The paper discusses the article Flanking in a Price War. Firstly the assumption of basic points of the article and its conclusion are provided. Than the companies researched in the article are contrasted and compared and the experimental design is analyzed. Finally, in terms of conclusion, the basic lessons are drawn from the article.
Contemporary market is characterized by a high degree of competition and this is why in a current conditions the problem of market survival becomes one of the most important. In such a situation many companies, particularly larger ones, which play a significant role in their segment of the market, are often involved in price wars that are characterized by increase or decrease of prices that is supposed to improve the position of the company compared to its competitors.
Naturally, it is impossible to start any of such price war without possessing knowledge about its possible effects and efficiency. This is why there appeared a number of researches which aim at the defining the effect of price wars and one of such research, led by Roger J. Calantone, Cornelia Droge, David S. Litvack and C. Anthony di Bendetto, would be discussed in terms of this paper.
Basic Points of Flanking in a Price War
Taking into consideration the title of the article it is easy to guess what are the object and the main goal of the research. Basically it concerns the analysis of the price war carried out between leaders of Cnadian grocery market Steinberg and IGA-Boniprix and its effect as well as the analysis of the general trends that results from the price war.
In fact one of the main points of the discussion within the study analyzed is the possible different pattern of price sensitivity that stock-up goods could have compared to non-stock-up goods. The researches used covariance design within a Bayesian decision framework to select the optimum price treatment strategy and the dollar risk associated with this strategy.
Initially the article discusses the situation in Canadian grocery market that was observed in 1960s. At this period of time Steinberg was among the leaders in its segment of the market and by 1969 it adopted a new discount price strategy that permitted to make a breakthrough in the market and become the company a leader while the majority of its competitors had to either leave the market or were acquired by larger companies. Eventually there remained only few serious players which occupied the dominant position within the market, among which, besides Steinberg, were traditionally singled out Provigo and Hudon and Deaudelin. The latter owned the IGA name in Quebec.
However, despite the rapid progress of Steinberg the effectiveness of the company’s operations turned to be in decline by early 1980s. The main reason was that the company remained the sole, fully integrated firm while its main competitors, namely IGA, having the same scale of economies were not bothered by organized labor since each store was independently owned. Moreover, Steinberg remained a kind of alien’ English company in French dominating Quebec. It means that cultural aspect also played an important role.
In such a situation Steinberg saw the best way out in the strategy of war of prices aiming at establishing lower prices than its competitors.
Naturally IGA could not remain passive and started to take countermeasures for which the company needed additional researches which were hold. The researches found several factors which influence the price changes.
Firstly, it turned to be that product category was an important determinant of sensitivity to price changes. Secondly, the frequency of purchases occurring through trade deals varied across product category. Furthermore, non-brand-loyal households were more sensitive to price deals and demand for products without a brand loyal segment was more sensitive to price changes. It was also found out that increasing advertising support lowered price sensitivity of demand. Finally, an important determinant of optimal deal magnitude was the customer’s and the firm’s inventorying costs for the good.
On making further analysis, the researchers found out that depending on the product large volume may increase or decrease that is the result of temporary price reductions basically due to stockpiling. As a result the researches discusses the difference between stock-up and nonstock-up items and they conclude that the price can be raised on nonstock-up products while the price on stock-up items can be lowered only. Moreover, they also found the main way which permitted to finance a long term price war. It turned to be the result of the fact that the lower per-unit contribution is more likely to be compensated for by higher volume in the case of stock-up goods, while price increases would result in less sales slippage in the case of nonstock-up goods. As a result such a selective price strategy is supposed to lead to a long term price war.
Also in terms of experiment there have been chosen three groups of products which were not advertised. The design of the experiment allowed the evaluation of six possible price treatments: raising prices of stock-up or nonstock-up goods; lowering prices of stock-up or nonstock-up goods; or maintaining regular prices on stock-up or nonstock-up goods. In assessing the experiment results it was taking into consideration how actual sales varied under each of these price treatments and the utility associated with each treatment.
Finally, the researches came to the conclusion that price cuts on stock-up goods were strategically preferable to price cuts on nonstock-up goods.
The Analysis of the Quebec Grocery Market
The Quebec grocery market gradually evolved from the 1960s to 1980s as a result the market has undergone a number of changes. Being a fractured market, initially it was characterized by diversity of companies operating in it.
Along with such giants as Steinberg, IGA, or Provigo there were other smaller companies. In fact in 1960s there were four main groups of competitors: two major fully integrated chains, including Steinberg and Dominion; six smaller, fully integrated chains; two major wholesaler-sponsored groups, including IGA and Provigo; and two retail cooperatives, including Metro and Richelieu. Later the number of competitors decreased significantly mainly due to the strategy of price discounts led by Steinberg that forced to led similar strategies by its main competitors that led to merges, for instance Metro and Richelieu, or like Provigo and IGA which moved into the franchised convenience store business.
However, eventually the strategy of Steinberg turned to be less effective than that of its competitors since it was confronted by its main competitors that had the same scale of economies but were not bothered organized labor since each store was independently owned that made these companies more mobile and flexible.
Thus, Quebec grocery market gradually evolved from a diverse market to a market controlled by a few companies, which controlled the lion share of this market.
Strengths and Weaknesses of the Experimental Design
Speaking about the strengths of the experimental design, it may be pointed out that the researches tend to the objectivity that is essential for efficient study. Furthermore, the model represents sales of each product as a function of product type and price level. The study also included a product type by price interaction term and covariate that provided data on total weekly retail sales at the particular store that give quite precise information about the company at large and each of its stores. Finally the covariate allowed adjustment for weekly sales fluctuations and other environmental factors help to ensure that observed effects are due to the treatment.
As for the weaknesses, it is possible to say that still the researches faced the problem that the study had basically examined sales differences across treatments, and little information would have been gained about expected loss of an incorrect choice that means that the study needs to be continued.
Finally speaking about the differences in firms’ pricing strategy it should be pointed out that the strategies, being similar in its basis (both companies were mainly focused on lowering the prices) they are quite different in their forms since Steinberg did not distinguished prices of stock-up and nonstock-up goods as IGA did as a result the emphasis of IGA on lowering prices of stock-up goods mainly turned to be more successful than the strategy of Steinberg.
Speaking about the lessons learned from the experiment, it is possible to say that IGA found a very important relationship between stock-up and nonstock-up goods. Furthermore, the company managed to provide a wise price strategy on the basis of the knowledge of the difference between the goods mentioned above. Also the company managed to remain quite a flexible structure with independent stores. Finally, the IGA showed its ability to provide an effective study before implementation of a new strategy.
In larger terms, the article discussed gives a lot of useful information about Quebec grocery market. The analysis of its development in 1960s-1980s, provide us with understanding of the basic trends in the grocery market, in which neither small nor large and rigid companies can succeed, while companies with independent stores and flexible strategy can survive. It is also very important to realize the difference between stock-up and nonstock-up goods and their peculiarities. Finally, the factors influencing the price changes are also necessary to know in order to be able to modify prices harmlessly.