Flanking in a Price War Article Summary Essay -- Economics Prices Econ

Flanking in a Price War Article Summary The article begins by giving a brief analysis of a study that was conducted in Quebec in the early 1980’s involving the grocery industry. It discusses a point of time before the leader in market share, Steinberg, Inc., initiated a price war. One of the authors of the article, Roger J Calantone, was involved in an experiment with one of the smaller grocery chains, IGA. The experiment was designed to see what IGA should do so as to retain profitability if their main competition launched an all out price war. The main premise was that certain goods, if prices were lowered, would have more favorable price demand elasticity than other goods. This would enable the grocer to not have to slash prices across the board, rather only cut prices on specific goods so as to retain profitability during a price war with the other competitors. During this time, the other competitors combined had dominant market share. The piece gives a background of the Quebec grocery market between 1950 and 1983, and discussed the main players in the market in this time period. It specifically discusses Steinberg, Inc. This grocery chain, as previously mentioned, was the market leader for most of this time until 1980 due to some questionable pricing strategies it had implemented as well as some political changes that occurred in the late 1970’s. The next point of the article was to discuss a pricing experiment IGA and the author chose to follow to help combat a price war initiated by its competitors. The premise of the experiment was to ascertain if certain goods were reduced in price, while others maintained or increased price, what would happen to overall demand elasticity as well as specific goods’ demand elasticity. The goods were divided into two key components and these were: stock-up goods (non-perishable items that could be bought in bulk) and nonstick-up goods (perishable items). The method ology and results of the experiment was discussed in this treatment. The results ultimately fell in favor of IGA and thusly they were able to effectively fight and win a price war with its major competitors in 1983. Pricing Experiment Design The experiment used a â€Å"covariance design within a Bayesian decision framework† to determine that stock-up goods have a different demand elasticity than nonstock-up goods. (Calantone, et al, 1989, p.1) Bayes... ...sis. It also learned that given a price war it could even raise prices of nonstock-up goods to offset the lowering of the stock-up goods prices and not affect the elasticity of demand on the nonstock-up goods in a negative way. What Did I Learn? I learned that in an ogopolistic market it might be wiser to collaborate with competitors rather than aggressively attempt to drive them out of the market. The Steinberg grocery chain, due to its aggressive pricing strategy, effectively cost itself market share and profitability. Rather than engage in this type of behavior, Steinberg should have attempted to remain at market equilibrium as it was the dominant player. They should have considered the ramifications of eliminating competition, and what scenarios could potentially occur if they continued on with their current strategies. Bibliography Calantone, R., Droge, C., Litvack, D., Di Benedetto, C. (1989). Flanking in a Price War. Interfaces, 19, 1-12. Wessels, W.J., Economics (3rd ed.) Joyce, J., "Bayes' Theorem", The Stanford Encyclopedia of Philosophy (Winter 2003 Edition), Edward N. Zalta (ed.), http://plato.stanford.edu/archives/win2003/entries/bayes-theorem/>.