Price and Non-price Competition

Price Competition Imperfect competitors use marketing strategies to increase their sales, their market share and consequently, their profitability. Price competition= Encouraging increased sales by discounting price

Price competition involves: Discounts Buy one, get one free Interest free terms Sale prices Loss leaders ( below cost prices on one item to get you into a shop where you will hopefully buy more – supermarkets use it)

Firms that are selling substitute goods can compete by cutting their prices as well. This will increase their market share (more people will buy their product over the substitute). E.g. Coke vs pepsi.

P P1 Q Q1 DDD1 Price ($) Quantity Market for CokeMarket for Pepsi Coke could use price competition to try to increase it’s market share in cola drinks

This type of price competition may lead to a price war (prices constantly falling) While consumers love this, producers loose profit Price wars tend to continue until one or more businesses fail Once this happens, prices will increase as the remaining business(s) try to recover lost profits even though they may now have a bigger market share.

Businesses often prefer to compete through non-price competition

Non-price Competition Product DifferentiationProduct Variation Location Packaging Advertising Branding Service SponsorshipModification of the product Vertical product variation

Product Differentiation Making the good or service APPEAR different or superior to the competition. Location: Choosing a better location than it’s competitors (convenience, classy, close to other shops, good parking). Businesses of similar goods locate close together as it becomes acceptable for consumers to buy a certain product in that particular area (e.g. second hand car dealers, restaurants, takeaways, etc)

Packaging: Firms compete by making their packaging more attractive (stand out). Includes logo’s and trademarks that helps to identify a product (e.g. horse-National Bank) Advertising: Media e.g. TV, radio, print media (magazines, newspapers, posters etc) Usually used for non-price competition by attracting attention to the business by other means Sense of fair play Discredit the opposition (Whitakers) Sex appeal Fun

Branding: Producers can create a brand name to differentiate from another product e.g. Coke for cola, BP for fuel. Brand loyalty can be encouraged through competitions and promotions (fuel stations) Service: Extra or better services could be offered. Petrol station- check oil & water, wash windscreen Fast food outlets-claim the fastest service available

Sponsorship: Some firms sponsor events (sporting, cultural) to be identified with something worthwhile, at the same time as getting media exposure for their brand name. Rebel Sport Super 14 Heineken Open (tennis)

Product Variation Real variations are made to the product so it actually is different. Product modification: Producers attempt to bring in new variations, i.e. new features (cars- cruise control) Vertical product variation This is aimed at creating a range of their products in order to appeal to a wider range of consumers. E.g. subaru (car manufacturer): Impreza (sedan and wagon) WRX (sedan and wagon) Legacy (sedan and wagon) Outback (wagon) Forrester (wagon)

Advantages and disadvantages of Non- Price competition Consumers Advantages More variety/choice Improved quality Better service Opportunity to win competitions Advertising improves your knowledge Disadvantages Higher prices to cover increased costs of production

Advantages and disadvantages of Non- Price competition Producers Advantages Increased demand Leads to more sold At higher prices-profit Avoids price wars Disadvantages Increased cost of Production may Decrease the profit