business and competition

7/28/2019 Business and Competition

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How competitive is my market?

Steps toward making a diagnosis The Who of competition

The How of competition The Symptoms of competition

The substitute conundrum


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Competitor Identification Step 1: Initial market selection Step 2: One product market or several? Step 3: One geographic market or several?

Step 4: Identifying the key product performancecharacteristics Do customers prefer a one stop shop or do they

prefer to deal with multiple vendors?

How might the product be segmented by attributes

like look and feel, ease of use, warranties, durability,availability of complementary goods as well as otherrelevant factors customers are likely to consider inchoosing among industry offerings?


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Competitor Identification What different channels is the product distributed

through?

Does brand matter and why?

How intimate are relationships between firms andcustomers? What are the switching costs?

How much price dispersion is there in the market?What drives this price dispersion?

Step 5: Competitor identification


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Market Structure

Used to measure competitiveness of a market

Number of players a fair measure but notadequate

Therefore, one alternative is the four-firmconcentration ratio(which is the market share

controlled by four largest firms) A better measure is the Herfindahl index


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1. Obtain competitors market share data. (Canignore firms with shares below 2 percent)

2. Square the shares. For example, if one firmhas a share of 0.40, its squared share is0.16.

3. Add the squares. For example, if one firmhas a share of 60% and its rival has 40%,

then HI equals 0.52


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Note that HI equals 1 if there is a lonemonopolist

HI approaches close to 0 if many firms dividethe market and no firm has a market share

above 10%. In general, competition becomes more benign

as Herfindahl increases and more virulent asHerfindahl decreases

Symptom 1: The Herfindahl index is below 2.5and/or has recently decreased in magnitude by atleast .05.


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Cola Wars Drugs - Hospitals Some price wars

Symptom 2: Firms rely on price reductions to gainmarket share.

Nonprice Competition

Symptom 3: Nonprice competition combined with alarge industry price elasticity of demand.


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Triggering Price Competition The nature of demand

Symptom 4: Customers are price sensitive.

Symptom 5: Customers are willing to switchloyalties, even if they try a new product justonce or twice.

Symptom 6: A large firm has entered into an

established market. Symptom 7: The industry has excess capacity.


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Triggering Price Competition The nature of transaction Symptom 8: Prices are kept secret from the competition.

(Bidding and Secret Bidding)

Symptom 9: Transactions are lumpy and large relative toannual sales.

Misreads and Misjudgments Symptom 10: Firms set prices in a complex environment,

where it is difficult to monitor each others actions andintentions.


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Particulars Goodyear Michelin Observed orSecret?

Invoice $35 $32 Observed

Volume Bonus $ 3 $ 0 Secret

MarketingAllowance

$ 2 $ 0 Secret

Net Price to Dealer $30 $ 32 Secret


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Triggering Price Competition The Competitors

Symptom 11: Managers have strong motivation toincrease market share.

Symptom 12: Firms are overly focused on the shortterm.

Symptom 13: There are differences in production costsacross firms.

business and competition

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