Just how far will Wal-Mart and Amazon go to prove price is king in an emerging online marketplace?

The price war started a month or so ago, when both Wal-Mart and Amazon began dropping prices on best-selling books and DVDs in an attempt to win buyers, rather than profits. But the price war soon expanded to other items including video games, mobile phones and other popular devices.

In some ways, the back and forth has gone from petty to absurd:

• Wal-Mart recently slashed a third of the sticker price off of Hasbro’s classic Easy-Bake Oven
• Amazon and Wal-Mart both offered the Xbox 360 gaming console, an extremely popular item this holiday season, for a bargain-basement price of $199 — complete with a $100 gift card
• Wal-Mart and Amazon both offered a $15 gift card with the purchase of “Call of Duty: Modern Warfare 2″ — the most popular video game of the holiday season, and
• Both companies are selling the Palm Pixi phone (an item that normally retails for more than $200) for approximately $30.

Obviously, neither company is profiting from sales of these items. In fact, they actually lost money on some of the best-selling items from this past holiday season. So the question is: Why employ a strategy like this, especially now, when a post-recession holiday season could provide a major boost in sales?

Answer: It’s a long-term strategy to win buyers — and eventual profits — in a shifting marketplace where a lot of customers now prefer shopping online to fighting traffic and crowds to shop in brick-and-mortar stores.

Online sales currently account for only 4% of the retail market, but that percentage is rising quickly, which has caused retail giants to scramble and determine whether to stake their company’s future in-store or online.

The current battle between Wal-Mart and Amazon is particularly compelling because it pits a consumer titan (Wal-Mart generated more than $400 billion in sales last year) against the emerging online contender (Amazon posted $20 billion in online sales last year), both of which cater to completely different buyers (Wal-Mart the average American shopper and Amazon, the edgy, urban-class buyer). It creates an old guard v. new guard matchup that has the potential to determine not only which company is built to last, but also the future of retail altogether.

Recession-proof businesses

While most retail chains are still feeling the ill effects of a consumer confidence hangover, Amazon’s sales were up 24% in the third quarter of 2009. Meanwhile, Wal-Mart’s direct merchandise sales were up 44%, which means both companies are basically recession proof right now.

But the issue at stake isn’t where consumers are spending now, but how — and where — they’ll be spending their money in the years to come.

Sure, Wal-Mart is still the team to beat … for now, but can the company maintain its momentum if its strategy remains dependent on low-to-no profit deals and in-store selling?

Who will ultimately win this pricing war, Amazon or Wal-Mart? Tell us what you think in the Comments Box below.

Source: “Price War Brews Between Amazon and Wal-Mart,” by Brad Stone and Stephanie Rosenbloom, New York Times, 11/24/09

Tags: Amazon, Call of Duty, Hasbro, holiday, Modern Warfare 2, New York Times, Palm Pixi, QVC, Wal-Mart, Xbox