Managerial Economics - Question 1 Projected answer (Price and non Price competition)

 

1) First, two concepts, price and non-price competition, need to be considered separately. According to law of demand, when the price of goods rise, the quantity demand will go down. If the price decreases, quantity demanded increases. The main reasons for that are the Substitution effect and the income effect. Due to the change in the price of the item under consideration, the change in consumption due to a change in the prices of relative goods calls substitution effect and the change in consumption due to a change in purchasing power call income effect. The quantity of demand (QD) will go up, if the price of goods decreased. The product is relatively more expensive than alternatives, and therefore people will switch to relatively cheaper products (Substitution effect). The increase in price of product reduces disposable income of consumer and this lower disposable income may reduce demand (income effect).

                    In price competition, the firms develop different price strategies to beat the competition. They generally decrease the price of goods or services than that of the competitors to gain the market share. Sometimes, prices are changed to recover the costs and sometimes for increase the demand. For instance, Bic razor and Gillette razors are close competitors, thus, they often engage in price wars.

                  In addition to the pricing method, firms try to attract customers through non-price competition methods. The non-price competition focuses on factors other than the price of the product such as features, quality, delivery, after sales service, and promotion. Thus, firms focus on these factors to increase the sale of products.

                                      Given the current state of the economy in the face of the emerging corona virus situation, it is important to examine how companies use those price and non-price competitive tactics and their effectiveness. Given the socio-economic environment associated with this COVID-19 situation, there is a growing sense of social isolation, rising demand for health care and related products, Adverse effects on international trade, a lack of access to the physical market for consumers to buy goods, a slowdown in the income streams of many, and a drastic reduction in the sources of income and the collapse of the tourism industry. There were also some business closures and Dismissal of employees.

                                                                 In the face of this crisis in the economy, many sections of the society are losing their sources of income and as a result are inclined to consume lower priced products. Also, there is a tendency for some goods to become unaffordable due to import restrictions. Therefore, there will be a wider market space for companies that are able to supply products at lower prices on this environment. There is also a decline in demand for goods and services due to social isolation and the loss of the tourist market. Therefore, there may be some surplus in some products, and the market can benefit by selling them at a lower price. Also, providing cheaper products during these difficult times will bring relief to the consumer, which will prevent the consumer from being attracted to other competing companies in the long run.

However, due to the social isolation caused by this epidemic and the consequent increase in consumers being tempted to buy goods online, it has become a very popular feature to go to the consumer and sell the goods and place orders online and deliver the goods to the customer's home. Here we can see that consumers are more concerned about delivery speed and ease of purchase than they are about price. Also, economically viable consumers are tempted to buy or pay more for products and services that are specifically based on health care practices. Firms prefer non-price competition. In spite of the additional costs involved, it is sometimes more profitable than selling at a lower price and avoids the risks of the price war. But in this case, the cost of the goods and services provided may go up due to the additional costs incurred in the non-price competitive system. As promotion costs, additional staffing costs, and additional transportation costs have to be borne, rising commodity prices can hamper competitive gains.

                                     Considering the situation with this corona virus situation, especially in Sri Lanka, there is a huge demand for low-cost products. The best example of this is the large gathering of consumers around firms such as the Sathosa with the recent imposition of lower prices for canned fish and dhal. On the other hand, there is a specialized market for non-price competitive strategies, such as distribution and online transactions. For example, in the recent past, there has been a rapid increase in the sale of goods near villages, consumer homes and online sales in Sri Lanka.

                                             Overall, there is a larger market for price-based competitive systems than non-price competitive ones. The main reason for that is the impact of this Corona virus on the cash and income flows of consumers. Although more expensive, higher quality products are available in the nearest market, there is a strong tendency to look for cheaper substitutes. Therefore, it can be concluded that the price system is ahead of the non-price system as mentioned in the above statement. However, non-price competitive methods have not become insignificant. They can only be shown to be lower than the price competitive methods.