Competitive Analysis:
"Flanking in a Price War"
Article Critique
The Article "Flanking in a Price War" discusses how an economic experiment and data were used effectively in the Quebec grocery industry. The beginning of the article gives some history of the industry, introduces the major participants, and describes how one firm in particular, Steinberg, used a price cutting strategy to became the dominant player for 30 years.
The article then goes on to explain the economic climate that changed the competitive environment from one of near-perfect competition to the oligopoly that existed in the 1980's. This was followed by several examples of how local legislation, and environmental factors kept many of the smaller independent stores and chains in business and clawing for market share.
In 1983, it became obvious to most observers that a price war would soon ensue, and most likely be initiated by Steinberg. One firm, Hudon and Deaudelin, wanted to be prepared in the face of such a price war and had a study based on pricing experiments performed. To summarize, the experiment was performed and found that different price elasticities existed for differing products. The difference was mainly in the products ability to be stored for long periods of time, and that by raising prices of stock-up items and lowering the prices of non stock-up items, one could minimize the loss to margin and continue to fund the price war.
When the price war finally came, Steinberg used an unusual tactic in lieu of slashing prices. It offered a rebate for every dollar spent that could be applied to the customer's next order in the store. This was accompanied by a new focus on customer service that required several hundred new employees. Two of the other major firms followed suit immediately, in a competitive reaction, while Hudon and Deaudelin implemented the price cutting measures that were proven by the pricing experiment. These new prices were enforced with a strong advertising campaign. This tactic not only offered the smallest reduction of margin among the competitors, but Hudon and Deaudelin was actually the only firm to gain market share from the 14 week price war. These results were a vindication for economists and proved the value of economic theory in business
The experiment that was performed consisted of prices being manipulated on a set of 72 grocery products over a six week period. The products were classified as stock-up goods or non stock-up goods.
They anticipate competition between supermarket chains will be fierce this year as food prices continue to stay low. The Canadian grocers have been grappling with declining food prices, especially for meat, and Loblaw’s said “The notion of a shift into a steady inflationary environment is going to be offset by what we see as a continued level of competitive intensity”
(The retail industry main aspect includes small stores that sell products directly to consumers. Mike took over the lease of a building and wanted to transform it into a fully functional department store that offered a variety of products.)
Reduced pricing does not always ruin margins – Coming into this simulation I assumed big companies, such as Walmart, were able to offer such low prices only because they sold in such large quantities. However, through the simulation this was not the case. We thought to be successful with our low pricing strategy we would have to maintain the most market share. Although by round 5 we were only the second highest market share in the industry. However, this did not end up equating to the bottom line. Compared to Baldwin, Digby had over $20 million less in sales in round 5, but ended the round with $10 million more in profits. Since we invested so heavily in the core of our business our costs were extremely low allowing us to be the most profitable company in our
This method overlooks the concept of price elasticity of demand, it is possible for businesses to set the higher price (or lower) to maximize profits depending on customer response to change in price of their product. With this method there in only a little ways to cut down or control their production costs, let say if the resources cost increases, the selling price will be increases too. There is a lack of efficiency and lack of competitiveness compared to another competitor' prices.
For Oliver’s Market among the five Competitive forces, pressures associated with the threat of new entrants into the market are the strongest one. Because Wal-Mart and Target had announced plans to develop regional supercenters in the Sonoma county region. They are strong candidates for entering the market, because they possess the res...
“So what’s wrong if the country has 158 neighborhood California Pizza Kitchens instead of one or two?” Virginia Postrel inquires in her In Praise of Chain Stores essay (Postrel 348). In rebuttal, I plan to answer her question with more reasons than one. However, the responses I intend to offer apply not only to the CPKs of America, but for all the national retailers, big box stores, chain stores, and the like. National retailers destroy the local character of small towns. Chain stores should be limited to only run in a few highly populated urban areas. Furthermore, the costs saved in the convenience and familiarity of chain stores do not outweigh the negative economic impact and damaging effects that they can have on a community’s well-being.
Since the inception of the company, Wal-Mart’s primary intended strategy has always been to be the lowest-cost provider. Sam Walton saw to this before he had ever opened his own discount store, “He decided that small-town populations would welcome, and make profitable, large discount shopping stores” (“Wal-Mart Stores, Inc. (2); International Directory…” para 4). Walton knew not only would his stores be welcome, but also that he would be “able to keep prices low and still turn a profit through sales volume” (“Wal-Mart Stores, Inc. (2); International Directory…” para 5). The low prices Walton offered were able to be transferred directly to his consumers on the basis that the goods Walton sold were purchased
The opposing side believe that local businesses are suffering due to “big box stores” and not being able to give as big of discounts or have as big of a selection of products. “People say, ‘Well, you lost your little stores,’ and that’s true. But it’s money-driven...if its $5 cheaper at one of the larger stores, we take advantage of it. I guess that’s human nature.” Carl R. Baldus Jr.
... on why firms choose to respond in this way, or if price maintenance is recommended through efficient measures.
Realizing that fierce price war in China’s color television industry brought them ever-decreasing profit margins hard to bear, in 2000, some core members of the color TV industry formed a price alliance intended to stifle the price war and re-establish their leadership in the value chain of home appliance. Responding to the price control, Gome initiated its powerful strike by lowering the price of Prima’s (a member of the alliance) color televisions to an extent lower than the price laid down by the alliance. The consumers’ response confirmed Gome’s low prices strategy at the beginning, while the allied manufacturer’s once again signal of price control was obviously aimed at Gome’s defiant market strategy.
But since " price wars" only lead to a loss in revenue for these firms
Intuitively, a cost-plus approach sets a lower boundary for the selling price. Yet to pitch a competitive price on the market, it takes more than that. The demand forecast advocates opting for the lowest selling price which yields the highest return. A market penetration strategy necessitates thorough knowledge of the selling prices of the nearest competitors and their retaliation potential. Ideally, the lowest price in the market of £10,400 dictates the upper ceiling of AUDI’s price discretion. However, setting initially a too low price in the hope for increasing it subsequently is not a viable option, as prices are somewhat inflexible upward. Instead, costs have to sink in the long run. Nevertheless, claiming a larger market share will allow AUDI to deftly climb the steep learning curve, lower its costs and further mobilize against market followers. A high price elasticity of demand insinuates that profit margins will continue to soar, if selling prices are reduced any further. As the point of maximum profit is apparently not yet reached, the company is advised to extend the range of the forecast. But is the highest profit naturally the best profit?
One method that Toyota can consider is using the price elasticity of demand to determine whether to increase or decrease the sale price of their automobiles. The responsiveness or sensitivity of consumers to a price change is measured by a product's price elasticity of demand (McConnell & Brue, 2004). Market goods can be described as elastic or inelastic goods as change in quantity demanded for that good. If demand is elastic, a decrease in price will increase total revenue. Even though a lower price would generate lower sales revenue per unit, more than enough additional units would be sold to offset lower price (McConnell & Brue, 2004). In a normal market condition, a price increase leads to a decreased demand, and a price decrease leads to increased demand. However, a change in income affecting demand is more complex.
One of the limitations of economic theory is that in order to show the relationship between price and quantity demanded or quantity supplied other factors that influence quantity demanded, for example the price of a substitute good, or quantity supplied, for example the price of an input, are held constant. These factors are held constant, because in reality, they are constantly changing. This can make it difficult to determine how one factor, such as price, can affect another factor, such as quantity demanded or supplied, because other constantly changing factors are influencing quantity demanded or supplied at the same time. This is a limitation because these other factors have an influence on quantity demanded or supplied, and can therefore influence the outcomes of decisions by individuals and firms. For example, a Pie Firm might decide to lower the price of their apple pies believing it will increase individuals demand for apple pies because they are now relativ...
The competitive environment of Metro Holdings Ltd would be evaluated based on Michael Porter’s 5 forces Model. The factors affecting each force would be critically analysed to determine the competition faced by the business. As the nature of department stores and specialty “accessorize” stores is vastly different, the report would focus on the analysis of department stores which accounts for a bigger portion of the company’s income and presence in the industry.