Firms compete for market share and the demand from consumers in lots of ways. We make an important distinction between price competition and non-price competition. Price competition can involve discounting the price of a product to increase demand (cost-plus, predatory and limit pricing). Non-price competition focuses on other strategies for increasing market share (advertising and sales promotion policies, and collusion and cartels).

Cost-Plus Pricing

Average cost pricing is defined as where a firm charges a price explicitly with reference to average costs plus a percentage profit mark-up.

Predatory Pricing

Predatory pricing is defined as a situation where a firm is prepared to deliberately make a loss in the short run with the aim of driving a rival(s) out of the market. In the long-run this will enable the firm to raise its price more than it has previously been reduced.

Limit Pricing

Limit pricing can be defined as a situation where an established firm tries to forestall new entry in a situation typically where economies of scale exist.

Advertising And Sales Promotion Policies

Consider the example of the UK supermarket sector where non-price competition has become important in the battle for sales

• Traditional advertising / marketing
• Store Loyalty cards
• Banking and other Services (including travel insurance)
• In-store chemists and post offices
• Home delivery systems
• Discounted petrol at hypermarkets
• Extension of opening hours (24 hour shopping)
• Innovative use of technology for shoppers including self-scanning and internet shopping services

Collusion And Cartels.

See previous notes.