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Some commentators have made a distinction between cost leadership, that is, low cost strategies, and best cost strategies. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage. In most cases firms end up in price wars. Instead, they claim a best cost strategy is preferred.
Revenue is the product of price and quantity and cost is given by the firm's cost structure, so profit is: = (+) (). The best response is to find the value of q 2 {\displaystyle q_{2}} that maximises Π 2 {\displaystyle \Pi _{2}} given q 1 {\displaystyle q_{1}} , i.e. given the output of the leader (firm 1 {\displaystyle 1} ), the output that ...
However, cost leader companies do compete on price and are very effective at such a form of competition, having a low cost structure and management. [1] Other aspects of cost leadership include tight operational controls across the business, avoidance of customers whose needs incur additional costs, and limits on expenditure in areas such as ...
A loss leader (also leader) [1] is a pricing strategy where a product is sold at a price below its market cost [2] to stimulate other sales of more profitable goods or services. With this sales promotion / marketing strategy, a "leader" is any popular article, i.e., sold at a low price to attract customers.
The equilibrium is such that both firms adopt a low-price strategy to protect themselves. [6] Predatory pricing: One firm substantially reduces its prices for a sustained period below its own cost of supply in an attempt to reduce market competition. [9] Predatory pricing on the international market is called dumping. That is, when a foreign ...
If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.
Thus, there may be unwritten rules of collusive behavior such as price leadership. Price leadership is the form of a tacit collusion, whereby firms orient at the price set by a leader. [14] A price leader will then emerge and set the general industry price, with other firms following suit. For example, see the case of British Salt Limited and ...
A price mechanism is a system by which the allocation of resources and distribution of goods and services are made on the basis of relative market price. There are two important elements of price mechanism – 1. PRICES - prices are essence of price mechanism. Price mechanism works through prices in a free enterprise economy, where all goods ...