Company A and B are close competitors. Company A's management has decided to adopt a price-assurance...

Company A and B are close competitors. Company A's management has decided to adopt a price-assurance policy and actively advertise about it. Under Company A's price-assurance policy, if its customers find lower advertised prices elsewhere on any items they purchase from Company A, then Company A guarantees that it will rebate the customers two times the price difference. In response, Company B’s management is considering lowering the prices of all items which are also carried by Company B with a view to inflicting financial pain on Company A, and has engaged you to advise them on their strategy. What is your advice to them? Explain.

Expert Solution

While pricing our product we need to consider that our price should be either similar, low or higher than that of our competitors.

Most commonly used strategy for our product is having similar price as that of our competitors as it will help in getting profit as well as covering our cost.

If you put your price higher than your competitors then it will reduce your consumers and will lead to emergence of improvement in your product or other facilities.

If you lower your price than your competitors then it will affect your profit margin and can even lead to difficulties in covering your product cost.

In the above case, company A should abolish such policy of guaranteed two times price if they got reduced prices from their product as even in a short time such policy can put a much higher financial stress on them if some competitors are willing to reduce their prices and it's possible to reduce costs nowadays with the improvement in technology.

Company B also shouldnot focus on creating financial stress on their competitor as it will lead to loss of their profit margin also.

To remain in market they can reduce their price but only upto the amount where they can cover their cost that they actually spend on developing their product if they can't even cover that then there is no point in putting financial stress on the competitors.

Hence both companies should level their prices in such a way that it won't affected cost as well as their profitability

Rahul Sunny answered 2 years ago

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