2. You compete against three major rivals in a market where the products are onl

Question

2. You compete against three major rivals in a market where the products are only slightly differentiated. The “Big Four" have historically controlled about 80% of the market, with a fringe of smaller firms accounting for the rest. Recently, prices have been rather stable, but your market share has been eroding slowly, from 25% just a few years ago to just over 15% now. You are considering adopting an aggressive discounting strategy to gain back market share. Discuss how each of the following factors would enter into your decision. (Note: You may want to elaborate your answer based on how the following factors affect your decision (i.e., You can choose among no effects, positive effects, and negative effects on your discounting strategy, which may break down collusive behavior among the Big four)

(a) You have strong brand identity and attribute your declining share to discounting by your rivals among the Big Four.

(b) The Big Four have all been losing share gradually to the fringe, as the product category becomes more well known and customers become more and more willing to turn to smaller suppliers to meet their needs.

(c) You believe your rivals are producing at close to their capacity, and capacity takes a year or two to expand.

(d) You can offer discounts selectively, in which case it will take one or two quarters before your rivals are likely to figure out that you have become more aggressive in pricing.

(e) Your industry involves high fixed costs and low marginal costs, as applies for most information goods.

(f) The entire market is in rapid decline due to technological shifts unfavorable to this product.

Explanation / Answer

It is a great pleasure and honour for me to join the Oesterreichische Nationalbank for its 2001 Economics Conference on "The Single Financial Market: Two Years into EMU". I would like to take the opportunity today to talk about the role of financial markets for economic growth. I shall first consider whether the design of the financial system matters for economic growth. Secondly, I shall say a few words about where the euro area financial system is heading, two years after the introduction of the euro. After this I shall discuss the role of monetary policy in the interplay between financial markets and economic growth. Towards the end, I shall address, as just mentioned by Governor Liebscher, the role of central banks in prudential supervision.

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