By Dr Suresh Vidyasagar Menon-Chief Consultant & Business Advisory for Six Sigma, Operations, Strategic Management and Information Security
Price Signaling is a method where companies attempt to control rivalry among competitors to allow the industry to choose the most favorable pricing option.
Beyond seeking to deter entry, companies may wish to develop strategies to manage their competitive interdependence and decrease price rivalry. Unrestricted competition over prices reduces both company and industry profitability. Companies use several strategies to manage rivalry; the most important are price signaling, price leadership, non-price-competition and capacity control.
Price Signaling A company’s ability to choose the price option that leads to superior performance is a function of several factors, including the strength of demand for a product and the intensity of competition between rivals. Price Signaling is a method where companies attempt to control rivalry among competitors to allow the industry to choose the most favorable pricing option. In this process companies increase or decrease product prices to convey their intentions to other companies and influence the way other companies price their products.
Companies may use price signaling to communicate that they will vigorously respond to hostile competitive moves that threaten them. For example, they may signal that if one company starts to aggressively cut prices, they will respond in kind. A tit-for-tat strategy is a well-known price signaling maneuver in which a company exactly mimics its rivals. If its rival cut prices, the company follows, by consistently pursuing this strategy over time, the company sends a clear signal to its rivals that it will mirror any price reductions and thus reduce profits. Thus, a tit-for-tat strategy can be a useful way of shaping pricing behavior in an industry.
Price Leadership
When one company assumes the responsibility for setting the pricing option that maximizes industry profitability, that company assumes the position of price leader-second tactic used to reduce price rivalry between companies in a mature industry. Explicit price leadership, when companies jointly set prices, is illegal under antitrust laws. Therefore, the process of price leadership is often very subtle.
Non-Price Competition
A third very important aspect of product and market strategy in mature industries is the use of non-price competition to manage rivalry within an industry. The use of strategies to try to prevent costly price cutting and price wars does not preclude competition by product differentiation. In many industries, product differentiation strategies are the principal tools companies use to deter potential entrants to manage rivalry. The four non-price competitive strategies are market penetration, Product development, Market development and product proliferation.
Capacity Control
Although non-price competition helps mature industries avoid the cutthroat price cutting that reduces company and industry levels of profitability, price competition does periodically occur when excess capacity exists in an industry. Excess capacity arises when companies collectively produce too much output; to dispose of it they cut prices, others quickly do the same because they fear that the price cutter will be able to sell its entire inventory and leave them with unwanted goods. Excess capacity may be caused by a shortfall in demand as in todays scenario clouds of recession and post pandemic effects are looming around the world so the leadership have to choose which pricing strategy is suitable for them.
About the Author
Dr Suresh Vidyasagar Menon has 31 years plus of overall experience in IT, around 3 Years in Auditing of ISO 27001-Information Security Standard, has executed 25 plus projects in IT and two turnkey projects for eastern railways (Liluah) and has to his credit 14 publications in International Journals of Science, Engineering & Technology.
