As Kimberly-Clark, the maker of Huggies diapers, and Proctor & Gamble, the maker of Pampers, increased their competition last year, Kimberly-Clark tried to raise the effective price of its product by reducing the number of diapers in its packages, and cutting its price by a little bit less. Rather than following in a similar fashion, as it had done in the past, P&G responded with its own price cut – it matched the price decrease and kept the number of diapers per package the same. The result: P& G gained significant market share at the expense of Kimberly-Clark.

This classic prisoner’s dilemma outcome arises in a number of industries attempting to ride out the tough economic times. Rather than raising prices to boost profits, firms tend to cut prices in an attempt to gain market share. If other firms do not follow the same path, they will lose market share to those firms with deep enough pockets to suffer through the price cuts. Among other industries, Dell has been engaged in a significant battle for personal computer market share with rival HP-Compaq.

P&G eventually did reduce the number of diapers in the package to match the change by Kimberly-Clark, but not for a number of months after the initial move. The damage had been done, however. P&G reported significantly increased earnings for first-quarter 2003, while Kimberly-Clark had to scale back its earnings estimates. P&G has increased its share of the disposable diaper market by close to 5 percentage points. As P&G’s CEO Lafley states in the article, “When times are tough, you build share.”

(Updated September 10, 2003)