What Is a Price War? How Competing on Price Can Destroy an Industry

BYD slashed its electric vehicle prices by as much as 30% in 2025. Dozens of smaller EV competitors went under. Profits across the entire Chinese EV industry fell. That's a price war — and understanding them is essential to reading earnings reports from the brands caught in one.

The Simple Definition

A price war is when competing companies repeatedly cut prices in an attempt to win customers from each other, often to the point where profitability across the entire industry collapses.

It usually starts when one player decides to grow market share aggressively by undercutting competitors. Rivals respond by cutting their own prices. Then the first company cuts again. And so on, until prices are so low that everyone is either losing money or barely breaking even.

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Why Price Wars Happen

Too much capacity — when an industry builds more supply than there is demand, companies fight for a share of a shrinking pool of customers, usually through price.

New entrants — a new competitor willing to operate at a loss to gain market share forces established players to react.

Commoditisation — when consumers can't tell the difference between brands, they buy the cheapest option. This pressures everyone to lower prices.

Survival logic — sometimes companies cut prices not to win, but to survive. If a competitor undercuts you and you don't respond, you might lose too many customers to stay viable.

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The Winners and Losers

Scale wins. Companies with the lowest cost base can sustain lower prices for longer. BYD manufactures at enormous scale and makes its own batteries — which gives it a cost advantage that smaller EV makers can't match.

Brands sometimes win. Companies with strong brand loyalty — whose customers value the product beyond just price — can hold prices better than generic competitors. Nike losing market share in running to On and Hoka was partly about this: those brands offered something different, not just cheaper.

Profits always lose — at least in the short term. Price wars compress margins across the industry. Even the winner often emerges with permanently lower profitability than before.

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How It Shows Up in Earnings

When a company is in a price war, you'll see:

• Falling gross margins — lower prices mean less revenue per unit while costs stay the same
• Increased promotional activity — discounts, deals, and sales events
• Management language around "competitive environment," "pricing pressure," or "promotional market"
• Volume growing while revenue per unit falls — selling more but making less per sale

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See It in Action

Price wars have been central to several Ask AYO earnings stories:

• BYD Full Year 2025: The Chinese EV market is described by BYD's own management as a "brutal knockout stage." BYD cut prices by up to 30% to maintain market share. Gross margins fell from 19.44% to 17.74%. Profits dropped 19% despite record sales volume.
• H&M Q1 FY2026: Fast fashion is under pressure from ultra-cheap competitors like Shein. H&M had been relying on promotions and discounting to drive footfall — then deliberately pulled back, accepting short-term sales pain to protect brand positioning.
• Lululemon Q4 FY2025: Lululemon used promotions to clear inventory in the US, damaging its premium positioning. Management cited restoring full-price discipline as a key priority — essentially declaring they were exiting the pricing war in their category.

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The Bottom Line

Price wars are lose-lose in the short term. They destroy profitability across an industry and leave everyone worse off — except consumers, who temporarily benefit from lower prices. The businesses that survive price wars best are those with genuine cost advantages at scale, or strong enough brand loyalty to avoid competing on price at all.

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Related Reading

• What Is Gross Margin?
• What Is a Turnaround?
• What Is Revenue?