Focus Question: What are the ways that firms engage in price and nonprice competition?

When two or more firms produce the same product or supply the same service to the same market they are in competition.

• The simplest way for firms to compete is over prices. All else being equal, consumers are likely to buy the product that is cheaper. 
• And so, firms can lower the price of their product to attract more buyers than competing firms. 
• However, the firms cannot lower prices too much and continue to make a profit. 
• If the price of a product to the consumer is less than the cost to the firm of producing that product, then the firm will lose money and quickly be out of business.

Definition of competitive pricing

A more detailed description of competition

Since price competition can only go so far, firms often engage in non-price competition. Instead of drawing consumers to their product by offering a lower price, firms try to convince consumers through other means.

Advertising and Marketing are two of the most common and important ways firms compete.

However, they may also compete on the basis of quality, convenience or customer service, as well as other aspects of their product/service.

Firms try to convince consumers that they should buy these products, not just because they're cheaper, but because they are in some way better.

Generally, these efforts at non-price competition cost the firm money, but if successful the increase in sales more than makes up for the increase in sales. For example, brand-name goods often sell more units than do their generic counterparts, despite usually being more expensive. Non-price competition may also promote innovation as firms try to distinguish their product.

Learn more: Competitive Dynamics and Pricing or Non-price competition: Definition and Meaning



Common practices in the competition between firms (such as supermarkets and other stores) are some of the following:

• 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

The website Non Price Competition can act as a lesson plan for a teacher potentially teaching this topic. The website had a lesson which consists of many different activities which gets into how firms compete with one another. There are sections in which you analyze Wal-Mart, K-Mart, and other stories like this. There is also an activity in which you examine fast food chains and the different things that those firms do to compete against each other.

Check out this comparison chart looking at the price and non price competition strategies.
Or, take a look at this video.

Teaching and Learning Resources

 
This site, from The Council for Economic Education, offers a number of lesson plans and other resources about competition.

Is Wall-Mart Good For America? from PBS examines the impact Wal-Mart on the U.S. economy.

Here is a lesson plan for older students that delves into Business Practices and Competition.

15 Ways Supermarkets Trick You into Spending More Money