Price and Non-Price Competition in Oligopoly – An Analysis ...
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 1 Price and Competition Basic economics...
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Transcript of MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 1 Price and Competition Basic economics...
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 1
Price and Competition
• Basic economics• Pricing decisions• Consumer price
response• Competition in food
markets
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 2
Some Basic Economic Concepts
• Supply– Curve of supply across
prices offered– Generally upward
sloping– Non-linear cost
structures may change shape
• Quantity supplied– Quantity supplied at any
given price
• Demand– Curve of demand across
prices offered– Generally downward
sloping (but high price may “signal” quality
• Quantity demanded– Quantity demanded at
any given price
• Equilibrium: Intersection of supply and demand curves
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 3
Elasticity
• Price elasticity =
% change in quantity demanded
-----------------------------------------------
% change in price• If
– Elasticity > 1, demand is elastic – Elasticity < 1, demand is inelastic
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 4
Elasticity Issues
• Elasticities for– Farmer’s commodities—can only sell at or below
clearing price– Product category (e.g., flour)– Brand elasticity (< product category elasticity)
• Cross price elasticity =% change in quantity demanded
-----------------------------------------------------% change in price of competing product
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 5
0.00
10.00
20.00
30.00
40.00
50.00
60.00
$0.00 $5.00 $10.00 $15.00
Atkins Enthusiast
Low FatEnthusiast
Price SensitiveConsumer
Average Joe
Total
Hypothetical Demand for Steak Across Segments
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 6
Determinants of Supply
• Long term investments made based on market price expectations and expected costs
• Current market situation– Current crop size– Variable costs of
production (fixed costs are “sunk”)
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 7
Costs
• Fixed– Short run: Existing investments and contracts
already in place– Long run: Planned investments and contracts
• Variable– Supplies (inputs such as feed, energy, and
fertilizer)– Labor– Other processing
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 8
Some Causes in Changes in Supply and Demand
• Change in number of customers– Overall– Within segments
• Changes in income or wealth• Change in tastes or preferences• Change in prices of competing products
(cross-price elasticity)• Future expectations of prices
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 9
Short Term Decisions
• May be optimal to sell at a loss so long as variable costs are covered
• Contracts may require production at predetermined price even if not profitable
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 10
Clearing Price
• Allocates current supply to those who value it most
• Encourages substitution where appropriate• Encourages investment in markets with
profitably served unfilled demand• Encourages market exit under insufficient
demand
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 11
Macroeconomic Ways of Changing Price Levels
• Subsidies/taxes• Price controls• Import controls• Rationing• Government purchase
of excess crops
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 12
Ways to Change Prices
• Sticker price• Quantity (e.g., smaller candy bars for same
price and/or fewer products per package)• Quality (charge separately for services or
“dilute” product)• Terms (e.g., charge for delivery)
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 13
Price Discrimination• Explicit: Lower rates for some
customers– Discounts to select customers– Quantity discounts (if customers
compete against each other, the seller must prove that the discount is justified by reduced costs in serving the larger account)
• Implicit: e.g., coupons (typically legal in U.S.; sometimes illegal in other countries)
Ten percentdiscount forsenior citizens!
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 14
Some Forms of Implicit Price Discrimination
• Coupons• Periodic sales
– Predictable (periodic)– Random
• Rebates
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 15
Consumer Price Awareness
• A survey revealed of consumers who had just selected a product suggested::– Avg. time spent before departing from
product area: 12 seconds– Avg. no. of products inspected: 1.2;
only 21.6% claimed to check price of non-chosen brand
– 55.6% could state price of just chosen product within 5%
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 16
Yet...
• Scanner data shows large effects of price on sales (own price elasticity is typically around -2.0)
• Price cuts combined with other factors may greatly influence sales– shelf space– signs SAVE
125%
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 17
The Promotion Signal
• A segment of consumers will respond to negligible discounts--e.g., “SALE! $3.95 (Was $4.02).
• However, merely placing a sign “EVERYDAY LOW PRICE” randomly also increased sales of affected products.
SALE!Hurry!
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 18
Price as An Attraction Strategy
• Positioning– Value--perception vs. reality– Price ---> quality
• Loss leaders• “Bait-and-Switch”--frequently
illegal
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 19
Discounting of Discounts
• Promotional claims (e.g., “Save 25%) are often not taken at face value
• Even implausible claims appear to impact perceived savings
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 20
Odd/Even Pricing--Does It Have an Impact?
• Theory: $3.00 is rounded to $3.00 while $2.99 is rounded to “$2.00 plus change”
• Reality: Studies in U.S. have found some impact; no impact found in Germany
• Note that odd pricing may signal receiving a bargain, which may nor may not be compatible with the desired product image
• Odd pricing has typically been used by tradition (initially implemented to force cashiers to ring up purchases).
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 21
Price Changes
• Consumers tend to resist prices being raised above expectations--latitude of acceptance varies between products and consumers
• Certain thresholds are difficult to pass; e.g.– Cereal above $2.00 per box in
1970s– Coke above 5 cents per bottle
You’re note gettin’away with this! You mean tell me that youare chargin’ me $1.29 for a $0.99 hamburger?
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 22
Estimating Consumer Price Response
• Very difficult--since precision matters a great deal
• Some possible methods:
– Empirical• Test marketing
• “Split” catalog
– Conjoint analysis with price as one attribute --> determine weight
• Ineffective methods– Direct questioning
(difference between predicted behavior and actual choice)
– Focus groups (small sample size; non-independent response)
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 23
Competition in Food Markets
• At the farm level– Commodities are usually
sold under perfect competition (market clearing price for a commodity of a specified grade)
• Manufactured Products– Oligopoly for very highly
branded products—e.g.,• Cola drinks
• Breakfast cereal
– Monopolistic competition where more competitors exist
• Brands with strong equity (consumer preference) influence prices
MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 24
Realities of Competition in the U.S. Market
• Types of competition– Price (everyday price, periodic discounts,
coupons)– Non-price (product quality, brand building)
• Collusion (discussing how to set prices) among competitors is illegal
• Competitors do “signal” to each other • Cooperative measures (taking turns
promoting each brand)