READ THE FOLLOWING CASE STUDY AND ANSWER THE QUESTION:

When supermarket chain Morrisons announced in March 2014 that it would invest $1 BILLION in cutting prices over the following three years, it threatened to turn the regular skirmishes between Britain's big grocers into trench warfare. The big four - Tesco, Asda, Sainsbury's, and Morrisons - had sparred for the previous five years, trying to win cash-strapped customers as the economy turned down and the volume of food bought fell for the first time in living memory. However, experienced supermarket watchers say this time the situation is much more serious. 'This is very, very different, says Dave McCarthy, an analyst at HSBC. So far the battles have largely been fought between the big four, which together control about three-quarters of the market, but in the past five years, new challenges have emerged. German discount supermarkets have not only expanded aggressively but have shed their no-frills image. New products, such as lobster tails and luxury Christmas puddings, have appealed to the squeezed consumers in the B and C1 socio-economic groups. According to Kantar Worldpanel, the consumer research group, more than half of British consumers have shopped in Aldi or Lidl. Other value retail chains, including Poundland and B&M, are expanding their grocery offer. Dalton Philips, Morrison's chief executive, said last week: '[The discounters] are a growing channel. Price is extremely important in that channel'. Late in 2013 Asda said it would spend $1bn cutting prices in the following five years, and in February 2014 Tesco said it would spend $200m cutting prices of core products such as tomatoes, onions, and cucumbers. Days later Tesco said it would cut the price of its own-label four-pint bottle of milk from $1.39 to $1. Its rivals quickly followed.

Unlike previous battles, which have been fought on offers largely funded by suppliers, the latest offensive is focused on cutting the prices of everyday items. This involves sacrificing some profit to drive sales, rather than passing the pain on to suppliers. 'There are some serious pledges here to reduce prices substantially on some high-profile items, which will cost tens of millions of pounds, this is real', says Mr. McCarthy. Much depends on the reaction of rivals. Tesco, Asda, and Sainsbury all run price-matching schemes, raising fears of contagion. Justin King, chief executive of Sainsbury, described his rivals' price tactics as part of the 'cut and thrust of the market' and called the threat of discounters nothing new. 'We have been competing hard with them, and we will continue to', he said. Andy Clarke, chief executive of Asda, also told the Financial Times that 'structural change in the market is something you could see coming for some time and that Asda had already responded by cutting prices and ditching 'gimmicks' such as money-off vouchers. Some analysts say Tesco will be drawn into the fray. 'Tesco has the strongest margin, but this has been shrinking for several years. It may now be pushed to rethink its pricing in order to defend market share, which has come under pressure', wrote analysts at Fitch Ratings credit agency. An expert on the grocery market says price-cutting campaigns might play into the discounters' hands. Not only have Aldi and Lidl gained free publicity - they have responded on price. Concerted action by the discounters could lead to a nightmare scenario for the big four, where they erode profit, only to see little impact on sales.

Question:

Describe the different pricing strategies that are mentioned in this case study, using the terminology discussed in this chapter. Based on the information from the case, what are the potential dangers and advantages of competing retailers using these strategies to engage in a price war?