Competitor’s reactions to price changes
A firm contemplating a price change has to worry about competitors as well as customers reaction. Competitors are very likely to react where the number of firms is small the product is homogeneous, and the buyers are highly informed. How can the firm anticipate the likely reactions of its competitors? Assume that the firm faces one large competitor. The competitor’s reaction can be estimate from tow vantage points. One is to assume that the competitors react in a set way to price changes.
In this case, it’s the company will have to figure out what lies in the competitors self interest at the time. The competitor’s current financial situation should be researched along with recent sales and capacity, customers loyalty, and corporate objectives. If the competitor has a market-share objective, it may react on some other strategy front, such as increasing profit-maximization objectives, it is likely, to match the price change.
If it has a profit-maximaistsion objective it may react on some other strategy front, such as increasing the advertising budget or improving the product quality. The task is to read the competitors mind by using inside and outside sources of information. The problem is complicated because the competitor can put different interpretations on, say, a company price cut; The competitor can surmise that the company is trying to steal the market, that the company is doing poorly and trying to boost its sales, or that the company wants the whole industry to reduce prices to stimulate total demand.
When there are several competitors the company must estimate each competitor’s likely reaction. If all competitors behave alike, this estimate amounts to an analyzing of typical competitors. If the competitors do not react uniformly because of critical differences in size market shares, or change, there is good reason to expect that the rest will also match it exhibit 17-6 shows how a major chemical company analyzed the probable reactions various parties to a contemplated price reduction.