Question

Assume you own and operate a firm that can be best described as perfectly competitive. However, prices are falling and your firm is no longer profitable:

a. explain a strategic action that you might take to increase your profits

b.draw a diagram of your firm before you made this strategic decision

c. draw a diagram of your after you made this strategic decision

d. outline five competitive actions you might undertake after you have made the strategic decision

Answer 1

a.) In a circumstance where the prices are decreasing, and as a result of which so is the profitability, one of the strategies that could be implemented is the product differentiation strategy, this strategy dictates that the firm develop products that would be distinctive than those its competition. If the firm could develop a differentiating factor it gives birth to a short-lived (short-lived due to perfect information) monopolistic market for itself where it can charge a different price(higher) than its competition for its products.

b.) The first picture corresponds to question (b). We can see the losses incurred by the firm due to declining prices.

c.) The second picture below corresponds to question(c). We can see the profits that can be realised by the firm as a result of product differentiation due to which it can a different and higher price.

d.) A few of the competitive actions that can be taken after undertaking the product differentiation strategy are:

Strong Promotion: After the firm has developed a product that is different from its competitors it should implement an effective and strong promotion drive to make the public aware of its product and how it is different from the competition.

Further Differentiation: As the firm operates in a perfectly competitive market, there exists perfect information, therefore any differentiation or cost-effective production methods will soon be mimicked. Hence, there is a constant need to develop differentiating factors to prolong the ability to charge a different price.  

Innovative Integration: The firm should always take advantage of the perfect information component of the perfect competition ecosystem and keep an eye out for any innovation or differentiation made by its competitors and capitalise on swiftly integrating this innovation in its own products. The firm should also look to how quickly it can adapt to more cost-effective production methods used by its competitors.

Market Share Maintainance: Through product differentiation, the firm should look at expanding its market share and then maintaining this increased market share by initiating actions to establish brand loyalty.

Developing Cost-Efficient Production: After the firm has arrived at a position where it is realising profits again, it should reinvest these profits back into developing production methods that are highly cost-efficient.