The hyper-competition theory analyzes the rapid and dynamic competition characterized by unsustainable advantage. It is the condition of rapid escalation of competition based on price-quality positioning, competition to protect or invade established product or geographic markets and competition based on deep pockets (financial capital) and the creation of even deeper pocketed alliances. Often a characteristic of new markets and industries, hypercompetition occurs when technologies or offerings are so new that standards and rules are in flux, resulting in competitive advantages and profits resulting from such competitive advantages cannot be sustained. In order to compete irrespective of how short-term the competitive advantage is, companies can implement a strategy based on finding and building temporary advantages through market disruption rather than trying to sustain an unsustainable advantage.
For example, we can analyze the price wars according to the hyper-competition theory. Price wars are easy to initiate but usually very expensive for companies. For example, in 1975, Datril launched a product at a much lower price than Tylenol and captured 50% share in test markets. Tylenol responded aggressively by reducing its own price and launching its first ad campaign, because Tylenol could sustain lower prices due to scale economies. While Datril ended up with less than 1% of the marketshare, Tylenol gave up a lot in profits.
To escape price wars, companies try to occupy different locations on the price—quality axis, using micromarketing, offering mass customization and shifting strategies based on the industry trends, for example the luxury car segment has moved from a redefine-perceived quality approach of product offering to fuel efficiency during the energy crisis, safety and comfort, 24-hour road-side assistance, micro-marketing and mass customization. The problem with all of these strategies is that they are highly imitable.