Questions raised over stores' price war

As Suning achieved a 1.74 billion yuan net profit in the first half, a 4 percent gross margin is acceptable because it would lead to just less than a 1 billion yuan loss for the online business.

"But assuming that Jingdong achieves sales of 47 billion yuan in 2012, it still needs to maintain the gross profit at 4 percent to sustain its development," he forecast.

But the squeezed margin also leads to losses for investors in the long run, Qiu said.

"As merchants are subsidizing customers with money from shareholders and private equity funds, they will have to consider how long this can last."

Service is the key

Against the backdrop of the ongoing price war, the Ministry of Commerce has announced it will introduce more regulations to better guide the development of the nation's e-commerce market.

The ministry had in the past issued at least two specifications to regulate the behavior of e-commerce companies and more national standards will be announced as the industry's turnover increases, according to Wang Desheng, deputy director of the ministry's department of circulation industry development.

But he did not elaborate on the details of the rules, or clarify whether the price war is against any existing regulations.

But Lockyer believes it could be considered against Chinese law as indicated by the Commerce Ministry's recent statement warning companies to obey the laws and regulations regarding competition in their marketing activities.

"Most obviously there could potentially be a breach of the Provisions on Prohibiting Price Frauds that specifically prohibit marking up prices for price reduction reasons, providing fraudulent discounted prices and lying about price reductions to coax others into buying," she said.

A fraudulent discounted price is where the discounted price indicated by the seller is equal to or higher than the lowest price at which the same product has been sold from the same premises within the past seven days.

But in China, price wars are not, in principle, against any laws, she added.

As the e-commerce segment starts to mature, price wars are gradually losing out to other critical indicators such as shopping experience, according to Serge Hoffmann, a Bain partner in Hong Kong.

"In the past, consumers cited cheaper prices as the major reason they went online. But a large number of consumers now are motivated by convenience and product variety," he said.

For retailers, this means that after initial price wars, holding on to shoppers requires delivering superior customer service and focusing on cultivating customer loyalty, he added.