You just can’t win in this economic environment.  Competition is fierce and the market reacts negatively to whatever path companies choose to take in dealing with the difficulties.

In most cases when companies face fierce competition and slowing sales, they lower prices.  Doing so shrinks profit margins.  The hope is that firms can ride out the storm with smaller profits and then raise prices again when times are better.

The trick of course is not to lower prices too much.  If you do, you risk losing money.  Lose too much money and you could be out of business.

Some companies choose to not lower prices holding firm to the belief that prices need to be set at a rate whereby a fair profit can be earned.  These businesses will not be lured into the trap of exchanging profits for a continuation of revenues.

In most cases you will see the largest companies take this more stubborn approach.  They know that they may lose customers in keeping prices high, but they have the resources to ride out the storm.

The idea is that it is more difficult to raise prices down the road.  Once you cut your prices, you may be stuck at those levels for longer than you might think.  It’s far better to just leave prices be and take the medicine that comes with your competition lowering prices.

Capitalism at Work

This economic dynamic takes place all of the time.  Currently we are seeing the drama play out on the center stage as the United States economic sputters and the rest of the world is following suit.

Yesterday, mobile phone giant Nokia Corp. (NOK) gave an update to its third quarter operations that highlight this pricing dilemma.  Specifically, the company announced that market share in the third quarter would be lower than expected previously.

The cause:  cut-throat price competition!  So there you go; capitalism at work right before our very eyes!

In its release, NOK stated that they had made a “tactical decision” to not cut prices.  Instead, they are focused on the sustainability of profits in the long term.  The company is choosing to loose customers in the short run in hopes of maintaining profits in the long run.

Well, they are losing customers and the market is not happy about it.  NOK shares are down some 10% or more on the news.  Where the stock goes in the long term is anyone’s guess.

 If you believe the world economy will suffer for longer than expected, NOK may be in trouble.  The good news is the company is very large and well capitalized.  They can take the punch as long as that punch lasts for a short period of time (to see how other tech giants are battling it out, read “Apple and RIM’s Smart Phone Arms Race Escalates“).

Nokia Posied to Profit

If they are right, NOK could be positioned for big profits down the road.  Ultimately those companies that are cutting prices may be the weaker players.  If those weaker plays miss the mark they may end up out of business.

That would bode well for NOK.  Given that the market has discounted shares by 50% from its 52 week high, Rational Investors may want to start building a position.

I like the strategy of holding firm in the face of downward pricing pressure.  It is not easy to do, but the benefits in the long term make it worth the while.  I think NOK will survive this current malaise and be in a stronger position exiting the storm.

This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight likes this, go to: www.InvestorPlace.com.