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41. Price and non-price competition. Fair and unfair competition
Price competition - this is a type of competition through changes in the prices of goods. Selling firms move along the demand curve by lowering or raising the price. The main condition for conducting successful competition with the help of prices is the constant improvement of production and cost reduction. Only the entrepreneur who has the chance to reduce production costs wins.
Mechanism of price competition operates as follows. The manufacturer sets prices for its products below market prices. Competitors who are unable to follow this initiative cannot stay in the market and leave it or go bankrupt. However, there is always a competitor who will lead the company out of a difficult situation, survive the "price war" and wait for a new increase in product prices. So only a company that has a really strong position in the market compared to its competitors can count on winning. If competing firms are in approximately equal conditions, then the "price war" is not only wasteful, but also meaningless.
Factors, affecting the intensity of price competition:
1) Interest rate. The higher the rate and the lower the likelihood of repeat sales in the market, the greater the incentive for a price war.
2) Economic risk level. Focusing on strategic goals, i.e., future profits, can prevent a price war between sellers.
3) Product differentiation. The goods of different enterprises serve as perfect substitutes for each other, which means that the Lerner coefficient is set to zero, which softens price competition and its consequences.
4) Limiting the power of sellers in the market. The lower the capacity of competing sellers compared to the capacity of the market, the higher prices they charge, the higher the monopoly power they have, the higher the profit they receive.
With non-price competition, the role of price does not diminish at all, but the unique properties of the product, its technical reliability, and high quality come to the fore. It is this, and not price reduction, that allows you to attract new customers and increase the competitiveness of the product.
Non-price competition is characterized by the creation of strategic barriers that prevent the entry of new enterprises into the industry. These include:
1) saving innovations;
2) long-term contracts with resource providers;
3) obtaining licenses and patents for this type of activity;
4) preservation of unloaded capacities;
5) all ways to increase the minimum effective volume of output in the industry.
Author: Ilyina V.N.
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