Handling Price Competition

Role of competitors in price-change response

Responses of competitors are important because they determine how the price change will affect
the price differentials between the company that initiates the price change and its competitors.
 Basic competitive stances

• Cooperative stance: satisfied with current situation and prefers things to remain the same

• Aggressive stance: want to improve position at the expense of price-change initiator; would like to
see things change with respect to initiator

• Dismissive stance: competitor who feels that whatever the initiator does will not substantially
affect him or her; ignore price-change initiator
 Competitor’s likely response to Initiator’s

Competitor’s stance Price increase Price decrease

Cooperative matching increase matching decrease

Aggressive No change or smaller Matching or larger decrease

increase

Dismissive No change No change

How to determine the stance of your competitors??????
 Four competitive dimensions

• Relative size

• Degree of brand differentiation

• Difference in unit costs

• Goals
Competitor characteristics associated with competitive stance

Competitive dimension
Competitor’s stance Relative size Differentiated Unit costs Goals
brand

Cooperative Equal No Equal maintain

Aggressive Smaller or No Lower Expand

larger

Dismissive larger yes lower Unrelated

 Communication of Competitive Information

Price signaling:
When the publicly available price-related information is intentionally managed to have an effect on
competitors.

News releases, Press conferences, Media access to company executives, Planting articles in major
newspapers, Blogs, Material posted on the Internet.
 Categories of Price Signaling

Signal to indicate Signal to encourage

Signal competitive competitors to match a
company’s limited
strength goals planned price increase
 Pricing game: Negative sum game

Sports Competition Price Competition

⚫ The more intense, the ⚫ The more intense, the
better the game worse the game

⚫ Play as hard as you can ⚫ Weigh the cost of each

confrontation
⚫ Goal is to win, regardless
of cost ⚫ Goal is to profit
considering all costs
 Assuming :

o Both A and B are equal-sized competitors;

o market supports sales of 20 million per period at current prices. Meaning, each company has
sales of 10 million per period;
o no differentiation;
o VC 30 % of current prices;
o 10 % price cut by one will take away half of the sales of other company when the other
company does not match the price cut;
o If there is a matching 10 % price cut by the other competitor, then the market’s sales will again
be equally divided between the two competitors.
 Pay off matrix

Company A- Maintains Price Company A- Cuts Price

Company B- Maintains Company A Company B Company A Company B

Price 10 10 R 13.50 5 R
-3 -3 VC -4.5 -1.50 VC
7 7 Profit 9 3.50 Profit

Company A Company B Company A Company B

5 13.5 R 9 9 R
-1.5 -4.5 VC -3 -3 VC
Company B- Cuts Price
3.5 9 Profit 6 6 Profit