Four Models of Competition and their Implications for Marketing Strategy

Strategic Implications of the Economic Models 
Implications of the economic models for marketing 
managers are as numerous as they are fundamental. 
This section discusses nine implications.
 
• Economic models are important because they stress 
the basics of economic competition. Products and 
services generate profits only by differences be-
tween their costs and their selling prices. Thus, all 
competitors must understand the cost and revenue 
structures of their products—average costs, mar-
ginal costs, marginal revenue—and the nature of 
customer demand or they cannot compete in the 
long run.
 
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• Economic models stress that competitive ad 
vantage cannot be maintained in the long run, ex 
cept in the case of monopolies. Supranormal profits 
always attract new competitors, like bees to honey. 
Thus, competitors possessing competitive ad 
vantage must move quickly to benefit from their 
advantage, must take action to protect their com 
petitive advantage, and must look constantly for 
new competitive advantages. Competitive ad 
vantage, like fame, is fleeting. 
• Economic models show the value of offering the 
market differentiated products and services. Dif 
ferentiated products and services permit the com 
petitor to exercise some "monopoly power" where 
consumers will pay higher than "market" prices to 
obtain greater satisfaction in their consumption. 
Consumers, after all, are purchasing value as 
sociated with their 
consumption experience 
— not the 
physical, tangible product. Value comes either from 
product quality (durability, reliability, consistency) 
or product performance (speed, convenience, size, 
style). 
• Economic models show the advantage (to sellers) 
of having only a few competitors, making it easier 
to exercise monopoly power. Thus, strategies of 
acquiring and merging, targeting weak com 
petitors to force withdrawal or demise, and 
preventing potential competitors from entering a 
market can move an industry from the less attrac 
tive, monopolistic competition- model to an 
oligopoly. 
• Economic models highlight the exchange of
 
economic value between buyer and seller, where 
economic value is ultimately set by the purchaser. 
If price for an item is raised beyond this value, 
exchange will not occur. This idea is expressed 
succinctly in the idea of a value map, illustrated in 
Figure 2 (Buzzell and Gale, 1989). The map shows 
a value relationship between relative quality or 
performance and relative price. Competitors strive 
to locate their products or services along the 
diagonal at either economy, average, or premium 
positions. Competitors strive also to move their 
products or services downward to the right, offer-
ing better value and gaining competitive ad-
vantage.
 
• Economic models indicate that competition 
benefits buyers at the expense of sellers. Increased 
competitive activity usually leads to lower prices 
and a reduction of economic profits; it sometimes 
leads to reductions in the number of competitors.
 
Vol. 19, No. 1, January-March 1994 
Relative Quality or Performance
 
Source : Buzzell and Bradley, 1989.
 
Thus, competitors may occasionally avoid compet-
ing and instead adopt cooperative tactics and 
strategy for the greater good of the industry.
 
• Economic models stress the importance to strategy 
of costs, price, product differentiation, and, to some 
degree, advertising. The models neglect distribu-
tion (Eliashberg and Chatterjee, 1985). Implications 
for strategy as proposed by two specific economic 
models appear below:
 
When one firm has a cost advantage, the best 
strategy for rival firms may be to use different 
competitive tools. For example, if the lower-cost 
firm spends more on advertising, the best policy 
for rivals may be to charge a lower price, rather 
than to match the advertising (Gupta and Krish-
nan, 1967).
 
In highly competitive situations, all companies 
are likely to adopt niching strategies by 
specialization; in relatively noncompetitive 
situations, a market leader is more likely to adopt 
a broad-based strategy that has universal appeal 
while smaller competitors will again seek 
specialization (Ballou and Pipkin, 1980).
 
• Economic models imply that relationships among 
competitors in the most competitive market struc-
ture—perfect competition—are almost never 
enemies or antagonists as arising from economic 
considerations. For example, two farmers usually 
will consider each other to be friends, not oppo-
nents or rivals, because any action either might take 
will have no impact on the other.
 
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• Economic models hold that "imperfect" market 
structures such as a differentiated oligopoly or a 
monopolistic competition are quite common when 
one considers a definition of "market." Because of 
past experience, knowledge of competing alterna-
tives, and transaction costs, buyers in many indus-
rial and consumer markets seldom consider more 
than two or three competitors for many purchases. 
Thus, two retailers on opposite street corners in 
Hong Kong are as much an oligopoly for some 
products and some consumers as are Apple and 
IBM for others. Strategies attempt to differentiate 
products and services such that buyers will prefer 
certain brands, packages, or styles and pay 
premiums for their favourite. Ultimately, strategies 
aim to develop loyal buyers who will consider no 
competing alternatives.
 
To summarize, economic models clearly describe 
the benefits available to firms from-achieving and main-
taining a monopoly-like position. Models are well 
described in terms of competitors' costs, revenues, and 
demand functions. Competitors in any model maxi-
mize profits by producing quantities of products where 
marginal costs equal marginal revenues. However, 
economic models tend to be abstract, usually apply to a 
single product firm under assumptions that many 
managers would find them restrictive, and ignore 
realities of competition that highlight other models. 
Still, the models permit numerous strategic implica-
tions for marketing managers.