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COMPETITION (Chapter 5)

COMPETITION Involves determining


how competitive action
(reaction) will influence
your pricing strategy

(A)How will the


competition react to the
price changes we are
contemplating?

(B) What price changes is


the competition likely to
make? How do we
respond to them?
A Philosophy for Price Competition

Negative sum game

Diplomacy v. Warfare

Establish Policies

Define Competitive Advantage

Long-term orientation
Conditions in Favor of Intense Price Competition
(A) High interbrand price sensitivity among buyers -- sales
increases from price cuts are at competitors expense.
(B) Low competitive barriers to entry or growth -- new
firms with low incremental costs can enter industry and
build market share.
Conditions Against Intense Price Competition
(A) Differentiated brands with low interbrand price
sensitivity
(B) Firms with a sustainable low cost advantage

Intensity of Presence of above conditions


Price = +
Competition Several mitigating circumstances
+
Communication of intentions (signaling)
MITIGATING CIRCUMSTANCES

Influencing Intensity of Price Competition

Market positions of firms in the industry

Cost structures of firms in the industry

Management philosophies

Company objectives/goals

Relative strengths & weaknesses of firms in the industry

Past price behavior

Stability of industry environment


Types of Competitive Pricing Behavior
Cooperative Adaptive Opportunistic Predatory
Typical behavior
Changes prices in Takes price changes Initiates price cuts. Initiates large price
parallel with other as given and adjusts Delays or foregoes cuts (or other
firms to maintain prices accordingly. meeting price actions) to inflict
traditional increases. Always harm on a
differentials. Attempts to meets price financially weaker
increase sales when decreases without competitor, even
Adjusts output as prices increase and delay. though those
necessary to to reduce sales actions are in the
maintain traditional when prices Attempts to use short run not
market share, decline, assuming any change in financially
reducing output that it cannot pricing to maintain justifiable.
when price influence the or increase its sales
increases reduce pricing structure by at competitors Attempts to
industry sales and its actions. expense. increase its sales as
increasing output much as possible at
when price the expense of the
decreases stimulate targeted
industry sales. competitor.
Types of Competitive Pricing Behavior (continued)
Cooperative Adaptive Opportunistic Predatory
Common identifying characteristics
Significant share in Market share too Lower unit costs Financially
market where a few small to influence than competitors. stronger than
firms dominate. industry pricing, prey due to lower
but nevertheless Significant excess costs, more
Lack of substantial viable. capacity. diversification, or
excess capacity. a larger war chest.
New to the market
Unit costs similar to with low share. Harmed by preys
competitors. opportunistic
Able to negotiate pricing or
price cuts without potentially
immediate benefited by
detection. preys demise.

Large portion of
sales concentrated
in few buyers.
Communication of Intentions Regarding your
Pricing Policies

1. Preannounce Price Increases

2. Show Willingness and Ability to Defend

3. Back up Opportunism with Information


Meeting Pricing Competition

1. Avoid Costly Confrontations

2. Compete from Higher Ground

3. Use a Nonprice Defense