The market for mobile applications processors is a tough one, characterized by intense competition and, as a result, low gross profit margins.

Qualcomm (NASDAQ:QCOM), which builds the Snapdragon family of applications processors and stand-alone modems, is the leading merchant smartphone applications processor vendor. Taiwan-based MediaTek is the second largest.

According to a recent report from DigiTimes, Qualcomm is pricing its Snapdragon 450 platform aggressively, which has put MediaTek "under pressure" to respond with price cuts for its competing Helio P23 chips.

A Qualcomm chip.

Image source: Qualcomm.

Let's take a closer look at the details, as DigiTimes provides quite a lot here.

Snapdragon 450 on the cheap

Qualcomm segments its applications processors into different tiers based on price, features, and performance.

At the top of the heap is the company's Snapdragon 800-series platforms, aimed at what the company refers to as "premium tier" smartphones. For the "high tier," Qualcomm sells its Snapdragon 600-series chips, and then for the "mid-tier," it offers its Snapdragon 400-series products.

Per DigiTimes, Qualcomm is now offering its Snapdragon 450 -- which Qualcomm announced in late June and said would show up in devices "by the end of 2017" -- for "less than $10.50" apiece.

To achieve this relatively low price, DigiTimes explains, Qualcomm's contract chip manufacturing partner -- Samsung (NASDAQOTH: SSNLF) Foundry -- has apparently slashed its 14nm wafer prices to $2,500.

MediaTek's Helio P23, on the other hand, is built using Taiwan Semiconductor Manufacturing Company's (NYSE:TSM) 16nm technology.

TSMC, which commands the lion's share of the contract chip manufacturing market, reportedly charges MediaTek "more than $3,500" for a single 16nm wafer.

DigiTimes goes on to say that MediaTek originally wanted $15 for its Helio P23 chip, but "the prices have recently been cut to USD$11-12 as the company intends to secure orders from its major China-based clients," citing industry sources.

What is TSMC to do?

If this report is accurate, then this situation presents something of a dilemma for TSMC. TSMC does have a wide range of customers using its 16nm technology, spanning from smartphone applications processor makers all the way to advanced graphics processing unit vendors.

On its most recent earnings call, TSMC said that 26% of its revenue came from wafers built using its 16nm and 20nm technologies (the former is based on the latter so TSMC reports them as one).

If Samsung prices as aggressively as it seems to be here in a bid to attract more customers, then -- if TSMC doesn't counter by having significantly better yields/cost structure (14nm/16nm technologies should be quite mature industrywide by now) -- TSMC has a couple of options.

First, it can engage in the proverbial price war that Samsung seems to want to start. This is problematic for TSMC because while Samsung's logic chip manufacturing business is just one small part of an otherwise highly profitable chip business (thanks to Samsung's pole position in the booming memory chip market), logic chip manufacturing is everything for TSMC.

TSMC can't cut prices by too much without suffering a painful gross profit margin decline (at least on leading-edge manufacturing technologies), nor can it just allow Samsung to siphon away substantial market segment share.

It's a tough position to be in.

TSMC's best bet, then, will be to try to compete based on technological excellence. Offering higher-performance, higher-yielding manufacturing technologies than Samsung can, particularly with respect to leading-edge technologies, is an effective way to keep customers buying higher-priced wafers (since chip prices might be similar, if not lower, and higher performance makes for better end products).

We'll see in the coming years how well TSMC can defend its position against a Samsung that's seemingly willing to dramatically undercut it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.