Forget the World Cup and the iPad. The media industry is bracing itself for an old-fashioned price war among the red-tops. Richard Desmond, owner of the Daily Star, will slash the price from 20p to 10p from next month.

He began this battle in November 2008 with a cut from 35p to 20p. Now he wants the Star, which sells around 823,000 copies a day, to hit one million and catch the Daily Mirror, which has kept its price at 45p and seen sales slip to 1.24 million.

A decade ago, when Desmond bought the Star, it sold about 630,000 and the Mirror was selling 2.2 million. A gap of 1.5 million has become 400,000.

“We're a minute away from defeating the Mirror and the Mirror is in freefall,” Desmond told Radio 4's Today Programme. “The Mirror is aimed at Andy Capps,” he added, referring to the flat-cap-wearing cartoon character, “and there aren't many Andy Capps around now, so there's no reason to buy your newspaper any more.”

Rupert Murdoch's Sun, which remains dominant with almost three million sales, is watching closely. The Sun has cut its price from 30p to 20p in many areas since last summer in response to the Star. In his Today interview, Desmond cheekily suggested he could buy the Sun and run it more efficiently.

This is a battle about pride, of course. But it is also about canny marketing and fighting for advertising in a market which is ripe for consolidation. The total sale of paid-for red-tops has been shrinking by around 4% annually for years.

And yet print, not the internet, still brings in the vast majority of revenues — well over 80% in most cases. So can price-cutting boost circulation enough to offset the loss in cover revenue? And how do increased sales translate into ad revenue? Ultimately, can price-cutting be more than a short-term fix?

Steve Hatch, managing director of Mediaedge:cia, part of Britain's biggest media-buying agency Group M, says price can be “a pretty powerful promotional tool” for papers and can make a difference in established markets. “It gives you that trigger to reconsider,” he says, but it is “not a massive driver” without other promotional activity such as TV marketing. Hatch adds that advertising revenues are unlikely to rise in the short term until any circulation gain proves permanent.

Price-cutting can certainly work. Some London papers which created Scottish editions in the Nineties have quadrupled circulation north of the border by grabbing share, before putting up the cover price gradually. But such tactics have their limits, as The Times found when it went down to 20p and failed to overtake the Daily Telegraph in the Nineties.

The Mirror also knows how costly such battles can be. When it last initiated a price war in 2002, the Sun cut for longer and harder. That price war cost the Mirror £20 million in marketing and price cuts; the Sun sacrificed £40 million in six months. Those sums are not insignificant when the Mirror national titles turn over about £460 million and the Sun and News of the World around £620 million a year.

Sly Bailey, chief executive of Mirror publisher Trinity Mirror, now refuses to match the Sun and Star on price. She made clear her view at this year's annual results, attacking rivals for “chasing short-term circulation volume through cover price discounting and levels of marketing spend which do not provide a return on investment”.

The view from the Mirror is that its core readers are loyal precisely because they are willing to pay more for the paper. Bailey has pushed through at least four price rises on the Mirror since 2004. What's more, the Mirror national titles remain highly profitable — at the top end of between £45 million and £55 million last year. That said, some senior Mirror figures are worried. When the paper increased from 40p to 45p in January 2009, circulation fell by up to 10%.

The Star's 10p strategy is going to be a further test for Trinity Mirror, which has to please shareholders in a way that Desmond, as sole owner, doesn't. Dominic Buch, analyst at Numis Securities, says of the Mirror: “Given the crowded market place, the low price-points and the fact that there are several substitutible products [the Sun and the Star], a competitive, hard price war would be of concern to investors.”

Those close to the Mirror counter that they don't see rivals as a substitute and strive to make their paper editorially different by investing more in quality journalism than the Star.

Desmond has already proved he can overtake an established rival as his celebrity magazine OK! has surged ahead of Hello! His strategy of multi-bagging magazines — selling several different titles together for a reduced price — also boosted circulation. At least one rival magazine publisher says they have been inspired by those tactics.

Desmond said in April that he is setting aside £5 million for his Star price war. Generally a paper gives around 25%-30% of the cover price to the newsagent — say, around 6p on a 20p cover price. If the price is cut temporarily, the newsagent would still expect 6p. On that basis, industry sources estimate that £5 million would cover around 14 weeks of selling the Star for 10p between Monday and Friday — at a cost of perhaps £350,000 a week. Still, observers suggest there may be limits to the depths of Desmond's pockets as they say he must keep an eye on the pension deficit at his publishing firm Northern and Shell.

The great unknown is what Murdoch will do. There is no sign yet that the Sun plans another price cut, amid hints that it regards 10p as uneconomic.

Cutting the cover price can undermine loyalty as readers flit between titles. “If you have 100,000 readers and you gain 8000 through a promotion, you can condition all 108,000 to think your product is worth less,” warns a circulation expert. But at a cost of just 10p, a surprising number of readers may engage in “double-buying” — some Sun and Star readers already buy both.

And from an advertiser's point of view, Hatch of Mediaedge:cia says that just because some new readers might not be loyal, it doesn't make them disloyal in the way they interact with brands that advertise in the paper. Sacrificing cover price revenue has arguably had some benefit for The Sun, which has had “many weeks” of record ad revenue since the start of this year.

The paradox is all this is happening while upmarket paid-for titles have increased to £1 and cut back on costly marketing such as free DVDs in favour of reader loyalty programmes.

What the red-top price war underlines is that, even in the digital age, newspapers offer a broadcast audience for advertisers like few other media channels. No wonder there's a fight on.