economics

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PRICE AND NON PRICE COMPETITION AND THE ELASTICITY

Market structure refers to the environment in which the buyers & seller of the product operate & interact directly or indirectly.

Classification of Markets

Market Characteristics

Market Type

No. of Firms

Entry Conditions

Pricing power

Product Differentiation

Equilibrium Condition

Demand Curve

Elasticity of Demand

Perfect Competition

Many

Free

Price taker

Homogeneous

MC=MR=AR=P=Min AC

Horizontal Straight Line

Perfectly Elastic

Monopolistic Competition

Many

Free

Price taker

Close Substitutes, differentiated

MC=MR

Downward Sloping

High Elastic in long run

Oligopoly

Few

Restricted

Some market power

Might be differentiated

MC passes through discontinuous MR

Price determined at Kink

Downward Sloping

Relatively Elastic

Duopoly

Two

Restricted

Some market power

Might be differentiated

MR=MC

Downward Sloping

Relatively Elastic

Monopoly

One

Restricted

Price maker

No differentiation and no close substitutes

MR=MC

Downward Sloping

Relatively Inelastic

PRICE COMPETITION – In Price competition, firms sells identical products to compete on the basis of price, trying to attract new customers & thereby increasing the market share. It exists in all types of markets except Perfect Competition as they are price taker & not the maker.

Monopolistic completion– As the products offered by each firm are close substitute, so there is price competition among the firms to attract more customers.

Oligopoly– Products might be differentiated as few firms are in the market & price competition lies to increase market share.

Duopoly- Two firms are only there who leads the market & a small change leads to shift of demand for a firm.

Price competition is irrelevant in-

Perfect competition- In this type of competition all the products are homogeneous & are sold by different sellers so price competition is not possible in perfect competition.

Monopoly- In monopoly a single firm is equal to industry so there is no competition at all, a firm decide his own prices.

Price elasticity of demand- PED or Ed is a measure used to show how the quantity demanded of a good or services responds to change in the price of that good.

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Perfect competition- Demand is perfectly elastic, quantity demand changes with no change in price as price & products are homogeneous.

Monopolistic competition- Demand is relatively elastic, with small change in price leads to large change in quantity demanded as all the products are close substitute to each other.

Oligopoly- As oligopoly is combination of monopolistic competition & monopoly, the products might be differentiated & price elasticity is relatively elastic.

Cross price elasticity of Demand - Cross price elasticity measures the responsiveness in the quantity demanded of one good to changes in the price of another good.

Substitute has positive cross price elasticity. It exists in Monopolistic competition, Oligopoly, & Duopoly as the products are close substitute to each other in this market & there a slight change in the price of a product will increase the demand for another product.

NON-PRICE COMPETITION – It is a marketing strategy, where a firm tries to distinguish its products or services on the basis of attributes like design, quality, & other competitive advantage other than price. Non-price competition involves promotional expenditures (such as advertising, sales promotions, special orders, or free gifts), marketing research, new product development, & brand management costs.

Monopolistic competition- Large number of buyers are there in monopolistic competition & due to product differentiation non-price strategies may be apply to attract customers & increase market share.

Oligopoly- Many buyers with few firms, compete on non-price competition so as they may have increase in the market share with product differentiation.

Advantages of non-price competition-

Enables companies to make unique different image from other competitors in the market by providing quality product.

The design and different features of product offered in the market matches the demand in the market and needs of the people in that area.

Location of distribution for target customers is given importance. Goods are provided to buyers matching their convenience and needs.

Quality of service that are given by the employees. CRM is very operational and builds customer loyalty, very true in the case of hospitals, hotels, spa, parlors, even groceries and supermarkets.

Non-price competition can be an effective means for growing market share and profitability.

Non-price factors affecting demand-

Tastes & preferences of buyers.

Future expectation of buyers.

Income of buyers.

Number of buyers.

Fashion.

Seasonal factors.

Non-price factors affecting supply-

Number of sellers.

Changes input prices.

Change in technology.

Expectation of buyers.

Product differentiation- Asituation where a producer or firm tries to win over the market or increase its market share by adding certain features to the product so that it becomes different form the other products.

Features of product differentiation-

Technical standards- How advance is the product in terms of the current state of technology. For example if you are purchasing LAPTOP then this point would play a very vital role in the consideration.

Quality standards- Quality of raw material used in the product whether it is related to the manufacturing or the assembling, as this directly affects the durability of the product. Therefore the quality of the product plays a very important role in non-price competition.

Design standards- It refers to the overall structure of the product that is provided in the market by a customer. This can play a vital role in attracting the customers. Thus the producers can try and make a better design standard of their product.

Service standards- This point generally refers to the after services given to the customers after the purchase has been made by them and thus if the after sales provided to a customer is good by any company then the level of satisfaction also will be high by the customer.

Types of product differentiation-

Vertical product differentiation- this can be defined as “where a product differs from the product that its rival firm produces in terms of quality.”

Horizontal product differentiation- this can be defined as “when a product differs from the rival’s products, although the quality of the product seems to be of the similar nature.

Non-price competition is irrelevant in-

Perfect competition- In perfect competition since all the products manufactured by the firm are homogeneous in nature & the firm is price taker, thus there is no point of non-price competition among the existing firms.

Monopoly- Monopoly is the market where there is only a single producer in the market & he is the price maker, thus the concept of non-price competition does not apply. And also due to the fact that there is restriction in the entry on the firm in this type of market.


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