2.2.3
Note

Non-Price Strategies

2.2.3 Firm strategies

Idea

Beyond price, firms compete and grow through non-price strategies — expanding, differentiating, advertising or cooperating to raise market share and profit in pursuit of their objectives.

Mechanism

  • Mergers and acquisitions (external expansion). A merger is the voluntary combination of two or more firms into one entity; an acquisition is the takeover of one firm by another through buying its shares. Both raise capacity and market share, and take three forms:

    • Horizontal integration — combining firms at the same stage of production, instantly raising market share and reaping greater internal economies of scale.

    • Vertical integration — combining firms at different stages. Forward integration is towards a later stage (greater market presence); backward integration is towards an earlier stage (better control of inputs and less exposure to supply shocks).

    • Conglomerate integration — combining firms in unrelated industries, which diversifies risk.

  • Diversification — obtaining new revenue sources by creating new products or entering new markets. It reduces the risk of shutting down, since losses on one product can be offset by profit on another — though entering a new market is itself costly and risky.

  • Innovation (real differentiation) — process innovation improves the production process to raise productivity or cut cost; product innovation improves quality, aligning the good more closely to consumer tastes and making demand more price-inelastic, which raises price-setting power.

  • Marketing (artificial differentiation) — branding and advertising raise the perceived value of a product and so its demand. Marketing may be informative (conveying product details) or persuasive (raising perceived desirability).

  • Collusion — firms cooperating to fix price or output jointly. Formal collusion takes the form of a cartel, which acts like a single monopolist, each member charging an agreed higher price; cartels are unstable because members have an incentive to cheat for greater share. Tacit collusion, or price leadership, is an unwritten arrangement in which firms follow the pricing of a recognised industry leader.

Considerations

These strategies are mostly the conduct of firms with market power, and several carry an evaluative edge. Collusion is widely treated as anti-competitive and is unlawful in many jurisdictions, since it raises prices and can entrench inequity. Expansion through integration trades the gains of scale and control against the internal diseconomies of scale that large size can bring.