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Wal-Mart (WMT) isn't waiting around to see what their competitors are going to do, they're already going to start cutting prices on some of the best-selling toys, two weeks before normal.

The retail giant will start cutting prices on what it's calling "Top 12 Toys of Christmas" from between 10 percent to 50 percent. It'll put pressure on Target (TGT) and Toy R Us, who are the company's chief competitors, both holding 13 percent of the toy market.

Part of this is related to the housing problems which at this time could have a strong psychological impact on how strongly consumers will hold on to their money during the Christmas season.

Wal-Mart would be especially vulnerable as their base consumer would be the most apt to tighten the grip on their money if the economy is perceived to be in trouble or slowing down.

Another factor is the toy recalls which also has made consumers of all income levels concerned about the safety of their children and grandchildren.

This is Wal-Marts' most powerful weapon and they're right to use it. They also say we'll be hearing of other price cuts on toys also. I would also think other fast moving holiday items, like electronics, will eventually be part of their pricing strategy also.

The company is thinking of two things in doing this: the fact that key competitor Target has been growing same-store sales far better than Wal-Mart recently, and lowering prices on toys and other strategic items should help cut into sales and margins; and they are looking to drive customer traffic and sales, even if it cuts into margins.

This is why Jack Welch has mentioned being number one or number two in our market is so important, it gives you flexibility and the ability to take short-term pain for long-term gain. Wal-Mart is showing it's willing to take whatever steps it needs to drive traffic and sales to change their recent same-store slowdown in sales.