Industry-level Pricing Conduct
Industry Pricing Conduct
One of the biggest threat for companies in most industries is that of Price war. Price wars are caused long term damages and casualties in a variety of sectors (Airlines, computers, Diapers, Chips, Cleaning services, …). On the other hand, more coherent and discipline Industry Pricing Conduct can lead to sustained prosperity and growth for companies that enjoy it.
Thus, for leading companies, it is key for their long term success to try and influence positively their Industry Pricing Conduct.
A certain number of Industry Pricing Conduct models emerge. It is essential that companies which one does (or may apply to their industry) and the part their can play to influence it favourably.
1 - The Price leadership Model
It is the most well known model of Industry Pricing Conduct management. A price leader is a business or company whose pricing decisions heavily influence its competitors.
Price leadership is common in oligopolies, such as the airline industry, whereby a Price leader (or a few firms acting in concert) sets the price and all the other competitors feel compelled to set their prices based on the leader’s prices. The trick, however, is that a fine line exists between collusion (which is illegal), predatory pricing (also illegal) and price leadership -- especially if the price changes are not related to changes in operating costs.
In most cases, price leaders try to influence the industry to keep the prices up, in order to sustain profits and the ability to invest for growth. They may also sometimes try to drive the prices lower in order to get a larger market share.
The Price follower role
Clearly, price leadership is usually a challenge for companies that aren't price leaders, because they are in the position of either defending their higher prices or, at a minimum, reacting to the strategies of another company…. But their market power is insufficient to influence the market and their best strategy is most often to follow the leader when prices are going, whilst they may have to take the initiative to influence prices going down.
It is also important for companies to recognize that they may be price leaders in some markets (where their share and image is strongest and ‘followers’ in others…).
2 - Barometric Model
In the barometric model, one competitor is more adept at spotting and adapting to changing market forces than others are. It leads not because it is large but because it is agile, and competitors find it easier to simply follow its lead than to discover the source of the market shift for themselves. For example, in the Indian automobile industry: In 2000, the Maruti Udyog Ltd. announced a price cut on its Omni model. The other firms were compelled to announce price cuts due to declining demand… which Maruti had anticipated.
3 - Dominant Firm
A dominant firm is the proverbial 800-pound gorilla, often surrounded by a cluster of tiny companies that offer similar products within their own niche. It sets its prices according to market forces of supply and demand, and other companies must scramble to match the new prices because they cannot compete directly with the dominant firm. Intel, long a dominant-firm price leader in the computer chips industry, with smaller competitors forced to price accordingly or else lose business.
4 - Coopetition Model
In collusive price leadership, a few key firms all tacitly agree to keep their prices the same. This often happens without any outright agreement -- which could be illegal -- and tends to occur when the barriers to entry are high and the costs involved in producing the product are well known to everyone. Aluminum producers, sandwich restaurants in Station or airports, DVD rental companies… and many others are all examples of industries that followed (at least temporarily) a coopetitive Industry Pricing Conduct.
As part of the ‘Power Pricer’ platform, Privaledge has developed a number of tools that can help companies better manage their Industry Pricing conduct, understand their role and which way prices could or should be heading…
The screen below illustrates PriValEdge’s 6C model (and Decision Support System) for Industry Pricing Conduct Management: