The wrong pricing strategy can destroy corporate value faster than almost any other business mistake. And when industries are about to be deregulated, managers habitually adopt ill-conceived pricing policies that are almost guaranteed to damage their companies and erode services to customers and the community.

These flawed pricing policies—common among deregulating telecommunications, transportation, and utility companies as well as other businesses—represent efforts to hang on to customers. Managers cut prices preemptively to fend off new rivals and then launch full-fledged price wars in hopes of outlasting attackers and emerging victorious from the rubble. This, at any rate, is the hope; the reality is usually quite different.

One example of such pricing behavior comes from the Chilean telecommunications sector, which deregulated in 1994. Before then, Empresa Nacional de Telecomunicaciones (Entel) had been the sole provider of domestic and international long-distance services, but with the coming of deregulation Entel had to compete against seven rivals. At first, hoping to keep its customer base intact, it joined in a price war. By the end of 1994, rates for calls from Chile to the United States had fallen by about 95 percent, and domestic long-distance rates had collapsed similarly (Exhibit 1). Despite the price...