Porter’s Five Forces
According to Wikipedia:
For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Having an understanding of industry rivals is vital to successfully marketing a product.
Potential factors impacting the degree of Competitive Rivalry include:
- Sustainable Competitive Advantage
- Continuous Innovation
- Brand Positioning
- Firm Concentration Ratio
The rivalry between existing competitors can include: (a) price discounts, (b) promotional campaigns, (c) distribution battles for access to customer, and (d) new product development. This Market Simulation demonstrates how dynamic Price Competition causes markets to act as Chaotic Systems.
Markets are dynamic. Each competitor in a Market will be constantly adjusting strategy to maximize their Revenue or Profit.
The global appliance industry, is an example of extreme and constant competitive rivalry. Competitors such as Electrolux, General Electric, and Whirlpool have been squeezed by the consolidation of retail channels. And, as there is price transparency within this B2C industry, these competitors are making constant adjustments to their prices and product assortment in an effort to grow market share and profitability.
In this Market Simulation, these three competitors offer partially differentiated Products. At the start of each round, each Competitor will independently judge on how a price adjustment can increase their own profitability. Competitors with more similar products will be more price sensitive and quicker to react to the change by the others. The simulation continues over 50 rounds.
The Willingness To Pay (WTP) of Customers for each Product is Normally Distributed with the given Mean and Standard Deviation (SD). The differences in Mean correspond to the Vertical Differentiation between Products, while the differences in Standard Deviation correspond to the Horizontal Differentiation between Products.
Similar Products have a higher Correlation than more differentiated Products and are, therefore, subject to more intense price competition. These Correlations also shape the WTP Customer Distributions. The degree of Correlation correspond to the Strange Differentiation between Products.
In this Market Simulation, each Product seeks to maximize Profitability by adjusting Price by up to +/-10% each round. The Price War between the Products continues for 50 rounds.
Vertical & Horizontal
Product A has the greatest Vertical Differentiation as the Mean Willingness To Pay (WTP) is the highest. Product C has the greatest Horizontal Differentiation as the diversity or Standard Deviation (SD) of its WTP Customer Distribution is the highest.
Product A and Product B have the highest Correlation and therefore the lowest amount of Strange Differentiation. Customers perceive these two Products as being very similar. Hence the two Products are more likely to engage in cut-throat Price Competition.
The Price and Market Share of each Product is collected at the end of each round of the Price War.
The results show that none of the Products find a steady-state Price and Market Share. Instead, the price for the same Product can vary by up to 10% while the Market Share for that Product can vary by up to 50%. Each Product continuously attempts to find new Profit opportunities given the changing position of the other two Products.
This Market Simulation models the global appliance market, with competitors such as Electrolux, General Electric, and Whirlpool. Each Competitor independently adjusts the recommended retail price to the consumer. With the changing position of the others, the competitors spot new profit opportunities each round. This causes continuous dynamic change in the Market.
The Competitive Rivalry in the market causes it to act like a Chaotic System in which the Price and Market Share of each Product never stabilizes but tends to hover within its own orbit.