When a firm enters a price war with its competitors, it usually signals that it has come to a point where it has nothing else to offer its customers other than the best price.
Unless your business model is being the superior low-cost producer or provider of a good such as Wal-Mart or Southwest airlines, competing on a price alone will never lead to a successful outcome.
There are exceptions (see article "Loss Leader - Losing Money to Make Money") where firms deliberately create pricing wars or even lose money on certain products with the expectation of making a long-run profit from their customers and are willing to forego short-term profits.
The most recent price war in the media was regarding the Amazon Kindle and the price of e-books. E-readers are competing to establish a platform among consumers and in order to have long-run success, need to get as many consumers buying into their platform as possible.
An effective means to avoid price wars is to find a point of differentiation in your business. Price wars occur when two firms offer the exact same thing to the same customers. Retailers have been plagued by price wars the most since consumers can easily price compare across retailers and since retailers do very little to differentiate themselves from one another.
As a small business, there is no room to compete on price alone. Businesses should be changing and adopting their offerings and strategies over time to keep their value of differentiation higher than their competitors and consistently finding new ways to create more value for their customers. The point at which there is not enough differentiation between your businesses and the competition, is the point at which your primary customers will shop on price alone.
As the popular saying goes, when everyone else zigs, you zag. When your primary competitors announce a price promotion, don't follow suit. Instead, announce your own value-added promotion to entice customers who value your added service, not price. If Borders announces a store-wide sale of 15%, an independent book retailer can either follow suit and announce its own price discount or it can find other ways to entice consumers to shop at their store rather than Borders.
An example promotion that the independent book retailer could run to increase traffic with out having to compete on price, would be to offer free delivery in the neighborhood to anyone who wants to buy a book this weekend, but can't come to the physical store location. Another offer, could be to bring in a local author and provide a free signing to any books purchased that day. There are several other creative options that the independent book store could use to increase traffic away from Borders.
The best part of avoiding price wars is you attract higher-paying consumers while your competition attracts the most price-sensitive consumers. There is no reason to attract customers to your store via price competition when those customers only value your price. They key to sustaining this over the long-run is to ensure that you offer significant value to your core customer base and give them reason to pay a slightly higher price than the competition.