Year 11 Economics Price and Non Price Competition - Internal Part 2

What are positive consequences (advantages) of price competition to producers?

Firms have to focus on lowering costs of production to keep prices low but still make a large profit - making the firm more efficient and productive than before. Larger firms can keep new entrants out of market or cause competition out of the market by keeping prices low. This helps them increase market share and profits as attracting customers from competitors who closed or would otherwise go to the new entrants. The possibility of when customers come to the shop, attracted by low prices (particularly when they use bait advertising) they buy other products and additional features (complement goods) related to the good boosting overall sales further. This helps them increase market share and profit as a result.

What are positive consequences (advantages) to consumers for non-price competition?

Get additional features, such as added extras or free gifts. More informed about the goods/services Better service More variety and choice Improvements in quality of product Better knowledge through advertising More convenient or innovative packaging Opportunities to win competitions etc As a result the consumers are happier than before non price competition started as they are receiving more benefits for each $ spent on goods and services. This increases consumer satisfaction without spending more discretionary income to achieve it. This is the ultimate goal of consumers to increase satisfaction. Consumers could be more informed about the goods and services they are purchasing. This is due to the additional information the consumers receives through advertising. Consumers will be more likely to make a better choice when purchasing products and less chance they will waste money therefore allowing them to buy a wider range of goods and services than before or perhaps save money for the future.

What are negative consequences (disadvantages) for consumers for non-price competition?

Goods and services prices are could now be higher to cover increased costs of additional features and options. Consumers that could previously have purchased the goods or service may miss out now as they cannot afford the higher priced good with their limited discretionary income. They may need to buy a relatively cheaper substitute good instead of the one they want. Increased choice and advertising may make decision making more difficult on what to buy and bad decisions are made buying what is not needed/suitable. Consumers maybe encouraged to impulse buy it when they do not really need it. They could better use their scarce discretionary incomes buying more essential items that are needed by them. There is then less to spend on other essential goods or services or for savings as a result.

What are negative consequences (disadvantages) of non-price competition for producers?

Have to increase prices to cover increased costs of production supplying extra features and benefits with the product/service - increased prices may mean customers move to a cheaper priced goods or services offered by other competitors. They lose market share, sales and profit as a result. The producer may have to leave the market as a result as it is not profitable to continue. If prices are not increased when offering extra features or benefits then despite increased market share and sales profits are reduced as a result of higher non-price competition costs. To maintain profitability the producer will have to reduce costs in other areas such as........... If this does not work then the producer may have to leave the market as a result as it is not profitable to continue.

When does "Branding" become an effective non-price marketing tool?

"Branding" works best when there are only a few producers in the marketplace. If there are too many brands, non-price competition can get lost if, in the mind of the consumer, the number of brands is too confusing, and they 'tune out' any promotions that do not refer to the brand they usually buy

What is the aim of Non-Price Competition?

"Non-price competition attempts to move the whole demand curve to the right rather than to move along a demand curve" Non-price competition tries to shift the demand curve to the right - an increase in demand All producers share the market demand curve. By engaging in non-price competition, one producer tries to influence their share of the demand curve at the expense of the other competitors in the market.

What is the aim of Price competition?

"The aim of price competition - an increase in the quantity demanded by lowering prices" This is a movement down along the curve. "Price competition means that one producer lowers price in an attempt to sell more. If there is a choice of two prices in the market, consumers will choose the lower price, and ignore the higher price, so again, only one price will rule in the market. "A seller who can undercut their competitors on price can often increase sales."

What is the logic behind lowering prices on a product?

"The law of demand states that 'when price falls the quantity demanded rises'. This is what a producer or seller who drops their price hopes for, especially if the extra quantity demanded is taken away from their competitors."

What is the purpose of a loss leader

A 'loss leader' is a form of price competition where firms promote a product at or below cost in order to attract customers into their stores, in the hope that customers will buy other goods and services as well. - overall profits rise as a result

What is the main danger of price competition?

A price war is started. Sales increase but profits actually decline as a result. It forces less efficient competitors to leave the market as despite an increase in sales there is a fall in profit resulting in it not being worthwhile being in the market any more. Firms close and leave the market as a result.

List the ways a firm can use non price competition to increase demand.

Advertising Providing better service Offering added extra's Product variation Product differentiation Sponsorships Competitions, games, prizes Packaging

What are negative consequences (disadvantages) of price competition to producers?

Difficult to maintain profits if price war develops and profit margins on each sale is eroded. The business may need to leave the market as a result of low/no profits Difficult for new firms with relatively small production levels to enter markets, as prices are low and they do not have the cost savings of economies of scale and cant make a profit at low prices.

When should Non price competition not be used?

Non-price competition results in higher costs of production. If these costs are not offset by an increase in demand (ie the demand curve moving to the right), then the producer may lose profit by increased costs that is not offset by increased sales. There is no point spending extra money on promotion if all that happens is a reduced profit

What are positive consequences (advantages) of non- price competition for producers?

Producers can create a point of difference for their product in the consumers mind that does not really exist. This will lead to increased demand and customer loyalty. This will lead to an increase market share, sales and profits. They can use the extra profit to expand the business. There will be an increase in market share for the producer. This is because the non-price competition such as...... will attract more customers to the store because........... This will increase the amount of sales the producer gets and reduce the amount of sales of the competitors increasing market share and profit to the business.They can use the extra profit to expand the business. Producers can cause consumer demand to increase but the actual price has not changed so Sales, profits and market share increases avoiding the negative consequences of price competition such as .......... They can use the extra profit to expand the business.

What is the difference between Product Variation and Product Differentiation?

Product Variation - the difference is not imagined by the consumer - it is real, it can be physically, seen touched by them whereas Product Differentiation - there appears to be a difference imagined by consumers where in reality there is no difference between the competitors products offered on sale

What are negative consequences (disadvantages) to a consumer for price competition

Quality may be compromised by the producer to enable to sell them at cheaper prices. Consumers may have to replace them more often as they break or wear out quicker. This costs them more of their discretionary income in the long run Consumers may have to spend more time and cost travelling to find the goods they want than before as less choice on the market. There is less time and discretionary income to do other activities like family time or buy other goods or services. Consumers have less choice and variety as new or smaller firms cant enter the market as prices are too low for them to make a profit. Consumers have a limited lifestyles due to limited choice and variety. No additional features or extras are supplied with the product and may cost extra to get instead of being included in the price. Consumers spend more of their discretionary income as a result buying the additional features and extras. There is then less to spend on other goods or services or for savings. Consumers maybe encouraged to impulse buy it when they do not really need it. They could better use their scarce discretionary incomes buying more essential items that are needed by them. There is then less to spend on other essential goods or services or for savings. Long term- if smaller competitors are squeezed out of the market due to price wars the remaining large firms may then put prices up higher than before. As there is less competition the remaining producers could increase their prices. Long term consumers would have to pay this higher price and will have less discretionary income to spend on other essential goods or services or for savings.

What tactics can be used to engage price competition?

Strategies can include discounts having sales (examples: end of season, fire, closing down, clearance) trade-ins interest-free terms buyone-get-one-free and 'loss leaders'.

What are the positive consequences (advantages) to a consumer for price competition?

The big drawcard for consumers is lower prices. Consumers like cheaper prices, because not only can they buy more, but their scarce income can go a little further buying more variety of goods or services than before. The other benefit is they can actually save money for future purchases of larger goods or services or have money saved for unexpected financial bills.

What is a problem of a Price War

The downside can be that some producers may drop out of the market. These are the suppliers who cannot compete with the lower prices offered by other producers. Their costs may be higher, and they cannot keep going with so little return. Long term- if competitors are squeezed out of the market due to price wars the remaining firms may then put prices up higher than before and consumers are worse off than before.

What is the best form of price and non price competition?

When Non-price competition and price competition is used in conjunction with each other. This can often be a good way to encourage people to try new brands, in the hope that they will decide to switch. Example "McDonald's and Burger King both produce burgers in the fast-food market. Both use non-price competition, such as different children's playgrounds, sponsoring, gifts with purchases and pleasant surroundings. Occasionally, they will also use price competition to launch a new product, or to try to persuade consumers to swap to their chain of restaurants because their food is cheaper than that of their competitors.

Define Product Differentiation

When a firm aims to make a good or service appear different to those of it's competitors - i.e. where in reality there is no difference.

Define Product Variation

When a firm makes a good or service that is actually different to those of competing firms - i.e. the difference is not "imagined" by the consumer, it is real.

Define non-price competition

When firms have a number of ways of competing with other firms so as to increase sales, market share and profit - and which do not involve price. To increase profit, the producer must make sure the increase in sales revenue outweighs the increase in costs from the non-price competition.

Define price competition

When firms have lower prices than their competitors so as to increase sales, market share and profit. They try beating the competition by offering a lower price.

When lowering prices to consumers what must be the long term objective of a firm engaging in this method?

When producers lower prices they are hoping to gain sales, or to use the term many sellers use, 'to increase turnover'. The main point is not to gain sales at the expense of profits By lowering price, the resulting increase in revenue has to be matched with an increase in profits or there is no point in lowering the price in the first place.

When does non-price competition work the best for producers

When their goods or services are positively "Branded" "Advertising and promotions will draw attention to the brand and ensures that consumers know the difference between one brand and another."

Define market share

the percentage of customers a firm has in a market