow. This cycle may occur very rapidly in markets where there is heavy price competition.

Engaging in this type of recurring price war hurts profits, but is difficult to avoid in some markets. When consumers are highly price sensitive, having a slightly higher price may significantly deter business, thus forcing a rapid price cut. Businesses attempt to differentiate their goods whenever possible so that a homogenous market does not exist. For example, in the gasoline market, retailers insert additives which supposedly make the brand of gasoline superior to others. These attempts at differentiation have met with limited success, however, and thus Edgeworth price cycling remains a problem in gasoline retailing.