Why are the supermarkets cutting their prices now?

Supermarkets are at war because a huge American company, Wal-Mart has bought the fourth supermarket on the high street in terms of size - Asda. Because of its huge size it can bargain suppliers down and therefore reduce its prices to a point where the other players - Tesco, Sainsbury and Safeway - cannot compete. This is why prices are coming down at the moment.

Is the competition affecting all products or only foods?

Initially it's mainly food - but as Wal-Mart sells all sorts of goods in the United States it is possible that it may affect a wider variety of retailers. Drugs and pharmaceuticals have been dragged into the fray already, so the price war will affect the likes of Boots.

It's all very confusing - what's the latest position of each of the main supermarket chains?

The recent bout began a week ago when Asda (with Wal-Mart's backing) announced it would cut 10,000 items by between 5 and 10%. On Saturday Sainsbury joined in and promised to match 1,500 goods at the lowest price available. Not to be outdone, Tesco has now cut the prices of 1,000 items by up to 20%. Having said that, if you check the shelves, you may find (as I did at 0800 on Monday morning) that not all the goods have been marked down.

For example, Pure Orange juice was still over �1 a litre and should have been less than 75p. On the other hand, Princes Salmon was lower than had been advertised. So the claims do need checking!

Lower prices sound good - are there any drawbacks?

Yes. They're fine in the short term - but there is a danger that the number of supermarkets on the high street will drop in the long term, providing less choice for the consumer. It is by no means certain that the other big three - Tesco, Sainsbury and Safeway - will be able to go on cutting away at their profit margins. The high street may change in the long term either because some of the players go broke or become takeover candidates by a home-grown or foreign company. So it can't go on forever!

If they can afford to slash prices now - does it mean their goods were always overpriced?

Although analysts deny it - there is anecdotal evidence to suggest that we pay more for our goods than people living on the continent. The supermarkets would deny this. The truth is that we do pay more for some things. A basket of personal hygiene items including items like toothpaste and shampoo cost us more than our friends and relatives on the continent. We certainly pay more for alcohol - but that's due to the high amount of tax the British Government places on alcohol. We pay more for our petrol - but the same applies there.

Will this battle have a knock-on effect for all UK retailing?

The answer to that will depend on how far the likes of Wal-Mart extend their grasp - early indications are that the effect will only directly hit supermarket prices.

Do lower prices dramatically affect customer loyalty for the supermarkets? Or do shoppers tend to go to their nearest big supermarket regardless?

The success of the loyalty card shows that customers' loyalty is for sale. Tesco was one of the first to introduce the loyalty card and it's believed that it helped them take the "Number One" spot away from Sainsbury.

As time goes on though it's been shown that customers become expert at playing the systems and carry more than one loyalty card. Some supermarkets, like Sainsbury for instance, put a premium on quality of goods as well as cost-cutting.

Is this phenomenon a flash in the pan or are keener prices here to stay?

It's not a flash in the pan - we can expect prices to go low and stay low for a while. But doubt must remain over the very long term as any closures on the high street will mean less choice and that is when we may see prices start to rise.