Models of Competition


Dolan (1981) presents an overview of approaches to competition from microeconomics and marketing as well as empirical evidence about types of competition from various industry studies. In case of monopoly and perfect competition, microeconomic theory provides un ambiguous results for optimal marketing mix decisions.

In case of oligopoly the problem of specifying competitors behavior makes it difficult to determine what the optimal marketing mix should be. the model of oligopoly provide no single solution or strategy  for a firm to follow.


Baumol proposes one of two approaches

-Ignore the interdependence between competitors.

-Assume each competitor is a rational economic  agent and then determine a likely set of actions that will allow it to maximize its expected utility.

Detail of competition

-These two approaches relate to work on reaction functions, first proposed by courin the 19th century, and to game theory models.

-This approach leads to unrealistic results that are apparently  non optimal (Mansfield 1979 : Scherer 1980),although Green and Krieger (1991) claim this Approach closely approximates actual market behavior.

=Dolan(1981) points out about this theory models would solve many competitive issues if only some critical mathematical hurdles could be overcome. a main problem is that game theoretic results depend critically on assumptions about the objectives. information available to the players.

And on the analytical capabilities to all competitors. Another approach Porter (1980)attributes the type and intensity of competition to 8 major factors.

1. Number and size distribution of competitors.

2. Industry growth rate.

3. Cost structure and storage costs.

4. Extent of product differentiation.

5. Divisibility of capacity additions.

6. Diversity of competitors.

7. Importance of the market to firms.

8. Heights of exit barriers.

Dolan (1981) has examined a number of industry studies to determine the extent to which these structural variables determined the mode of competition. he summarizes his results in four lessons.

1. High fixed cost promote competitive responses to share gain attempts.

2. Low storage costs reduce competitive reactions.

3. Growing primary demand reduces competitive reactions.

4. Large firms avoid price competition.

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