Question

A Phoenix tortilla chip producer enjoyed a competitive advantage over a national brand. Its price was lower and its quality higher than the national brand’s chip. Nevertheless, the local chip maker watched the national company very carefully because of its huge size relative to the local firm. Thus, when the national company upgraded its chip, the Phoenix firm believed it had to respond. It chose to reduce the quality so that its costs would be lower. It believed that in this way it could maintain its price advantage. A specific size of the national brand’s potato chips was priced at $1.59 while a comparable size of the local brand was $1.29, a difference of 30 cents. Over time, the price of the national brand increased to $1.89. The local brand followed the lead of the national brand but maintained its 30 cents price differential by raising its price to $1.59. These changes caused the local company to go out of business.How is it possible for a firm to have a lower price on its good relative to a competitive good and still lose out to the rival?

Answer 1

A firm may lose out to a rival despite having a lower price on its good due to factors such as the rival's superior product features or negative customer perception caused by a reduction in the quality of the local firm's product.

Step-by-step explanation:

A firm can have a lower price on its good compared to a competitive good and still lose out to the rival due to several reasons. One possibility is that the rival's upgraded product may offer superior features or benefits that customers consider valuable, even at a higher price. In this case, customers may be willing to pay the higher price for the rival's product, resulting in a loss of market share for the local firm. Another possibility is that the local firm's decision to reduce the quality of its product may have affected its reputation and customer loyalty. Customers may have perceived this change negatively and switched to the rival's higher quality product, despite the price difference.