It ia the rivalry between companies selling similar products and service with the goal of achieving revenue, profit, and market share.
Always exist in business market.
Competition
Prisoners dilemma
Prisoners dilemma
Is the process of selling strategic price points to best take advantage of a product or services based market relative to competition.
Setting a price in comparison with competitors.
Price war
Fewer competitor tend to be able to monitor one another’s price practices and respond appropriately.
Number of competitors
Mature competitors are better positioned to both anticipate competitors response to prices and be aware of competitor’s pricing.
Competitor’s manegerial maturity
Industries facing high fixed cost but low marginal costs often face extreme pressure to lower price to capture marginal revenue.
High fixed cost and low marginal cost
Has been known for long time as a major factor increasing profitability and contributing to a firms other financial and operational ratios.
About benefit gained by the production of large volume of a product.
Economics of sale
Efficiency and growth is driven by training and specialization resulting in profitable, high added value goods and services.
Economies of learning
New approach to business strategy, and is heavily based on the development of high technology.
Economies scope
Products are said to benefit from network externalities when the value of the product increases with the number of people who use it.
Industry maturity and network externalities
When considering a response to a competitors price reduction, executives should evaluate the costs and benefits of their response.
To reduce the chance of the response tipping off a price war.
Direct cost and benefit
When a firm responds to a price reduction by a competitor, two serious secondary can arise.
PRICE CONCESSIONS in one opportunity may enable other customers to demand a similar price concession in other situations.
Secondary consequences
A company’s relative position within its industry matters for performance.
Reflects choices a company makes about the kind of value it will create and how that value will be created differently than rivals.
Strategic competition
(4) Options for reacting to price competition
- Attack
- Defend
- Mitigate
- Accomodate
May appear easier than imitating price changes.
Price may be strategic focus of the firm, stripping out costs to serve a larger market at a lower price point and capture a significant market share.
Initiating price reductions
” The general who wins the battle makes many calculations in his template before the battle is fought. The general who loses makes but few calculations beforehand.”
Sun Tzu, The art of war
When using this the need and willingness to pay of customers determine every attribute of the firm’s operations and products.
Southwest, IKEA, and Wal-Mart all share a common focus of reducing costs and price simultaneously to profitably take market share and enter unserved and underserved markets.
Price as a strategic focus
Competitive response is a type of competitive action carried out by a firm in direct or indirect reaction to an initial action from a rival firm.
In reducing prices or increasing the price-to-value tradeoffs faced by customers, executives should gauge the response of their competitor.
Gauging competitive response
(4) Lines of inquiry will enable executives to gauge a likelihood of a competitive response:
- Will your rivals see your pricing actions?
- Will competitors feel threatened?
- Will mounting a response be a priority?
- Can your rivals overcome organization inertia?
What options will the competitor actively consider?
The single most common counteraction is to introduce a “me too” product or matching a price change.
Both of which are highly obvious response.
Which options will the competitor most likely to choose.
They will consider only their direct response to a pricing action and fail to consider a subsequently responses.
Managing price actions, (2) Techniques to deliver negative repercussions:
Price signaling and
Tit-for-tat pricing
Firms communicate a strategic price action to their competitors indirectly. Direct communication with competitors regarding prices is a for of illegal collusions.
Therefore firms cannot talk directly to each other about pricing decisions.
Price signaling
(2) Price signaling two key requirements:
- The price change must be announced in a highly public forum.
- The reasons for the price action must be credible.
