Competitor Reactions to Price Changes

A firm considering a price change has to worry regarding the reactions of its competitors plus its customers. Competitors are most likely to react while the number of firms involved is little, while the product is uniform, and while the buyers are well informed.

How may the firm anticipate the possible reactions of its competitors? If the firm faces one great competitor, and if the competitor tends to react in a preset way to price changes, that reaction can be simply anticipated. But if the competitor treats each price modification as a new challenge and reacts according to its self-interest, the company will have to figure out only what makes the competitor's self-interest at the time.

The problem is complicated because, as the customer, the competitor may interpret a company price cut in various ways. It may think the company is attempting to grab a larger market share, that the company is doing weakly and attempting to boost its sales, or that the company desire the whole industry to cut prices to increase totality demand.

While there are several competitors, the company has to guess each competitor's likely reaction. If all of the competitors behave likewise, this amounts to analyzing just a typical competitor. On the contrary, if the competitors do not behave likewise-perhaps because of differences in size, policies or market shares -then separate analyses are essential. However, if some of competitors will match the price change, there is good cause to expect that the rest will also match it.