Price competition

The launch of the first zero-fee fund by Fidelity can be a trigger to start a widespread price competition in the fund market. Usually, a price competition is started by one player in the market starting to lower its price; such move can force everyone else in the market into a price competition. Price competition can be brutal and crazy that suppliers squeeze their profits in the hope of winning larger market shares and earning much greater profits in the future, and sometimes suppliers may even sell at the prices below the costs, which is known as "dumping".

If every supplier has the same capacity of production, then a price competition makes no sense because everyone is only able to lower its price up to the same level and the only result a price competition gets is everyone gets zero profit. However, if suppliers have different capacities of production, then the story changes. The suppliers who can produce their products more efficiently will win the price competition. In addition,  if there is a supplier that can produce the product at the lowest cost in the market and also is capable to produce the product for the entire market, this supplier can win the entire market through a price competition.

Cost of production can change over time. If all suppliers expect that their costs of production will decline in the future, then they have no fear of lowering prices below their costs of production. Furthermore, those who hold more confidence are likely to be more aggressive in the price competition, and the risk for them is also going to be higher.

As we can see a price competition is only beneficial for the companies with efficiency advantages, a price competition is likely to only occur when there is a clear efficiency gap within an industry.