The most obvious, and often the most dangerous, form of competition is price competition. Many competitors make effective 1,()of price competition. The stories of Ford, Apple Computer, Southwest Airlines, and Walmart show 2,()powerful this weapon can be. Note in all these examples demand is price - elastic.Price competition is dangerous, however, if demand is price - inelastic. Cutting prices in a price - inelastic situation reduces total revenue. Thus, a firm 3,()cuts its price can gain only by taking business away from its competitors and increasing its 4,()of the market . But if the competitors cut prices 5,( )there may be no increase in any firm's market share.
Price competition is most effective and advisable if the firm doing the price cutting is also the low - cost producer. 6,( )the competitors won ' t be able to match the price cuts and still stay in the business, A firm that wants to be the low - cost producer should be aware of two important economic concepts that govern costs of production. One is the concept of economies of scale. Often a firm can lower its average costs of production 7,()increasing the size of production 8,( )and its overall volume of production. It can offer volume discounts to its customers.
9,()cost - related concept is the experience curve . Even without increasing the scale of operation, a firm can nevertheless lower costs as a result of increasing efficiencies gained from experience making the product. To 10,()advantage of efficiencies, management has to deliberately try to learn how to cut costs as the company gains experience in producing the product.