There are different ways in which firms can compete against one other. In monopolistic competition and oligopoly there is not only price competition among firms but quality rivalry as well. Such quality rivalry is an important aspect of what is called non-price competition.
Non-price competition may take a variety of forms:
Form # 1. Physical Product Differentiation:
Sellers may attempt to differentiate technically similar products by altering the quality and design, and by the improving their performance. All these efforts are intended to secure buyer allegiance by causing buyers to treat these products as, in some way, better than those of competitions.
Form # 2. Product Differentiation by Selling Techniques:
Competition is selling efforts includes media advertising, general sales promotion (free trial offers, discount coupons), personal sales promotions (through representatives) and the creation of distribution outlets (channels). These activities are directed at stimulating demand by emphasizing real and imaginary (fancied) product attributes (qualities) relative to those of competitors.
Form # 3. New Brand Competition:
In a dynamic world characterised by constant changes in technology and tastes and preferences, of buyers, a firm’s existing products often become obsolete. A supplier is thus obliged to introduce new brands or redesign existing ones in order to remain competitive.
Given the enormous cost, it usually pays to promote only those products which consumers are likely to buy again and again or to speak more of such products to their friends and relatives. Where the quantity differences between (among) competing goods are small, advertising may have a significant influence on which brand a consumer really chooses.
Market incentives do not always lead to the amount of advertising that is best from society’s point of view. True enough, strong competition among firms may sometimes lead them to spend huge sums on advertising.
The basic objective of creating synergy is to increase the market share of the firm under consideration through product differentiation. Take the case of Maruti Udyog Ltd. Suppose its main product Maruti 800 has captured 30% of the total market for cars in India.
Now if it adds another new car in its product line, say Alto, which captures another 10% of the market, the market share of Maruti 800 may fall by 5%. But its total market share goes up to 25% + 10% = 35% which is higher than 30%. Similarly, if it introduces Maruti Zen which captures another 15% of the market for cars in India, the demand for Maruti 800 and Alto may fall by 5% each. Still, its total market share increases from 30% to 35% + 5% = 40%, as shown below. This is one example of intra-firm competition.
This is another form of non-price competition observed both in monopolistic competition and oligopoly. It may be named new brand competition.