Essay on Price Competition

Submitted By agundry
Words: 1364
Pages: 6

Competitive Strategy and Industrial
Structure
Course Review
Professor Yuval Salant

Main topics


Investigating the connection between industry fundamentals and competitive strategy
 Strategy success depends on industry fundamentals



Strategic management of competition





The tradeoff between flexibility and commitment
Direct vs. strategic effects

Incumbent weaknesses and entry to markets

1

Strategy is not a sequence of isolated decisions •




Strategy as a process
Stage 1: Structure
“Understanding the game”

Demand analysis (location model)
Cost analysis (economies of scale)
Risk factors
Key cognitive biases

Threats & Opportunities

Product positioning, Differentiation,
Competitive convergence, proliferation & preemption, Consolidation, Signaling and punishment, Price protection policies,
Winner-Take-All competition ,Judo strategies, Couponing, Loyalty Programs,
Pricing with Adverse Selection

Stage 2: Strategy selection
“Playing the game”
Propose plausible strategic alternatives

Stage 3:
Evaluation & Implementation

Evaluate and revise your strategy;
Implement, react and adapt

Industrial structure: Demand analysis meets cost analysis Economies of scale

Taste for variety Weak

Strong

Perfect Competition

Homogenous Product
Oligopoly

Strong

Monopolistic Competition

Differentiated Product
Oligopoly

More products

Weak

Fewer firms

2

Competitive Strategy:
Playing the Game

Stages 2 & 3:

Demand Analysis meets Cost Analysis

Strong taste for variety plus strong economies of scale
Likely industrial structure: Multi-product, concentrated, profitable oligopoly
 Product proliferate to serve diverse consumer tastes and to Pre-empt entry
(RTEC)
 Segment market with different firms located in different niches (Gillette vs.
Bic, GE-W)
 Consolidate a fragmented industry (Video stores, funeral homes)
Strong taste for variety plus weak economies of scale
Likely industrial structure is monopolistic competition with little scope for competitive strategy (car retailing)



Competitive Strategy:
Playing the Game

Stages 2 & 3:

Demand Analysis meets Cost Analysis

Weak taste for variety plus strong economies of scale
 No network effects: homogenous product oligopoly – price management is critical (Airlines)
 Network effects: Winner-take-all markets
 Preemption, commitment, licensing
Weak taste for variety plus weak barriers to entry
 Perfect competition with little scope for competitive strategy
 Possible sources of long-run profit:



Adverse selection – when price cutting selects “bad” customers prices may remain high (credit cards, car insurance)
Competitive advantage that is hard to imitate (southwest, capital one)

3

Strategic management of price competition


Managing short-term price competition is key to profitability



Suffer short-term “pain” (i.e. forego immediate profit) for long-term “gain”
(i.e. cooperative pricing in future)



Success often depends on structural issues

Stage 1: Risk Factor Analysis
Structural factors

Market performance

Root causes

Observable symptoms

Weak Entry Barriers

Competitive Strategy:
Understanding the Game

Excess entry

Fragmented industry
Rogue / marginal players

Strong incentives for price cutting Predatory behavior

Durable Capacity
Feast / famine cycles
Frequent Capacity Misalignment

Volatile demand
Lumpy orders
Non-transparent
pricing

Ineffective signaling punishment strategies

Poor profitability 4

Managing price competition: Airlines
Stage 1: Structure
Weak taste for variety, durable capacity, volatile demand, weak entry barriers, marginal players

Stages 2+3: Strategy Selection and evaluation
Competitive Price Discrimination
Leads to targeted discounts to win share, triggers price wars, and hence is unsuccessful
 Successful strategy must deal with short-term incentives
 Value Pricing simplifies pricing structure to
(1) improve signaling and monitoring and
(2) reduce temptation to cut prices but cannot deal with marginal players
…