According to Pacheco (2007), there a number of things that Ria must consider before she responds to the lowered price by her competitor(S). Some of the things that Ria should consider are her costs and the certain characteristics of the market she is in, whether a perfect competition, oligopoly or close between. In a perfectly competitive market there are many buyers and sellers, the products sold are homogenous or similar in nature, as a result there many substitutes. There are also no barriers to entry for new firms, perfect information exists that is available to both consumers and producers, and prices are determined by supply and demand. On the other hand in an oligopoly, there are only few firms that make up the industry. This select group of firms has control over the price and, high entry barriers exist. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. In both market types, if the competitor lowers his or her prices then, in economics, it is assumed that he or she will capture a greater market share. As such, an action must be taken if Ria is to remain competitive.
According to Pacheco (2007), if the firm decides that it should take some action against the price cut, it can do one or more of the following:
It can reduce its prices to match the competitor’s price. It may do this if the market is price sensitive or if it feels that recapturing lost market share later would be difficult.
The firm could maintain its price but raise the perceived quality of its offer. It could improve on its communications and highlight the quality of its product. (It is usually cheaper to maintain the current price and spend money to improve perceived value than to cut prices).
The firm can improve quality and increase price. The higher quality justifies the higher profit margins.
The firm can...