thumb|A model of imperfect competition in the short-run
Non-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship". It often occurs in imperfectly competitive markets because it exists between two or more producers that sell goods and services at the same prices but compete to increase their respective market shares through non-price measures such as marketing schemes and greater quality. It is a form of competition that requires firms to focus on product differentiation instead of pricing strategies among competitors. Such differentiation measures allowing for firms to distinguish themselves, and their products from competitors, may include, offering superb quality of service, extensive distribution, customer focus, or any sustainable competitive advantage other than price. When price controls are not present, the set of competitive equilibria naturally correspond to the state of natural outcomes in Hatfield and Milgrom's two-sided matching with contracts model.
It can be contrasted with price competition, which is where a company tries to distinguish its product or service from competing products on the basis of low price. Non-price competition typically involves promotional expenditures (such as advertising, selling staff, the locations convenience, sales promotions, coupons, special orders, or free gifts), marketing research, new product development, and brand management costs.
Businesses can also decide to compete against each other in the form of non-price competition such as advertising and product development. Oligopolistic businesses normally do not engage in price competition as this usually leads to a decrease in the profit businesses can make in that specific market.
Non-price competition is a key strategy in a growing number of marketplaces (oDesk, TaskRabbit, Fiverr, AirBnB, mechanical turk, etc) whose sellers offer their Service as a product, and where the price differences are virtually negligible when compared to other sellers of similar productized services on the same marketplaces. They tend to distinguish themselves in terms of quality, delivery time (speed), and customer satisfaction, among other things.
Market structure
Although any company can use a non-price competition strategy, it is most common among oligopolies and monopolistic competition, because firms can be extremely competitive. Firms will engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price, and avoids the risk of a price war.thumb|Kinked demand curve model
Oligopolistic competition
Non-price competition often occurs in oligopoly, where few firms dominate the market. Due to the little or few firms in the market, these firms tend to compete in non-price measures to distinguish themselves. Such competition would be otherwise known as quality competition where oligopolistic firms depend on their quality improvement intensities to survive. In order to distinguish themselves well, these firms can compete in price, but more often, oligopolistic firms engage in non-price competition because of their kinked demand curve. In the kinked demand curve model, the firm will maximize its profits at Q,P where the marginal revenue (MR) is equal to the marginal cost (MC) of the firm. Hence, a change in MC would not necessarily change the market price, implying rather stable and sticky market prices.
thumb|Long-run equilibrium of the firm under monopolistic competition
Monopolistic competition
Monopolistic market structures also engage in non-price competition because they are not price takers. Due to having rather fixed market prices, leading to inelastic demand, they engage in product differentiation. Monopolistic markets engage in non-price competition because of how the market is designed where the firm dominates the market. In order to sustain in the market, they have to innovate and improve on their product development to appeal to consumers. The new trade theory suggests that the model of monopolistic competition plays a big role in explaining trade trends in trade patterns where product development drives product differentiation. Under monopolistic competition, firms engage in non-price competition to innovate and further boost their brand image.
Main types
There are two main branches of non-price competition. This is where firms branch out to create new avenues for themselves to remain competitive in a market where prices are rather sticky. Such streams of non-price competition include product differentiation and/or development and advertising and/or promotion.
Product differentiation
Product differentiation allows for a firm to establish its products from its competitors to win over a greater market share. The more different the products of rival firms are, the lower the cross effects between their markets with regards to both non-price and price variables. By offering a wide range of products, firms can not only achieve economies of scope, but also be able to expand their market base. However, such product differentiation measures may result in significantly higher overhead costs.
Advertising and promotion
thumb|Example of a promotional material to capture customer attention: Marilyn Monroe and Tom Ewell in a promotional photo for the movie The Seven Year Itch, 1955.
Promotion can be considered an umbrella term to include all advertising, branding, public relations and packaging. This strategy includes all aspects of non-price strategies to continuously capture market attention. Advertising is divided into two categories:
- Informative: This form of advertising includes informing consumers about product features, details descriptions.[https://studyrocket.co.uk/revision/a-level-economics-b-edexcel/the-wider-economic-environment/types-of-non-price-competition]
- Persuasive: This form of advertising engages with the consumers on an emotional level. Such advertising methods are highly linked to behavioural economics which takes advantage of the heuristics and bounded rationality of consumers when making decisions.
Advertising mediums can be designed specifically to meet with the expectations of consumers as well as the size of the market. Firms aim on reaching as high targets as possible by making use of the network effects of advertising. Such methods are important because it gives other new consumers an anchor to base the quality of their products on, and creates a certain level of trust from the amount of positive feedback received.
Offering good after-sales service
After-sales service is crucial for the reputation and brand loyalty of the firm. In order to retain customers, they would have to provide great after-sales service so customers would be able to return and obtain the services they demand. Examples are such like Apple Care offering warranty and also proper services to repair the purchased devices.
Relationship with excess profits
Many economists wonder about the literature on non-price competition whether positive profits accruing to the members of an oligopolistic group of firms, which may be pushed to zero by competitive price undercutting, can also be competed away by advertising or other non-price activities.
The history of price competition has led to many believing that non-price competition is less intense as compared to price competition. Formal models like those of Stigler (1968) show that the outcome depends on how the system parameters is valued.
Non-price competition engages in any other forms of non-price attributes of products or services tailored to capture as much market share as possible. Non-price competition revolve around competing qualitatively among products and services.
With relations to the demand curve, price competition implies that the firm accepts its demand curve and manipulates its price to reach its goals. Non-price competition however, seeks to change its demographics and shape of the demand curve by adapting and innovating.
Incentives
Price regulation
Price competition can be completely absent in markets where the government fully sets the rates. When there is no room for price competition because of fixed market prices, firms resort to other non-price alternatives to compete. Before deregulation in the late 1970s and early 1980s, there were many industries in the United States where price regulation was done in conjunction with non-price competition but disguised as price competition. However, elimination of price competition through regulation does not necessarily result in non-price competition. In an initially unregulated industry, firms would be able to choose optimal values for both price and non-price values. This is also to maintain their own branding by colluding on a set price so their brands can be the distinguishing factor within a branding competition.
Consider a situation where the cartel fixes a price and allows for competition in advertising. There would be two marginal costs: (i) Marginal cost of production alone (MCp) and (ii) Marginal cost of production + advertising (MCp+a). This leads to two possibilities: (1) Marginal cost (MCp+a) stays constant, (2) Marginal cost (MCp+a) falls. If marginal production cost (MCp) is constant, the marginal production cost+cost of advertisement (MCp+a) will remain constant as well, under the conditions of increasing returns to advertising. On the other hand, if marginal production cost is rising, then the rise must be equally offset by increasing returns to advertising. In case (1), each firm will seek to expand output by increasing advertising efforts. In case (2), firms will expand until where (MCp+a) equals to the price.
Price competition is believed by most economists to be more effective in increasing output and reducing profits as compared to non-price competition. However, marginal costs of production do not rise as rapidly as marginal costs of advertising, quality and other non-price variables. Therefore, the more common and plausible view would be that the marginal non-price variable cost is larger than the marginal price-reduction cost, if the firm was an initial monopolist.
Business
Business research confirms that firms rely highly on non-price strategies in competition. For example, in strategic management, areas of focus revolve around continuous innovation, synergism and long-term relationships that build sustainable businesses.
- May incur additional costs to firms engaging in non-price competition (advertising, marketing, etc.)
- Greater research and development needed.
- Information asymmetry among customers and competitors.
- Moral hazard: consumers are unsure of which firm offers truly better quality products.
- Might lead to wasteful rent-seeking: If industry output does not increase, advertising is considered unambiguously to be wasteful.