CommoditiesIn a commodity market, consumers see no difference between products and buy on price alone. In this situation, cost is the only type of competitive advantage a producer can build as consumers will typically ignore quality improvements and branding in a commodity market. For example, the solar panel manufacturer with the cheapest unit cost at some minimum level of quality that customers will accept has a competitive advantage.
Monopolistic CompetitionMonopolistic competition is a market where consumers see a difference between products. In this situation, producers compete in three primary areas: quality, brand and price. Producers in this type of market still compete to bring down costs but only with respect to quality levels and goals to establish a brand image. For example, a premium shampoo may bring units costs down to $5 a bottle but still outsell cheap shampoos with a unit cost of $1 a bottle. The producers with the cheaper unit costs have more flexibility to compete on price, but consumers won't care if they prefer the premium shampoo.
ServicesAn IT consulting firm is often pushed by large customers on price. This requires the firm to reduce costs to stay profitable. Generally speaking, the only way to do this in a competitive labor market is to recruit inexperienced employees or employees who have been out of the job market and are willing to take a pay cut to get back in. This strategy has risks as clients may be dissatisfied with the quality of work products as few of the consultants are at the peak of their careers. However, it may be necessary to for the firm to survive in the price competitive market.
NotesCost competition is competition to reduce unit costs. Price competition is competition on prices. The two strategies are related because it is impossible to compete on price and stay profitable if your competitors have lower unit costs at the same level of quality.
|Overview: Cost Competition|