Competition price

The most obvious, and often the most dangerous form of competition, is price competition. Many competitions make effective use of price competition. The stories of Ford, Apple Computer, Southwest Airlines, and Walmart show just how powerful this weapon can be. Note that in all these examples demand is price elasticity.

However, price competition is dangerous if demand is inelastic. Reducing prices in an inelastic price situation reduces total revenue. Therefore, a company that reduces its price can only win if it takes business away from its competitors and increases its market share. But if competitors also cut prices, it is possible that no company’s market share will increase.

Price competition is more effective and advisable if the company that carries out the price reduction is also the low-cost producer. In that case, competitors won’t be able to match the price cuts and stay in business. A company that wants to be a low-cost producer must be aware of two important economic concepts that govern production costs. One is the concept of economies of scale. Often times, a company can reduce its average costs of production by increasing the size of its production facilities and its total production volume. You can offer volume discounts to your customers.

The second concept related to costs is the experience curve. Even without increasing the scale of operation, a company can reduce costs as a result of increased efficiencies gained from product manufacturing experience. To take advantage of efficiencies, management must deliberately try to learn how to reduce costs as the company gains experience in producing the product.