Compaq has already cut prices by more than 60 per cent since last June, forcing its competitors to follow suit. Another substantial reduction of between 10 and 20 per cent will set off a price war in the industry at a time when many of the smaller US clone makers can least afford it.
After ruthlessly slashing its own overhead costs over the past 18 months, Compaq is the industry's low-cost producer.
Analysts believe Compaq is prepared to squeeze profits to the point where it is the only company making any money. The price of the average PC is expected to drop another 35 per cent by the end of the year.
IBM, while still the world's leading seller of personal computers, has had little choice but to follow Compaq's price cuts. Dell, the industry's largest telemarketer, has also matched the cuts and tried to impose cuts of its own, but as a result was forced last month to abandon a planned dollars 146m share offering.
Compaq, which is expected to double its 6.6 per cent share of the PC market this year, also plans to unveil its first full mail-order catalogue campaign this week, bringing it into direct competition with Dell.
But Dell - which also likely to double its 3.5 per cent share - is not the intended target of the cuts, said Steven Eskenazi, an analyst with Alex Brown, an investment research firm. 'If it ever comes to that, everyone's in trouble,' he added.
Instead, Compaq's strategy is aimed at the 75 per cent of the PC market not already taken by the three companies and AST, a smaller American PC designer that has successfully farmed out much of its production work to other manufacturers.
Half a dozen well-known brand names have already disappeared from the market in the past year, and analysts say the shake-out is likely to be accelerated with abandonment of slower 386 chips in favour of the 486 and Intel's new Pentium microprocessor.