INTERACTION OF FIRMS IN THE MARKET

PRICE COMPETITION  
Producers use this strategy to try and undercut the competition and increase sales.
By reducing their price producers are trying to increase the quantity demanded for their product and decrease the demand for their competitor�s product.
 		  
   
Price competition involves the firm in some way reducing its price, and may include.
  • Two for the price of one.
  • Discounts.
  • Interest free loans.
  • Loss leaders � an item deliberately sold at loss to get customers into the store. Super markets often use this stratergy.
Price competition may lead to price wars where two or more firms try to undercut each other. This may lead to a loss in profits and eventually one of the firms closing down. Recent price wars can be seen in the airline industry.
Larger firms such as the Warehouse, are able to take advantage of economies of scale such as bulk buying, marketing economies etc. and undercut smaller firms eliminating them.
There are often a lot of arguments about �big box� stores that often eliminate smaller firms when they come to a town.
 
Advantages of price competition include:
  • Cheaper price for consumers.
  • Increased market share for producer.
 Disadvantages of price competition include:
  • Loss of profits for producers.
  • If firms go under may eventually lead to a loss in competition and increased prices for consumers.
NON PRICE COMPETITION  
Non price competition allows firms to compete without reducing their prices.

This involves encouraging consumers to buy a good by making it appear different or better to the other products.

 
THE MAIN FORMS OF NON-PRICE COMPETITION ARE...  
 
Product differentiation includes
  • Advertising � e.g. T.V, radio, magazines etc. A new trend has been product placement in shows, where the actors use the advertising company�s products.
  • Branding � creating an image or brand so that customers can easily identify their product e.g. Nike, McDonalds.
  • Packaging - making their packaging look more attractive. Hubbard�s differentiates its cereals in this way.
  • Location � a good location can help a firm to increase sales. Shop rents / building prices are often determined by foot traffic � the number of people going past that point.
  • Sponsorship - firms sponsor local clubs, schools or national teams to raise awareness for their product. They get expose from T.V. and support from supporters of that team.
  • Service - some firm concentrate on offering a better service than anyone else to encourage people to use their shop / product.
  • Loyalty schemes - such as Fly Buys encourage people to use their product as they get rewards for spending money there.
PRODUCT VARIATION
Product variation is where firms give their product real variations to try and get consumers to buy their product.

PRODUCT MODIFICATION
Producers give their products real differences such as airbags in cars, better body designs, raspberry coke etc. The modificatications may draw customers away from their competitors. 		VERTICAL PRODUCT VARIATION
To make their product appeal to a wider range of income levels, some producers may introduce a number of different models of the same product.

e.g. Car manufactures may have the economy model, GTI model, station wagon model, sports model with different engine sizes or extra features for the more expensive models, but the body design general aspects are still the same.
   
ADVANTAGES AND DISADVANTAGES OF NON-PRICE COMPETITION.  
Advantages to Suppliers
  •  Increases demand for their product.
  • Greater market share.
  • Greater market power.
  • Increased profits.
Non price competition will increase the demand for the product by shifting the demand curve to the right. Consumers are more willing to buy more of the good. This reduces the demand for competitiors products and so their demand curve shifts to the left.
 

Disadvantages to Suppliers

  •  Higher selling costs due to advertising costs.
  • Cost of production increases.
  • Higher Average Costs.
  
Non price competition will increase the average cost of production for the product as more is spent on advertising, competitions etc.
Vertical product variation leads to increased costs of production for each model of products as less able to take advantage of economies of scale.

 

 
 

ADVANTAGES AND  DISADVANTGES OF NON PRICE COMPETITION
ADVANTAGES TO CONSUMERS
  • Consumers may believe they have more choice.
  • With product variation they do get a wider choice.
  • Better quality of goods and services.
  • Better informed of choices.
  • Better standards / quality as producers are forced to continually update and improve their products.
     
 DISADVANTAGES TO CONSUMERS
  • Higher prices as producers pass on increased costs.
  • May not be able to distinguish between products.
  • �Wider� choice may be just packaging or branding � product may not be any better.