Week 6 OverviewThis is your last week of class and a Final Paper.docx

Week 6 Overview
This is your last week of class and a Final Paper. If you will go
to the bottom of the Course Material you will find a Course
Outline. The Paper information is at the beginning prior to the
Week 1 Assignment. Also, both Chapters 11 and 12 is all that is
left. You have been a great class and good luck on your Final
Paper. I realize that this was a tough class, but most of you did
well. I would also like to thank-you for all of your hard-work
this term I wish you only the best this year too. Dr. Steve
As we enter into Week 6 as our Last Week with a Final Report
to do, I also appreciate all of your hard work thus far.
In Week 5, we studied non-price competition and price
competition in monopolistic competition, oligopolies, and
sometimes monopolies. That is monopolies that are forward
thinking rather than those that may typically, just do what they
always have done, to just get by. Pricing seems to be an issue
that most firms struggle with most of their product cycle. If you
will remember the 4 stages of the product life cycle from
beginning, growth, and acceptance, and finally market decline,
most firms will have to change their prices within each of these
cycles and add new products as it goes. One industry that it took
years for firms to recognize these changes was the airline
industry which allowed both Southwest and Jet Blue to
dominate the airline industry, while the old standbys thinking
they were still in a growth mode, lost a lot of market share.
Most situations here, if a firm goes into direct price retaliation,
both firms will lose, so firms decided not to compete on price,
but if they do compete, to compete on the other 3 P’s you will
learn in marketing: Product, Place and Promotion. Therefore, it
is the manager’s job to adjust the non-price variables such that
the firm’s other 4 P’s as the superior value proposition to its
target customer to gain market share on a competitor. Another
variable that a firm might use that is in-cased in the price is its
quality or branding (Ashford College follows this theme with

using the reputation of its its long established Iowa campus) and
service which all of these non-price strategic variables can
create profits for the firm and take market share away from a
competitor.
We also will look at Game Theory where Oligopolies in
particular will play games not using price, but using non pricing
factors to gain edge over its completion which plays out to
gaining market share, within the industry. You see this
happening very much with Coke and Pepsi as well as in the
Pharmaceutical industry. Also, some of these firms may even
have barriers of entry where other firms cannot compete due to
capital, resources, or some form of scarcity, causing such a firm
a more monopoly position when other firms have not the
resources or time to enter.
Earlier in the course we defined sustainable competitive
advantage (SCA) in terms of the triple-bottom line outcomes
chosen to be pursued by the firm’s stakeholders. Profit may be
traded off for beneficial social or environmental outcomes. Like
we discussed is how firms that are very GREEN oriented like
IKEA, Toyota, and Ford etc. are creating huge gains over its
competition.
Here are some other important negative influences on firms’
profits are also identified and analyzed, such as market power
on the other side of the transaction, low barriers to entry, many
substitutes, and rivalry in the marketplace. The resource-based
view also considers physical, reputational, organizational,
financial, intellectual, and technical resource characteristics
that are important for firm profitability and sustainable
competitive advantage.
1. Chapter 11: Non-Price competition ~ This can comprise a
strategy of using the other 4 P's of marketing other than price
that oligopolies like Pharmaceuticals will use such as
promotion, place and product. Watch any dinner time
commercial and you will see so many pharmaceutical products
for sale. These firms have an inelastic demand curve, many of
which are oligopolies which can raise prices higher. However,

generic drug companies from India, have been able to use the
same chemical base and add some different additive properties
to get around any legal entanglements, and produce a similar
product with similar properties as the high marked up product
for less money. So even pharmaceuticals are no longer protected
from patent infringements as they once were. Many other
industries are finding the same competition as we go global and
firms in low wage countries produce what was produced in the
US at higher prices.
2. Chapter 12: The economics of Competitive Strategy~
Competitive Strategy is knowing what is the firms best
advantage in competing with its competition. Jack Welch CEO
and Chairman of GE stated in his book, "Winning" that firms
that are able to differentiate what they sell from the competition
do better than those that won't or can't. Most often Product
Differentiation comes from the other 3 P's other than price such
as new product, place and promotion. Also, with the ecological
problems expanding smart companies of course are using
"Green" strategies which today allows them to benefit from
increased revenues due to Green awareness. Green awareness
results as customer's continue to become "Green" aware over
time while choosing its products from firms that are "Green"
producers and such firms that are able to drop costs and finding
additional markets for bi-products.
Douglas, E. (2012). Managerial Economics (1st ed.). San Diego,
CA: Bridgepoint Education.
APA Support Resources
Quick APA reference guides:
http://owll.massey.ac.nz/referencing/apa-5th-vs-6th-edition.php
Comparison APA 5 & 6
http://owl.english.purdue.edu/owl/resource/560/01/
http://blog.apastyle.org/apastyle/2011/01/writing-in-text-

citations-in-apa-style.html
Other Extra Videos and a Few Articles
1. Non-price competition can be used in conjunction with
pricing strategy in order to capitalize on creative ideas and
unique product characteristics in the market-place.
https://www.bing.com/videos/search?q=non+price+competition
&qs=n&form=QBVLPG&sp=-
1&pq=non+price+competition&sc=8-
21&sk=&cvid=C3C1E7EFAB4847CA92EA6D275905302D
2.Game Theory in analyzing oligopoly strategic behavior.
https://www.bing.com/videos/search?q=oligopoly%20game%20t
heory&qs=n&form=QBVR&sp=-
1&pq=oligopoly%20game%20theory&sc=7-
21&sk=&cvid=41A1F5D0F6A748549B5C4956F12B0E4D
Hollywood’s Version of John Nash “Beautiful Mind”
https://www.bing.com/videos/search?q=oligopoly%20game%20t
heory&qs=n&form=QBVR&sp=-
1&pq=oligopoly%20game%20theory&sc=7-
21&sk=&cvid=41A1F5D0F6A748549B5C4956F12B0E4D
3. Competitive strategies, including gaining control of
resources, in order to achieve superior and sustained
profitability.
Economies of Scale
https://www.bing.com/videos/search?q=economies+of+scale&qs
=CustomSearch&pq=economies+of+&sc=8-
13&cvid=FF78B0B40D3A4E0EB636CBFECA73BE38&sp=1&fo
rm=QBVR
Returns to Scale

https://www.bing.com/videos/search?q=returns%20to%20Scale
&qs=n&form=QBVR&sp=-1&pq=returns%20to%20scale&sc=8-
16&sk=&cvid=A698288681174070AB1C26C65071DEF5
Coke vs. Pepsi (Pepsi with Frito Lay had more assets into other
than syrup affecting its stock price)
https://www.bing.com/videos/search?q=coke%20vs%20pepsi&q
s=n&form=QBVR&sp=-1&pq=coke%20vs%20pepsi&sc=8-
13&sk=&cvid=9F0F62F899CA44A59FEC7863F4A2058F
How to Create a Construction Bid as an example of creating
other bids
http://wn.com/Construction_bidding
5. Competitive Bidding
https://www.bing.com/videos/search?q=competitive%20bidding
&qs=n&form=QBVR&sp=-
1&pq=competitive%20bidding&sc=8-
19&sk=&cvid=677DEBFB63254AAB97DA8A4ED8965460
6. Quotas
https://www.bing.com/videos/search?q=quotas&qs=WebSearch
&form=QBVR&sp=3&pq=quotas&sc=8-
6&cvid=4F3807ADA8424F028C236DE4473B3F02
7.Tariffs
https://www.bing.com/videos/search?q=Tariffs&qs=n&form=Q
BVR&sp=-1&pq=tariffs&sc=8-
7&sk=&cvid=73329013D7E6438686ADBFD117F0AACF
8.Tariffs Trump
https://www.bing.com/videos/search?q=tariffs%20trump&qs=W
ebSearch&form=QBVR&sp=1&pq=tariffs%20trum%5B&sc=8-
13&cvid=6E19F466E55043ED85E6749B1ED65767
Adjust your audio
This is a narrated slide show. Please adjust your audio so you

can hear the lecture.
If you have problems hearing the narration on any slide show
please let me know.
© 2016 John Wiley & Sons, Inc.
1
Chapter 6
Architecture and
Infrastructure
2
Mohawk Paper
What did Mohawk paper see as an opportunity?
What did they do?
What was the result?
3

Opportunity: Cloud, SOA, XML technology allowing them to
make service the primary focus, collaborate with network of
partners, incorporate flexibility into the process. Can shift
quickly from outsourced to insourced for projects.
Results: 5 times the number of products sold to customers
compared to before. Tripled earnings. More customers than
before: now 100, previously 10-15 distributors. Automated
transactions: saving $1 to $2 million
3
From Vision to Implementation
Architecture translates strategy into infrastructure
Home architect develops a blueprint of a proposed house—
based on customer
Business architect develops a blueprint of a company’s
proposed systems—based on strategy
This “blueprint” is used for translating business strategy into a
plan for IS.
The IT infrastructure is everything that supports the flow and
processing of information (hardware, software, data, and
networks).
4
4

From abstract to concrete
– building vs. IT
5
The Manager’s Role
Must understand what to expect from IT architecture and
infrastructure.
Must clearly communicate business vision.
May need to modify the plans if IT cannot realistically support
them.
Manager MUST be involved in the decision making process.
6
6
From Strategy to Architecture

Manager starts out with a strategy.
Strategy is used to develop more specific goals
Business requirements must be determined for each goal so the
architect knows what IS must accomplish.
7
7
Example
Strategy: Be a customer-oriented company
Goal: 30-day money back guarantee
Business Requirement: ability to track purchases
Business Requirement: ability to track problems
Goal: Answer email questions within 6 hours
Business Requirement: Ability to handle the volume
8
From Business Requirements to Architecture

9
9
The Example Continues
Business Requirement: Ability to track purchases
Architectural Requirement:
Database that can handle all details of more than a 30-day
history
10
From Architecture to Infrastructure
Adds more detail to the architectural plan.
actual hardware, software, data, and networking
Components need coherent combination
11

11
From Architecture to Infrastructure
12
12
The Example Continues
Architectural Requirement: Database that can handle all details
of more than a 30-day history
Functional Specification: be able to hold 150,000 customer
records, 30 fields; be able to insert 200 records per hour
Hardware specification: 3 gigaherz Core 2 Duo Server
Hardware specification: half terabyte RAID level 3 hard drive
array
Software specification: Apache operating system
Software specification: My SQL database
Data protocol: IP (internet protocol)
13

A Framework for the Translation
Considerations for moving from strategy to architecture to
infrastructure:
Hardware – physical components
Software – programs
Network – software and hardware
Data – utmost concern: data quantity & format
What-who-where is a useful framework
14
14
ComponentWhatWhoWhereHardwareWhat hardware does the
organization have?Who manages it?
Who uses it?
Who owns it?Where is it located? Where is it
used?SoftwareWhat software does the organization have?Who
manages it?
Who uses it?
Who owns it?Where is it located? Where is it
used?NetworkWhat networking does the organization have?Who
manages it?

Who uses it?
Who owns it?Where is it located? Where is it used?DataWhat
data does the organization have?Who manages it?
Who uses it?
Who owns it?Where is it located? Where is it used?
Information systems analysis framework.
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
15
Figure 6.3 Infrastructure and architecture analysis framework
with sample questions.
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level

16
Common IT Architecture Configurations
Centralized architecture – All purchases, support, and
management from data center
Decentralized architecture – uses multiple servers perhaps in
different locations
Service-Oriented architecture – uses small chunks of
functionality to build applications quickly.
Example: e-commerce shopping cart
Software-Defined architecture – instantly reconfigures under
load or surplus
17
Software-Defined Architecture
Birdbath example: Thanks to the Oprah Winfrey show, sales
went from 10 per month to 80,000.
Increased sales seen as an attack with static system
Adaptive system warns other parts of sales fluctuations,
preventing lost sales
Famous Coffee Shop example:
WiFi shares lines with production systems; problems in one can
be shunted to another
Also, coffee bean automatic reordering; spot market purchasing
High potential for decreasing costs

18
New Technologies
Peer to peer architecture: Allows networked computers to share
resources without a central server
Wireless (mobile) infrastructure: allows communication without
laying wires
Web-based architecture: places information on web servers
connected to the Internet
Cloud-based architecture: places both data and processing
methods on servers on the Internet, accessible anywhere
Capacity-on-demand: enables firms to make available more
processing capacity or storage when needed
19
Architectural Principles
Fundamental beliefs about how the architecture should function
20

Enterprise Architecture (EA)
The “blueprint” for all IS and interrelationships in the firm
Four key elements:
Core business processes
Shared data
Linking and automation technologies
Customer groups
One example is TOGAF (The Open Group Architecture
Foundation)
Methodology and set of resources for developing an EA
Specifications are public
Business and IT leaders develop EA together
21
Virtualization and Cloud Computing
Cloud computing refers to:
Resources that are available “on the Internet”
No software for the organization to develop or install (only web
browser)
No data for the organization to store (it stays somewhere in the
Internet “cloud”)
The provider keeps and safeguards programs and data
This is “infrastructure as a service” (IaaS)

Also available is SaaS (Software as a service)
And there is also PaaS (Platform as a service)
Utility Computing: Pay only for what you use (like power,
lights)
Source: Computerworld Aug 4, 2008
22
Examples of Systems Provided in the “Cloud?”
Just some examples
Word processing; spreadsheeting; email (Google Docs: $50 per
user annually)
Buying/selling Financial services (Salesforce.com)
Email (Gmail, Hotmail)
Social networking (Facebook)
Business networking (LinkedIn)
Music (iTunes)
Storage (Amazon’s Simple Storage Service—S3)
A server (Amazon’s Elastic Compute Cloud—EC2)
Source: Computerworld Aug 4, 2008 and CRN website
23

Assessing Strategic Timeframe
Varies from industry to industry
Level of commitment to fixed resources
Maturity of the industry
Cyclicality
Barriers to entry
Also varies from firm to firm
Management’s reliance on IT
Rate of advances affecting the IT management counts on
24
Assessing Adaptability
Guidelines for planning adaptable IT architecture and
infrastructure
Plan for applications and systems that are independent and
loosely coupled
Set clear boundaries between infrastructure components
When designing a network architecture, provide access to all
users when it makes sense to do so
25

Assessing Scalability
Scalability refers to how well a component can adapt to
increased or decreased demand
Needs are determined by:
Projections of growth
How architecture must support growth
What happens if growth is much higher than projected
What happens if there is no growth
26
Other Assessments
Standardization – Common, shared standards are easy to plug in
Maintainability – Can the infrastructure be maintained?
Security – Decentralized architecture is more difficult to secure
27
Assessing Financial Issues
Quantify expected return on investment
Can be difficult to quantify

Steps
Quantify costs
Determine life cycles of components
Quantify benefits
Quantify risks
Consider ongoing dollar costs and benefits
28
28
Summary
After you have listened to this lecture and read Chapter 6 of
your text
Go to Discussion Board 7 and answer the discussion prompt
Finally complete Quiz 6
29
AbstractConcrete
Owner’s
Vision
Architect’s

Plans
Builder’s
Implementation
StrategyArchitectureInfrastructure
Information
Technology
Building
Abstract
Concrete
Owner’s
Vision
Architect’s
Plans
Builder’s
Implementation
Strategy
Architecture
Infrastructure
Information
Technology
Building
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https://content.ashford.edu/print/AUBUS640.12.1?sections=fm,
ch11,ch11introduction,sec11.1,sec11.2,sec11.3,ch11summary,ch
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11
© Paul Hardy/Corbis
Nonprice Competition
Learning Objectives
A�er reading this chapter, you should be able to:
Iden�fy how nonprice strategic variables can be u�lized to
complement pricing strategy.
Describe how nonprice compe��on is a more subtle form of
compe��on that rewards be�er ideas and
management crea�vity, whereas price is a blunt instrument.
Discuss how the Internet increases compe��on among firms
and rewards firms who do nonprice
compe��on well.
Explain how nonprice strategic variables can be adjusted in
theory to op�mal levels.
Describe the prisoner’s dilemma problem facing oligopolists
opera�ng under condi�ons of mutual
dependence recognized.

10/15/2019 Print
Aquafina prac�ces nonprice compe��on by using nonprice
variables
such as product design and promo�on to increase sales.
© ASSOCIATED PRESS/AP Images
Introduction
In the preceding four chapters, we have been concerned
with how the business firm engages in price compe��on,
that is, how the firm should choose its
price such that it expects to maximize profit (in the short
run with full informa�on) or to maximize the expected
present value of profit (when revenues and
costs occur beyond the present period and are not known
with certainty). We saw in Chapter 4 that the firm’s
quan�ty demanded at any price also depends
on a range of other controllable and uncontrollable
variables. The other variables that are controllable by the
firm are the firm’s product quality, its
promo�on expenditures, and its place of sale—these are
the other three Ps of the firm’s four Ps (price being the
fourth)—these are the strategic variables
the firm can use to influence the demand for its product
or service. In Chapter 4, we saw that changes in price
will cause a movement along the demand
curve, whereas changes in the other three controllable

variables will cause a shi� of the demand curve.
We also know from Chapter 4 that the firm’s demand
depends on the concurrent ac�ons of
some other firms. Specifically, the four Ps of firms that
produce subs�tutes (i.e., rival firms)
and the four Ps of firms that produce complementary
goods will impact upon the focal firm’s
demand. In addi�on, uncontrollable customer variables such
as customers’ incomes, tastes,
and expecta�ons will impact the focal firm’s demand
curve when they change. All of these
determinants of demand, other than the firm’s own price,
are influences on demand that we
mentally include when we say "other things being equal"
in rela�on to demand curves. They
are all demand shi�ers—when they change they cause the
demand curve to shi� inwards or
outwards at all price levels. In this chapter, we shall
consider the nonprice strategic variables
(i.e., the other three Ps) that the firm can use to shi� its
demand curve out to the right. Thus,
nonprice compe��on is the use by the firm of these
nonprice variables, namely product
design, promo�on, and place of sale, to gain greater sales
at any given price level.
Nonprice compe��on effec�vely focuses on differen�a�ng
the firm’s product, allowing the
firm to increase product quality, inform and persuade
customers of product differences, and
offer different places of sale. In Chapter 9, we saw that
the firm’s value proposi�on is judged
by the customer as the ra�o of quality over price where
quality is mul�dimensional and is
broadly defined to include all aspects of the product that

the customer finds desirable, such
as how it looks, how it works, what it can do, and what
it does not do (e.g., endanger or
annoy). We will now argue that the other three Ps each
contribute to the customer’s percep�on of product quality,
such that nonprice compe��on is
primarily about compe�ng on the basis of quality, when
quality is broadly defined to include benefits provided by
promo�onal efforts and distribu�on
systems.
Star�ng with product design, we note that it includes the
shape and appearance of the product that can be expected
to generate psychic sa�sfac�on (to the
extent that it is a�rac�ve) to the poten�al customer.
Product design also contributes to the product’s durability,
longevity, func�onality, and other aspects
that the customer will perceive as u�lity genera�ng. For
example, coffee grounds sold in an air-�ght, but easy-to-
open canister will be perceived as adding
addi�onal value for those who want their coffee grounds
to stay fresh and yet be easily accessible. Offse�ng part
of (or all of) the u�lity from these
desirable design features might be some nega�ve aspects
of the design that give the customer disu�lity, such as
annoying or dangerous features. For
example, if the easy-to-open latch tends to break your
finger nails, customers will not prefer that product and
will purchase a different coffee product
instead.
Product promo�on typically highlights the product’s good
features, informs customers of the product’s advantages
(rela�ve to rival firm’s products), and
effec�vely congratulates the buyers for their good
judgment in buying the product. Accordingly, promo�on

for a product might be expected to generate
u�lity for the user, especially if it promotes a par�cular
lifestyle or posi�ve emo�on or associates consump�on of
the product with a celebrity endorser.
Thus we see, for example, billboards and TV
adver�sements for Coca-Cola where happy people are
having a good �me while drinking Coke.
Place of sale, or the distribu�on system u�lized by the
firm, also generates u�lity for the buyer by providing
convenience both at the �me of ini�al purchase
and later when the product requires scheduled maintenance
or repairs. It is much more convenient, for example, to
have easy access to a local automobile
dealership, rather than needing to spend a lot of �me
ge�ng to and from a more-distant dealership. Online
availability of many goods (e.g., hardware) and
services (e.g., Ne�lix) with subsequent delivery by mail
or by electronic downloading has made shopping much
more convenient for most people. So, while
we will look at promo�on and place of sales separately
from product design, it will facilitate discussion at �mes
if we conceptualize more generally that
nonprice compe��on is largely concerned with the quality
element of the value proposi�on.1
(h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�o
ns/ch11introduc�on#footernote1)
Search, Experience, and Credence Goods
Some products are more suited to nonprice compe��on
than they are to price compe��on, and vice versa. Search
goods, which are defined as products for
which the search cost of ascertaining product quality is

rela�vely low, are more likely candidates for price
compe��on, since the customers can more easily
evaluate product quality. For example, your clothes are
search goods; it takes only a few seconds to decide
whether you like the quality (i.e., the cut and
color of the fabric) of a shirt or jacket. Thus, when there
is a price reduc�on (e.g., for Brand X shirts) the increase
in the value proposi�on is easier for the
consumer to judge. Importantly, search goods are also
easier for rivals to imitate, since they can more easily see
what it is that makes the product different.
https://content.ashford.edu/books/AUBUS640.12.1/sections/ch1
1introduction#footernote1
10/15/2019 Print
Thus, search goods tend to evolve towards sameness in
the market as compe�ng firms modify their product
offerings to more closely resemble the products
of rivals that are more profitable—this is what we saw
happens in monopolis�c compe��on (in Chapter 8) and
as discussed when we considered product
prolifera�on (in Chapter 9). As the quality of compe�ng
brands tends to gravitate toward the same level, the value
proposi�on will be driven almost totally
by the price level. Thus, firms selling search goods and
seeking higher profit will tend to engage in price
compe��on to increase their profits via larger
volumes at lower levels of contribu�on per unit of
output. Changes in design are necessary to differen�ate

their product again and thereby allow higher
profit margins (at least temporarily un�l rivals also revise
the design of their compe�ng products).
Experience goods, on the other hand, are products for
which product quality is more difficult to judge in
advance of actual consump�on. Examples of
experience goods are foodstuffs, restaurant meals, vaca�on
packages, and college degrees. The difficulty to judge
product quality before the purchase
decision can be measured by the extent of search costs
necessary to ascertain and evaluate the qualita�ve aspects
of the product. If these search costs
would exceed the price of the product, then the cheapest
alterna�ve might be for the consumer to simply buy the
product and subsequently experience the
quality (as we do with a new brand of cheese, for
example). Alterna�vely, firms anxious to sell their
experience goods are likely to offer "taste tes�ng" or
other free or low-cost trials of the product that facilitate
the consumer gaining informa�on about product quality,
and, hopefully, informing the consumer
about the value proposi�on represented by the firm’s
product. These ac�ons by the firm are promo�onal
strategies that serve to increase demand for the
product. Note that with experience goods (that the
consumer has been unable to try previously) there will be
uncertainty in the consumer’s mind about the
product quality, and, thus, the evalua�on of the value
proposi�on will be fuzzy or indis�nct, unlike the case
for search goods where both the price and
quality offer can be seen dis�nctly. Thus, if the firm cuts
its price it might find the demand response is quite
inelas�c for experience goods (as compared to
more elas�c for search goods).2

ns/ch11introduc�on#footernote2) Thus, firms with experience
goods will tend to favor
nonprice compe��on over price compe��on.
Credence goods are experience goods that are likely to be
different in quality the next �me the customer purchases
them, such as a repeat visit to a
restaurant (when the chef has changed), or to an open-air
concert (when the weather is inclement). Credence goods
are most suited to nonprice
compe��on, other things being equal, because the
prospec�ve buyer can less clearly see whether quality
claims are indeed true un�l a�er purchase, and
any prior purchases may give misleading informa�on about
product quality the next �me around. For example, one’s
enjoyment of a dinner while on
vaca�on might be largely due to the a�en�ve and
knowledgeable service of a par�cular waiter—returning to
the same restaurant the next night may be
disappoin�ng due to that waiter having the night off.
Thus, the firm’s a�empts to induce purchase of a
credence good by reducing the price is likely to be
less effec�ve (as compared with nonprice strategies),
par�cularly for promo�on but also for place of sale.
Promo�on can be used to persuade the
prospec�ve customer that the product is of sufficiently
high quality to make it the superior value proposi�on,
while place of sales can be adjusted to
increase purchasing convenience (and/or reduce transac�ons
costs) for the customer, which can make it the best value
proposi�on for the customer.
Nonprice Competition in the Different Market Forms
In Chapter 7, we introduced the four main "market

structures" which were pure compe��on, monopolis�c
compe��on, oligopoly, and monopoly. You will
recall that in pure compe��on the products of rival firms
are iden�cal and, thus, there is no benefit for any firm
to compete on the basis of product quality.
But, for the other three market forms there is product
differen�a�on across the firms. There is a rela�vely
small degree of product differen�a�on for
monopolis�c compe�tors. Oligopolists typically have a
greater degree of product differen�a�on, perhaps due to
loca�on and branding even when their core
products are otherwise quite similar. Monopolists have an
extremely high degree of product differen�a�on, since
they are alone in their marketplace with
no direct rivals. In each of the la�er three market
situa�ons, the firm has a profit incen�ve to adjust its
nonprice strategic variables to increase its
profitability. There is an important difference, however. In
monopolis�c compe��on, the many small firms can adjust
their strategic variables without
expec�ng any direct reac�on from rival firms, but in
oligopoly markets the firms are few and large rela�ve to
the market and, as a result, they must
recognize their mutual dependence. The gains from one
oligopoly firm’s strategic ac�ons will have direct nega�ve
impact on the sales of rival firms. We
should expect these rival firms to want to react with their
own adjustment of strategic variables in order to win back
their lost sales. The monopolist, while
facing no direct compe�tor, may nonetheless gain from
using its nonprice variables to push its demand curve
outwards; it might a�ract sales away from
other products that are indirectly compe��ve, such as an
electricity monopoly a�rac�ng sales from a gas monopoly
due to one of these monopolies
adver�sing that cooking with their source of energy is

somehow be�er.
The More Subtle Nature of Nonprice Competition
Note that price compe��on and nonprice compe��on are
very different in the �ming and severity of their impact
on customers and on rival firms. Price
compe��on is sudden and o�en quite severe in its
impact, as customers will quickly switch towards (or away
from) the focal firm based on their percep�on
of the rela�ve value proposi�ons offered by compe�ng
firms. Price is a rela�vely unambiguous number, assuming
that transac�on costs, search costs, and
other costs that make up the total price to the customer
do not also change significantly when the firm changes its
s�cker price. Thus, the quality-to-price
ra�o calcula�on can be made quite quickly once the new
price is known, based on the previous percep�on of
quality. The consumer will change suppliers if
a new best-available value proposi�on becomes apparent,
and the impact on the focal firm and on rivals will be
rela�vely sudden.
Nonprice compe��on, on the other hand, must be planned
before it is implemented, and its implementa�on will
typically take much longer than it takes to
implement a price change. Adver�sing and promo�onal
campaigns must be discussed, designed, and media �me
and space must be booked before any
campaign can be implemented. Changes in product quality
must be proposed, considered, and tested against the
preferences of poten�al customers before
the produc�on facili�es are modified to produce the
changed product, which must then be distributed to
retailers or otherwise made available to
prospec�ve purchasers. Similarly, place of sale, or the

firm’s distribu�on system, cannot be changed overnight—
arrangements have to be made, contracts
have to be signed, facili�es have to be set up, and so
on.
1introduction#footernote2
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Price compe��on is sudden and requires
li�le advanced planning whereas nonprice
compe��on takes �me to plan before it
can be implemented.
© Digital Vision/Thinkstock
Thus, while price compe��on can be decided and
implemented in hours or, at most, in a few days, nonprice
compe��on may take weeks or months to set up and
implement. A�er that, the impact on consumers will be
slower than a price change, because changes in the quality
component of the value proposi�on will be harder to
see and evaluate compared to changes in the price
component. This is par�cularly so for experience and
credence
goods, of course, but even for search goods the
prospec�ve customer will have to examine the quality
a�ributes
of the new product, interpret the nuances of the
promo�onal message, or visit the new place of sale

before
concluding that the new value proposi�on offered is
superior to rival offerings, or not.
Nonprice compe��on is therefore typically less abrupt and
more gradual in its impact (on the firm’s sales) than is
price compe��on. It needs to be considered and planned
well in advance of its implementa�on, such that quick
nonprice retalia�on in response to a rival’s nonprice
ini�a�ve is usually impossible. This means that a well-
planned
and well-implemented nonprice strategy can gain a market
advantage that endures for quite a while before rivals
are able to mount their own new promo�onal campaigns,
product design changes, or new distribu�on outlets.
During that �me, the focal firm will enjoy increased sales
at the same (or higher) price levels un�l rival firms
either reduce their prices or come up with their own
nonprice strategic ini�a�ves. Indeed, during the �me that
rivals are trying to catch up with the focal firm’s
nonprice strategic ini�a�ve, that firm can be working on
its next
nonprice ini�a�ve to once again shi� its demand curve
outward.
In the remainder of this chapter, we will examine changes
in product design, promo�on efforts, and place of sale
(distribu�on systems) to see how the firm can increase its
profitability by changes to these nonprice strategic
variables.
1. This is not strictly true, of course. New places of sale will be
more convenient for some buyers, where convenience of
purchase can be viewed as a quality a�ribute, but new
distribu�on points also will reduce the customer’s transac�on

costs of buying the product, which we have considered as an
element of the total price paid by customers. Similarly,
adver�sing and promo�on might provide informa�on and
persuasion that removes the customer’s need to conduct search
costs, which we have also considered to be a component of
the total price to the customer. Thus nonprice compe��on
impacts the value proposi�on perceived by the prospec�ve
customer via either or both the quality or the price percep�on.
[return
ns/ch11introduc�on#return1) ]
2. Recall that inelas�c means that the percentage change in
quan�ty demanded will be less than the percentage change in
price, so that total revenue will increase for a price increase,
for example. Conversely, elas�c means that the percentage
change in quan�ty demanded will be greater than the
percentage change in price, so that total revenue will decrease
for a
price increase. [return
ns/ch11introduc�on#return2) ]
1introduction#return1
1introduction#return2
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Product Promo�on: Target Marke�ng

11.1 Demand Shifting Using Nonprice Strategic Variables
As noted, the aim of nonprice compe��on is to shi� the
firm’s demand curve to the right, to induce more sales at
the current (or any other) price level.
This is not a limitless process, however. A�er some
point, addi�onal product design features, promo�onal
expenditures, and distribu�on outlets will cost
more to set up and operate than they will generate in
terms of addi�onal sales. The manager’s problem is to
increase the expenditures associated with
these nonprice variables to an appropriate level such that
the firm’s profit (or expected net present value) is
maximized. In this sec�on, a�er a short review
of the nonprice variables, we shall consider how the firm
might adjust these to maximize its profit in the short run
(under full informa�on) or maximize its
expected net present worth (under uncertainty and longer
�me horizons).
Product Quality
The mul�ple dimensions of product quality include how
the product looks (e.g., its shape, appearance, or design
aesthe�cs); what it does (e.g., its
func�onality, or usefulness); how long it lasts (e.g., its
durability, or robustness); and what it does not do (e.g.,
it does not endanger, annoy, or cost more
money to maintain). Improving product quality means
increasing the first three of these aspects of quality and
reducing the la�er. In Chapter 3, we
considered product a�ribute analysis, which iden�fied the
main product a�ributes (or quality dimensions) that
consumers will use to differen�ate between
and among compe�ng products and on which they base

their purchase decision. Put another way, the product
a�ributes of importance to each consumer
are the ones that enter the quality component of the
firm’s value proposi�on that is perceived by that
consumer.
Thus, the firm’s managers need to view the product
through the eyes of their customers to appreciate which of
these quality dimensions are more (or less)
appreciated by those customers and by prospec�ve
customers. Market research, which is asking customers and
prospec�ve customers what they like and do
not like about the product, will serve to inform
management as to which of the qualita�ve features are
par�cularly desirable and which might be increased,
reduced, added, or deleted (Kim & Mauborgne, 1999).
Packaging and People
As first men�oned in Chapter 3, some marketers talk
about the six Ps of marke�ng, adding packaging and
people to the tradi�onal four Ps. Packaging refers
to the way in which a product or service is presented to
the poten�al customer. For example, a�rac�veness and
the security of the packaging can be viewed
as aspects of product quality. The pictures on the boxes
in which new TVs are delivered raise the customer’s
an�cipa�on of the viewing experience and the
strength and rigidity of the box and interior packaging
ensures that the TV will work immediately when it is
turned on. The term people relates to the
human element, or the quality of personal service
associated with the purchase and delivery of the product.
Note that by "product" we mean "product or
service" and that both physical products and intangible
services can be delivered with be�er (or worse) personal

service by the provider. This personal
service is o�en inextricably combined with the product, of
course, and even when it is a minor component of
perceived product quality (such as for impulse
purchases of commodity items) it is rarely irrelevant.
Thus, what we have said above about adjus�ng quality
dimensions to the op�mal levels also relates to
packaging and personal service—these should be augmented
to the extent that the marginal cost of addi�onal
packaging and service is just equal to the
marginal revenue deriving from that addi�onal packaging
and service. For example, a restaurant manager considering
whether to hire an addi�onal waiter
(for say, $100 per day) must consider whether the
improved service provided will generate at least $100
addi�onal contribu�on to overheads and profit
from addi�onal food and beverages ordered either
immediately or via repeat purchases of sa�sfied customers.
Promotion
Promo�on includes a variety of ac�vi�es that are
designed to induce the prospec�ve customer to
purchase the firm’s product or service. Adver�sing is
perhaps the most commonly used
promo�onal tool, but also Internet websites, Google
adver�sing and key-word purchase, point-of-
sale displays and give-aways, and support of spor�ng
events are also common promo�onal
vehicles.
Many firms have an adver�sing budget, o�en calibrated
to be a par�cular propor�on of sales
revenue, to be spent on adver�sing or other promo�onal
ac�vi�es. For example, Coca-Cola is
reported to spend about 30% of its revenue (or wholesale

price per can) on adver�sing in order to
maintain its market share in the face of adver�sing by
rival firms.3
ns/sec11.1#footernote3) Managers will be concerned
whether or not the current level of promo�onal
expenditure is the profit-maximizing level. They
should expect that increased adver�sing expenditures will
lead to increased sales of their
products, assuming, of course, competent adver�sing
campaigns that do not "turn off" customers.
But they should also expect diminishing returns to
adver�sing expenditures, such that there is an
op�mal level of adver�sing expenditures for their
par�cular product and market situa�on.
Assuming that Coca-Cola has gravitated over �me to an
op�mal level of adver�sing expenditure,
any reduc�on in their adver�sing is likely to be
accompanied by a reduc�on in both sales and
profits.
In oligopoly markets, the firm will be concerned about the
level of its adver�sing expenditures rela�ve to the
adver�sing expenditures of rival firms. If rivals
increase their adver�sing the focal firm should expect
some erosion of its own market share as rivals’ demand
curves shi� outwards and its own demand
https://content.ashford.edu/books/AUBUS640.12.1/sections/sec
11.1#footernote3
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Internet promo�on like Google adver�sing is designed to
induce
the prospec�ve customer to purchase a firm’s product or
service.
curve shi�s inwards. A large frac�on of the oligopolist’s
adver�sing budget may be required simply to maintain its
market share. Thus oligopolists keep a
sharp eye on the adver�sing campaigns of rivals and will
feel compelled to increase their own adver�sing (or adjust
another strategic variable) to counter
increased adver�sing by rivals. In most oligopoly markets,
the firms will gravitate towards a level of adver�sing that
seems to provide the op�mal
contribu�on to overheads and profit, and then watch their
rivals to see that they maintain the status quo.
A complica�ng issue for the evalua�on of adver�sing
expenditures is that adver�sing campaigns are likely to
differ qualita�vely and in their impact on
consumers—some adver�sing concepts will be more
successful than others, and some campaigns will be
interrupted by adverse weather or major events
that distract consumers and reduce the effec�veness of the
adver�sing campaigns. For example, during the Olympic
Games, or the presiden�al elec�on
campaign, adver�sing by the firm might be overlooked by
customers more interested in the spor�ng or poli�cal
events. Similarly, new health informa�on,
such as new data rela�ng obesity to the sugar and fat

content of fast food, may render adver�sing less effec�ve
in increasing the firm’s demand. Where
adver�sing can be increased by more of the same
promo�onal message (e.g., more billboards in new
loca�ons u�lizing the same promo�onal message, or
the same adver�sement placed in more newspapers) the
firm’s managers can gain a more reliable es�ma�on of
the marginal impact of increased
adver�sing on the demand for their products.
Internet Promo�on
Quickly replacing billboards, print media, radio and
television adver�sements, and even point-
of-sale promo�onal materials as the media of choice for
many firms is Internet promo�on,
informa�ve and persuasive material posted on the firm’s
(and other) websites, cross-pos�ng
with other firm’s websites, purchase of Google "ad-words"
and paid adver�sements that pop-
up when people search for specific informa�on on the
Internet. Social media sites, such as
Facebook, allow the firm to have ongoing communica�on
with customers and poten�al
customers, and also allow the firm’s products, service
quality, and corporate social
responsibility to be rated by millions of customers and,
thus, provide informa�on to poten�al
customers about the value proposi�on offered by the firm.
Increasingly, people search for informa�on just-in-�me on
the Internet, that is, just before
they plan to use the informa�on, rather than keep printed
adver�sements and other materials
on hand for reference just-in-case they will need this
informa�on at a later �me. It stands to

reason that the immediate availability of product price and
quality informa�on via Internet
websites tends to reduce the impact of other forms of
just-in-case promo�on. Whereas print
media, radio, and television provide seller-supplied (and
poten�ally biased) informa�on about
the product, the Internet allows the prospec�ve customer
to quickly find (and compare) offers from various sellers
and usually also to find reviews and
ra�ngs of the firm’s product in comparison with rival
products. These reviews and compara�ve ra�ngs are
par�cularly effec�ve for the promo�on of
experience and credence goods, assuming the firm’s
product is rated highly, of course. Thus, the Internet has
not only impacted the efficacy of other forms
of promo�onal media but has also served to increase the
quality of many firms’ products since any adverse
comparisons or deficiencies are quickly noted
and publicized by consumers and other interested third
par�es. Indeed many companies explicitly ask (on their
websites) for ra�ngs and reviews of their
products to provide them with the informa�on they need
to improve product and service quality.
Place of Sale
The place of sale refers more broadly to the firm’s
distribu�on system, which includes the way in which the
product is made available for viewing or
considera�on by prospec�ve customers, and the means by
which it is delivered to the customer at or a�er the point
of sale. Thus, the firm might set up
physical shops where the product can be viewed,
purchased, or consumed by customers who travel to the
shop and purchase the product there. Heavy or
bulky items may need to be delivered subsequently to the

customer’s place of residence or business, or the purchaser
may take delivery at the point of
purchase, consume it there (consider the case of services,
food, and beverages, for example), or transport it
themselves to the desired loca�on.
As men�oned elsewhere, the place of sale creates more or
less inconvenience, search, and transac�on costs for the
prospec�ve buyer. This will enter the
prospec�ve customer’s evalua�on of the value proposi�on
offered by the firm, either as a transac�on or search
costs on the (price) denominator, or as a
product a�ribute on the (quality) numerator of the value
proposi�on. By having mul�ple places of sale, the firm
reduces transac�ons and search costs and
increases the convenience for at least some customers and,
as a result, may become the best value proposi�on for
some of those customers, thus selling
more units of output.
In Chapter 9, we considered franchising as a means of
gaining addi�onal market share and greater firm-level
profit even under condi�ons of monopolis�c
compe��on where the individual franchise might make
only normal profits. By opening addi�onal franchises, the
firm is effec�vely making its place of sale
more convenient while reducing the search and transac�on
costs for more people and, thus, gaining customers that
previously did not perceive that firm to
be offering the best value proposi�on.
Internet Sales
As implied earlier, the physical store is declining as the
major place of sale for many goods and services, being
progressively replaced by the Internet

websites of firms where prospec�ve customers can view
images of the product, gain informa�on about product
a�ributes and comparisons with rival
products, and then purchase and pay online, with delivery
subsequently to the customer’s desired loca�on within
hours, in some cases, and, generally,
within a few days. Prospec�ve customers, increasingly
"�me-poor" and faced by an increasing array of rival
products (including imports or products that
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would be imported directly to the consumer a�er
purchase), find that their transac�on costs are reduced
significantly by Internet purchases. Thus, buying
online offers a be�er value proposi�on even when buying
the same item from the same seller at that firm’s physical
store. In addi�on to the savings of
transac�on costs, the customer may find that Internet
prices are lower than in-store prices for two main reasons.
First, the costs of displaying and selling the
items in-store are likely to be higher than selling via the
Internet and shipping from a warehouse. Second, the
customer who is in the store has already
invested �me (and possibly also parking costs) and would
need to repeat this investment in other stores to find
compara�ve price and quality informa�on.
That person is likely to make the economically ra�onal
decision to buy in store at what is likely to be a higher
price than may be available in other stores or

on the Internet rather than incur addi�onal search costs to
find out if that is in fact true.
3. Firms need to keep their brand name product quality
asser�ons in the minds of consumers, not only to prevent direct
rivals (e.g., Pepsi and RC-Cola in Coca-Cola’s case) but to
avoid
being replaced by indirect rivals (other beverages) and to avoid
being forgo�en amongst the "noise" of many other firms
adver�sing their unrelated products. [return
ns/sec11.1#return3) ]
11.1#return3
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U�lity companies such as electricity and gas suppliers,
are o�en
regulated in the public interest, since no compe�ng firms
exist to
s�mulate increased efficiency in produc�on and more
compe��ve
pricing.
© Images.com/Corbis
11.2 The Optimal Level of Nonprice Competition

It is useful to consider the adjustment of a nonprice
strategic variable in two stages. First, for
simplicity of exposi�on, we shall consider adjus�ng the
nonprice variable while holding price
constant, which is appropriate for some market situa�ons.
Later we shall adjust price and the
nonprice variable simultaneously to find the profit-
maximizing combina�on of price and
nonprice strategies, which is appropriate for other market
situa�ons. We saw in Chapter 7
that firms opera�ng in oligopoly markets with mutual
dependence recognized o�en face price
rigidity—they will be reluctant to raise their price for fear
of the elas�c demand response that
would happen if their rivals did not also raise their
prices, which would cause their market
share and profitability to decline substan�ally. They might
also be reluctant to reduce their
price for fear of an inelas�c demand response, which
would happen if all rivals also reduce
their price to protect their market share, such that while
their market share would stay the
same, each firm’s profit margin on each unit sold would
be substan�ally less. In such kinked-
demand-curve markets the oligopoly firm effec�vely faces
a price that it prefers to keep fixed
at the current level.4
ns/sec11.2#footernote4)
We might also expect price to be held constant in
monopoly markets where the firm’s price is regulated by a
government authority and is, thus, set at a
par�cular level that is maintained for a considerable
period between regular (perhaps annual) reviews of the

price level by the regulatory authority. As
indicated earlier, public u�li�es, such as the post office,
electric company, and gas suppliers, are o�en regulated in
the public interest since there are no
compe�ng firms to induce the firm to be more efficient
in produc�on and more compe��ve with their prices.
Without compe��on, monopolies tend to
allow their cost structures to inflate such that prices
would periodically increase, so public regula�on of prices
is u�lized to prevent upward creep in their
prices due to managers’ unwillingness to pursue
produc�on efficiencies.
So, in the following sec�on, we shall first consider the
most simple case where the firm leaves price at its
current level and adjusts one of the other
strategic variables to the profit-maximizing level. Although
this could be any one of the three nonprice strategic
variables, in the following we will discuss
the process in terms of product quality, and later
generalize our findings to refer to all other nonprice
strategic variables. If the firm were to increase its
product quality by constant increments to expenditure (e.g.,
$1,000) we should expect the demand curve to shi�
outward but we should also expect to
observe diminishing returns to market demand for the
product quality. That is, for a series of increases to
product quality (with each increase cos�ng
$1,000), we should expect the outward shi� of the
demand curve to be progressively less, as shown in Figure
11.1.
Figure 11.1: Diminishing returns to quality
Figure 11.1 demonstrates diminishing returns to product
quality—the demand curve shi�s outwards by progressively

less for each constant increment to
expenditures on product quality. Because total revenue
(TR) is equal to price �mes quan�ty (i.e., PQ) and since
price (P) is constant, it is evident that TR
must be increasing at a decreasing rate because the
quan�ty (Q) is increasing at a decreasing rate (as
adver�sing is augmented by constant increments). This
means that the marginal revenue associated with quality
augmenta�on must be falling. But, in addi�on, we should
also expect to find the marginal cost of
quality augmenta�on is increasing, due to diminishing
returns to expenditures on product quality. That is,
constant increments (e.g., $1,000 increases) to
expenditures on quality will increase the level of quality
by diminishing amounts. This means that the marginal cost
of quality augmenta�on (i.e., the cost
per unit of addi�onal quality) will be increasing.
In Figure 11.2, we show the profit-maximizing level of
quality augmenta�on—it will occur when the (rising)
marginal cost of quality augmenta�on just equals
the (falling) marginal revenue due to quality augmenta�on.
The marginal cost and marginal revenues associated with
quality augmenta�on are shown in
Figure 11.2 as the slopes of the total curves, respec�vely.
The curve TCqa (for total cost of quality augmenta�on)
rises at an increasing rate as quality is
increased, while the curve TRqa (for total revenue from
quality augmenta�on) rises at a decreasing rate as quality
is increased. These are the total cost and
total revenue associated with changing quality above the
ini�al level (and do not include the produc�on cost of
the basic product). The slopes of these
curves represent the marginal cost and the marginal

revenue associated with augmen�ng adver�sing. These
slopes are equal at the quality level shown as
K*, which is the profit-maximizing level of quality, since
the marginal cost of increasing quality is just equal to the
marginal revenue due to the increase in
quality, all other things being held constant.
11.2#footernote4
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12,ch12introduction,… 10/42
This result is the (by-now-familiar) marginal-equality
condi�on of economics—for profit maximiza�on any
strategic variable should be adjusted to the point
that the marginal revenue obtained from that adjustment is
just equal to the marginal cost associated with that
adjustment. In this case it is profit-
maximizing to raise quality to the level where the
marginal cost of quality augmenta�on is just equal to the
marginal revenue due to quality augmenta�on.
At quality levels below K* the marginal revenue exceeds
the marginal cost so it increases profit to augment quality
up to this level. At quality levels above
K* the marginal cost exceeds the marginal revenue from
quality augmenta�on so profit would fall if quality was
augmented to these levels. Thus, the profit-
maximizing level of quality is K* where the last dollar
spent on quality augmenta�on is just covered by a dollar
contributed by the addi�onal sales of the
product in the market.

Figure 11.2: The quality augmenta�on decision
It is important to note that the marginal cost of quality
augmenta�on as shown in Figure 11.2 will be composed
of two separate cost categories that are
likely to shi� upwards as the level of quality increases.
The first is an increase in fixed costs. Addi�onal
machines and specialized equipment might be
required to allow the firm to produce higher quality
products, so we might imagine the total fixed cost (TFC)
curve shi�ing upwards con�nually (or jumping
up at points where be�er equipment is needed to improve
quality further). Secondly, the total variable cost (TVC)
curve is likely to shi� upwards as quality
is con�nually increased, because more labor �me and
higher quality raw materials or components are required to
increase quality progressively. Thus the
MCqa curve in Figure 11.2 is the change in both TFC and
TVC that is required to raise quality by an addi�onal
unit (of quality). You can see that the
analy�cal process underlying Figure 11.2 is a no�onal
planning exercise conducted to find the op�mal level of
quality. Once that level has been found (in
theory) or es�mated (in prac�ce) the firm can select the
appropriate combina�on of machines and equipment that
can provide the desired level of quality
and, thus, have a par�cular level of TFC. Similarly, it
will u�lize the appropriate level of labor per unit of
output and quality of raw materials and
components such that the desired level of quality is
a�ained. The firm would have a par�cular TVC curve
that it would move along as quan�ty of produc�on
changes while quality is constant at the chosen level.

We know that product quality is mul�dimensional, so we
must note that the above conceptual analysis applies to
only one par�cular dimension of product
quality. For example, the dimension under considera�on
could be package size. Suppose a new firm that is
planning to produce fresh orange juice can only
afford one bo�ling set-up and wants to choose the best
size of a plas�c container for its orange juice. It will
consider packaging its juice in, for example, 1-
quart, 2-quart, 3-quart, or 4-quart bo�les, or indeed any
frac�onal volume along the spectrum from 1 quart to 4
quarts. The above analysis would allow the
op�mal container size to be determined. In prac�ce, of
course, the firm needs to consider the market reality that
orange juice is normally presented to
consumers in standard packaging sizes (e.g., 1- and 2-
quart containers), so it may wish to choose whichever
package size is superior in terms of profit
genera�on. Alterna�vely, it may decide to offer a
dis�nctly different container size (e.g., 1.35 quarts) and in
its promo�on claim that this size provides "extra
value" for the customer if it believes that this is the
profit-maximizing combina�on of nonprice strategies.
In theory, the firm would repeat this analysis for each
dimension of product quality that is recognized by its
customers. For example, the sweetness of the
orange juice can be adjusted by the choice of orange
variety as a raw material or by the addi�on of sugar or
other sweetener. Similarly, the color could be
adjusted by the addi�on of minute quan��es of food
dye, or the frac�on of solid content (pulp) in the juice
can be adjusted by calibra�ng the juicing
process of raw oranges. Each one of these quality
dimensions for orange juice must be considered and set by
the firm at the op�mal level, with a view to

maximizing its short-term profit or net present value of
profit.
In prac�ce, the firm’s managers would adjust each
dimension to the levels indicated by their market research.
Conjoint analysis is a market research
technique that allows customers to conjointly value (i.e.,
consider together, rela�ve to each other) the quality
dimensions of any product and thus, managers
can determine how much each quality a�ribute should be
augmented or diminished (Green & Srinivasan, 1978). Just
as the reserva�on price of customers
varies, each respondent to a marke�ng survey will
poten�ally value the quality dimensions (which we called
product a�ributes in Chapter 3) of the product
somewhat differently. These customer valua�ons will
reflect how much extra the customers would, on average,
pay for an addi�onal unit of each quality
dimension. The manager will consider the average
customer valua�on and compare this with the cost of
augmen�ng quality and, subsequently, choose the
level of quality for each par�cular product a�ribute. For
example, Kia Motor company introduced a six-speed
transmission and a smaller turbo-diesel engine
to its range of automobiles to allow enhanced accelera�on
and increased fuel economy, a�er concluding that its
customers wanted be�er accelera�on and
be�er economy.
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From taste to color, each quality
dimension of orange juice must be
considered and set by the firm at what it
thinks is the op�mal level to maximize
profit.
© Mar�n Poole/Thinkstock
Simultaneous Adjustment of Price and Quality
For the monopolis�c compe�tors (and for the monopolist
whose price is not regulated), the fact that they can set
prices without fear of rival reac�ons means that the
increase in demand due to quality augmenta�on also
means
that they can raise their price to find the profit-
maximizing price and quality level simultaneously. To show
this
graphically we need to develop several new concepts and
then bring them together in one (admi�edly more
complex) diagram. But you will be ready for this level of
complexity because each of the concepts is rela�vely
simple
and the analysis u�lizes knowledge that you have learned
in the preceding chapters.
We start with the locus of op�mal prices (LOP) which is
a line joining the op�mal (i.e., profit-maximizing) price
level
at each different quality level. In Figure 11.3 we show
two demand curves (and related MR curves) that reflect
two
different levels of quality—D1 and MR1 reflect one quality
scenario while D2 and MR2 reflect a higher level of
quality

scenario. We also show two marginal cost of produc�on
curves, MC1 and MC2, which relate to two different
levels
of quality that might be chosen. The op�mal price in the
first quality scenario is P1, and the op�mal price in the
second quality scenario is P2. (Note that the op�mal
output level is found where MR = MC in each scenario,
and
these prices are found by projec�ng up to the relevant
demand curve from those output levels in each scenario.)
The line joining those two op�mal price levels, shown as
LOP, is the locus of these profit-maximizing price and
output combina�ons (and many other op�mal price and
quan�ty combina�ons). We need this locus showing all
possible op�mal price and quan�ty combina�ons so that
we can superimpose it on the cost side of the quality
augmenta�on issue, which we now address.
Figure 11.3: The locus of op�mal prices
The locus of average quality costs (LAQC) is a line
joining the average quality cost at each profit-maximizing
price level. The average quality cost (AQC) is
the total costs of quality at a par�cular level of quality,
divided by the number of units of output subsequently
produced and sold. Total cost of quality can
be regarded as a fixed cost once the product design (and
thus the level of quality) is chosen and the firm’s plant
is set up for that quality level.
Subsequently, when output is produced, the total costs of
quality is a constant, and thus, the average quality cost
curve will be a rectangular hyperbola, as

shown in Figure 11.4, for each of the two quality
scenarios. In each scenario AQC values will be very high
ini�ally but will fall progressively as the total cost
of quality is divided by a progressively increasing level
of output. As you can see in Figure 11.4, in the first
quality scenario the op�mal output level was Q1
(from Figure 11.3) and the average level or quality costs
per unit at that output level is A1. For the second quality
scenario, the average quality cost is A2 at
output level Q2. The line drawn through these AQC and
Q coordinates will be a locus of average quality costs,
shown as LAQC, which represents the AQC
value at each of the op�mal output levels associated with
each quality scenario.
Figure 11.4: The locus of average quality costs
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On the basis of the LOP and LAQC curves we can now
demonstrate the simultaneous determina�on of the profit-
maximizing quality (K), output (Q) and
price (P) levels. Note that each of the locus curves in
Figures 11.3 and 11.4 represents an average, and there
must be a marginal curve associated with each
of these average curves. These marginal curves would
show the rate at which the total in each case was
changing—that is, the locus of marginal quality

costs (LMQC) will show the rate at which total quality
costs are changing as quality changes (see Figure 11.2),
and the locus of op�mal marginal revenue
(LOMR) will show the rate at which the total revenue is
changing as quality changes (see Figure 11.2). Whereas
Figure 11.2 was in two dimensions (i.e.,
quality vs. cost/revenue) holding output level constant, we
now need to find the op�mal output level while allowing
both quality and the cost/revenue
dimensions to vary. Rather than show a three-dimensional
diagram, in Figure 11.5 we show the marginal and
average locus curves for both prices and
quality costs mapped against the third variable of interest,
the output level. At the output level where the marginal
curves intersect (i.e., LOMR = LMQC), we
sketch in the demand curve (D*) and the AQC curve
(AQC*), both of which must cross the LOP and LAQC
curves, respec�vely, at that output level. These
show the profit-maximizing price and quality levels that
the firm should set to maximize its profit. The profit-
maximizing price will be P*, the profit-
maximizing level of average quality costs will be AQC*,
and the profit-maximizing level of output will be Q*. The
total expenditure on quality augmenta�on
will be the AQC* �mes the output level Q*.
Figure 11.5: Simultaneous choice of price and quality levels
Thus we have demonstrated that the op�mal levels of
price and quality can be determined simultaneously to
solve the manager’s problem of finding the
op�mal value proposi�on for the firm. The above model
serves to demonstrate the principle that price and any one
of the nonprice strategic variables can
be adjusted simultaneously to increase profitability. Indeed,
in theory, price and all of the other strategic variables (and

all of their composite dimensions)
can be adjusted simultaneously to best posi�on the firm’s
product in its market, but to prove that here would
require mathema�cs of a fairly high order and
is best le� alone! In prac�ce, of course, managers will
not have the informa�on necessary to draw in all these
curves and see where they intersect, and so
will need to u�lize an itera�ve procedure to approach
this op�mal price and quality combina�on by trial and
error and the exercise of judgement based on
their knowledge of consumer behavior in their markets.
Estimating the Optimal Level of Nonprice Strategic Variables
The foregoing sec�ons have established the theory of
op�mal nonprice compe��on and have demonstrated the
principles involved in adjus�ng several
strategic variables simultaneously to find the profit-
maximizing combina�on of those strategic variables. In
prac�ce, the firm will find that the informa�on
search costs required to u�lize these theore�cal models
would be prohibi�ve. Nonetheless, an understanding of the
theory of nonprice compe��on will
allow the manager to use parts of the theory (for which
informa�on is available) to es�mate the profit-maximizing
level of par�cular nonprice strategic
variables.
For example, a firm that consistently adver�ses could, at
rela�vely small cost, collect �me-series data on monthly
quan�ty demanded (in thousands) and
adver�sing expenditures per month (in thousands of
dollars), and could calculate a line of best fit between
these two sets of data observa�ons. Suppose a
firm has done this and u�lizing correla�on analysis (see
Chapter 4) has found the line of best fit to be Qd = a +

bA where A represents adver�sing
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expenditures in thousands of dollars. The coefficient to
adver�sing in this line of best fit, that is, b, is the
marginal impact on quan�ty demanded for a
$1,000 change in adver�sing expenditure. It is a simple
ma�er to then calculate the marginal revenue due to a
$1,000 change in adver�sing5
ns/sec11.2#footernote5) and compare it with the marginal
cost (i.e., $1,000) of a unit of expenditure on adver�sing.
The sta�s�c b will be some frac�on or mul�ple of a
unit of output. Let us suppose it is 0.25, meaning that an
addi�onal $1,000 spent on adver�sing
increases sales by one quarter of 1,000 units (i.e., 250
units) of the product. Now, if the contribu�on to
overheads and profit of the product is say, $5, those
250 units generate $1,250 in contribu�on, which exceeds
the $1,000 marginal increment in adver�sing expenditures.
Thus, adver�sing could be increased to
maximize profit, assuming that all other influences on
quan�ty demanded remain the same. Perhaps several more
increments of $1,000 could be spent,
un�l the marginal revenue due to adver�sing falls to
equality with the ($1,000) cost of the marginal unit of

adver�sing.6
ns/sec11.2#footernote6)
Using mul�ple regression analysis, the manager can
control for other variables that are likely to have changed
to be�er isolate the impact of adver�sing on
quan�ty demanded, as we saw in Chapter 4. Also,
mul�ple regression analysis allows us to es�mate
nonlinear rela�onships between quan�ty demanded
and the nonprice variables. We have argued above that
there will almost certainly be diminishing returns to these
nonprice variables. As an example,
suppose the demand func�on for a firm has been
es�mated as:
Q = 10,000 + 25.2 A – 0.8 A2 (11-1)
Where Q is quan�ty demanded in units and A represents
adver�sing expenditures in thousands of dollars. The
op�mal level of adver�sing will be the level
at which the last $1,000 spent on adver�sing contributes
just $1,000 towards overheads and profit. Thus the
maximizing condi�on is dπ/dA = 1 where π
(the lowercase Greek le�er pi) represents the contribu�on
to overheads and profit. To find dπ/dA we must first find
out how quan�ty demanded varies with
adver�sing (i.e., dQ/dA) and then how profit varies with
quan�ty demanded (i.e., dπ/dQ, which is the contribu�on
margin). Thus dπ/dA expands to:
dπ/dA = dQ/dA · dπ/dQ (11-2)
From equa�on 11-1, we can find dQ/dA by taking the
first deriva�ve of the es�mated demand func�on with

respect to adver�sing expenditures, which is:
dQ/dA = 25.2 – 1.6A (11-3)
Since the profit-maximizing condi�on is to set dπ/dA = 1,
and because dπ/dQ is the contribu�on margin (CM), we
can restate equa�on 11-2 as:
dQ/dA = 1/CM (11-4)
Thus, the profit-maximizing rule is to set the marginal
impact of adver�sing on quan�ty demanded equal to the
reciprocal of the contribu�on margin. From
the es�mated demand func�on (11-1), we found the
marginal impact of adver�sing on quan�ty demanded as
shown in equa�on 11-3. Now assuming that
the contribu�on margin is $6 per unit, we can solve for
A by se�ng equa�on 11-3 equal to 1/6 as follows:
25.2 – 1.6A = 1/6
Mul�plying both sides by 6 we find:
151.2 – 9.6A = 1
Taking 151.2 from both sides we have:
– 9.6A = – 150.2
Finally, by dividing both sides by –9.6, we find that A =
15.646. Thus, when the contribu�on margin is $6 per unit
of output, the es�mated op�mal level of
adver�sing is $15,646.
In the above example, we implicitly assumed that the
contribu�on margin was constant at $6, regardless of the

output levels, and that the shi�ing outward
of the demand curve due to adver�sing would allow all
addi�onal units of output to be sold at the same price
level. This is a simple case that, nonetheless,
might be applicable (or sufficiently close to reality) in
many business situa�ons. But, where there are diminishing
returns in produc�on (i.e., rising MC as
output increases), the contribu�on margin will fall as
output levels increase so this must be incorporated into
our calcula�ons. Recalling that the
contribu�on margin is equal to price (P) minus average
variable costs (AVC), and that a rising MC causes the
AVC value to rise, we would have an expression
for contribu�on margin of the form CM = P – AVC –
(δAVC/δQ), where the la�er term indicates the extent to
which AVC is expected to rise as output
increases. But you will recall from Chapter 5 that as the
output rate is increased, AVC falls at first; bo�oms out
where MC cuts the minimum value of AVC;
then rises again as the MC con�nues to rise. Thus, if the
firm is opera�ng at an output level anywhere near the
minimal point of its AVC curve, the AVC
curve will be rela�vely flat on each side of that minimal
point, and so the assump�on of a constant contribu�on
margin may be a sufficient approxima�on
for calcula�ng the op�mal level of adver�sing.
Where managers do not have inexpensive access to
sufficient data on the rela�onship between prior
adver�sing (or other nonprice variable) and the
quan�ty demanded, they might experiment by
implemen�ng a slight increase or decrease in adver�sing
expenditures (or other variables) to observe by how
11.2#footernote5

11.2#footernote6
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A price war occurs when the prices of all
firms are adjusted downward repe��vely
un�l no firm is making any or much
profit. To avoid a price war, firms can
create price leadership and price fixing
agreements.
much sales volume changes as a result of the change in
that nonprice strategic variable and thus, gain an
apprecia�on of whether they should increase or
decrease that strategic variable further in pursuit of the
maximiza�on of their firm’s net present worth.
Nonprice Competition With Mutual Dependence Recognized
In oligopoly markets, the firm should realize that its
adjustment of strategic variables will have no�ceable
impact on
the sales of rival firms and consequently that these other
firms are likely to react by adjus�ng their own strategic
variables and thus impac�ng the focal firm’s sales,
triggering another round of adjustments, and so on. When
the
strategic variable being adjusted is price, this sequence of

ac�on and reac�on could result in a price war, whereby
the prices of all firms are adjusted downward repe��vely
un�l no firm is making any or much profit. Clearly,
profit-
maximizing firms will want to avoid this outcome,
resul�ng in the emergence of price leadership and price
fixing
agreements, as men�oned in Chapter 8.
We have noted that, unlike price compe��on, it typically
requires a significant lead �me to implement a change in
a
nonprice strategic variable. As a result, if an oligopolist
is caught napping by a rival’s new promo�onal campaign,
product improvement, or new retail outlet, there will be a
significant lag before it can retaliate effec�vely, during
which �me it may have lost a significant part of its
market share that may be very hard to regain. The
existence of
this lag, therefore, mo�vates firms to maintain an ongoing
involvement in promo�onal ac�vity—if the firm is always
planning its next promo�onal campaign, it will not be
caught napping to the extent that it would be if it had to
start
from scratch a�er a rival launches a new promo�onal
campaign.
The threat that a rival might launch a major nonprice
strategy and gain market share at the expense of the focal
firm may cause the mutual-dependence-recognized
oligopolist to increase its adver�sing, quality, or
distribu�on
outlets as a defensive move, just in case a rival firm
does the same thing. In effect the oligopolist is involved
in a
strategic game in which the rival’s next move is

an�cipated, so the firm will be induced to make an
aggressive
nonprice adjustment in order to render less potent the
rival’s move if indeed it occurs.
4. As we saw in Chapter 6, the short-run profit-maximizing firm
will want to change its price if its MC curve intersects a
concrete sec�on of the disjointed MR curve that accompanies
the
kinked demand curve, and will tolerate the market share loss
because its objec�ve is to maximize profits in the short run,
and thus the subsequent-period benefits of market share
(such as repeat sales) are not included in the firm’s objec�ve
func�on. When oligopolists consider the longer run impacts of
their pricing decisions they are likely to hold price constant
to maintain market share for future period benefits, assuming
they are not prac�cing price leadership or followship, of
course. [return
5. The marginal revenue will be the increase in quan�ty
demanded mul�plied by the contribu�on per unit, assuming
that price and AVC remain constant at the higher output level.
[return
6. Although the line of best fit is a linear expression, we expect
that there will be diminishing returns to adver�sing
expenditures, so the marginal impact on quan�ty demanded of
$1,000 of adver�sing is not likely to remain at the value b =
0.25. Thus the firm must monitor the impact of addi�onal
adver�sing on its quan�ty demanded, and stop increasing
adver�sing when the incremental revenues just equal the

incremental costs. [return
11.2#return4
11.2#return5
11.2#return5
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11.3 Game Theory in Mutual-Dependence-Recognized
Oligopoly
A game is a situa�on in which two or more players
choose strategies to compete for a reward or payoff of
some kind. In mutual-dependence-recognized
(MDR) oligopoly the game is producing and selling a
similar product, the strategy is (let’s say) adver�sing
expenditures, and the payoff is market share and
the profit associated with that market share. A game that
contests market share is a zero-sum game, meaning that
the gains of some players equal the
losses of the other players. In Table 11.1 we show the
payoff matrix for a two-person, zero-sum game in which
the players are Firm A and Firm B. We
assume that they are each considering two alterna�ve
strategies—strategy 1 is to maintain their adver�sing at $4
million per year, and strategy 2 is to

increase their adver�sing expenditure to $6 million per
year. The four quadrants of Table 11.1 show the four
possible combina�ons of the two firms’
strategies. The numbers in the top-le�-hand quadrant show
the payoffs to the two firms if both maintain adver�sing
at $4 million each—by conven�on we
show A’s payoffs first, followed by B’s payoffs, in each
quadrant. When both firms spend $4 million on
adver�sing the expected profits are shown to be $10
million for each firm.
Table 11.1: Payoff matrix for two-person game
Firm B’s Adver�sing Budget
$4m $6m
Firm A’s Adver�sing Budget
$4m $10m, $10m $5m, $12m
$6m $12m, $5m $8m, $8m
Suppose now that Firm A were to increase its adver�sing
expenditure to $6 million while Firm B maintains its
adver�sing at $4 million. The payoffs for this
scenario are shown in the lower-le�-hand quadrant: Firm
A’s profits increase to $12 million while Firm B’s profits
decline to $5 million. This result occurs
because the addi�onal adver�sing of Firm A causes some
customers to be persuaded that Firm A offers the be�er
value proposi�on and as a consequence
they switch their purchases from Firm B to Firm A.
Oppositely, suppose that it was Firm B that increased
adver�sing to $6 million while Firm A maintained
adver�sing at $4 million (the payoffs for this scenario are
shown in the top-right-hand quadrant, and are $5 million
to Firm A and $12 million to Firm B).

Finally, suppose that both firms increase adver�sing to $6
million, the payoffs (shown in the lower-right-hand
quadrant) are $8 million to each firm. This
result occurs because the increased adver�sing of each
firm essen�ally offsets the impact of the other firm’s
increased adver�sing, but while the increased
adver�sing does a�ract new buyers to both firms, the
shi� of their demand curves does not increase total
revenue by enough to cover the addi�onal $2
million in adver�sing expense that each firm incurs. This
is the worst possible outcome, since profits have fallen
compared to the ini�al situa�on where $4
million adver�sing returned a profit of $10 million.
Given that the managers of these firms are likely to be
risk-averse to some degree or another, and that there will
be a significant lag before the firm can
retaliate if the other firm were to increase its adver�sing,
the focal firm will worry that if the other firm moves
first to increase its adver�sing to $6 million
then the focal firm’s profits will fall from $10 million to
$5 million. The other firm will have exactly the same
fear, so both firms are likely to increase their
adver�sing expenditures to $6 million, and if they do
they will end up in the lower-right-hand quadrant with
profits down from the $10 million level to $8
million but this will be be�er than the worst outcome,
which is to remain at $4 million adver�sing and see
profits fall to $5 million.
The Prisoner ’s Dilemma Problem and the Maximin Strategy
In the previous example, the firms are subject to what
has been called the prisoner’s dilemma. A prisoner’s
dilemma is a situa�on in which two par�es who
act independently to make gains for themselves actually

create a worse outcome for both par�es. This is called
the prisoner’s dilemma a�er the supposed
situa�on in which two bank robbers are caught with a
bag of money, which they tell the police they found lying
in an alley. The police have no more than
circumstan�al evidence that these two men actually did
rob the bank, but they are in possession of stolen goods,
which would earn them a one-year prison
sentence. The police put the men in separate rooms and
interrogate them individually. They tell each robber that if
he confesses and implicates the other,
he will walk free under a "state witness" deal, while the
other will get eight years in jail. But if the other one
confesses, the "state witness" deal is off the
table and they will both get five years in jail. So the
payoff matrix for the bank robbers looks like the one in
Table 11.2.
Given the inability of the two prisoners to communicate
with each other (and because "there is no honor among
thieves"), each will be mo�vated to avoid
the worst possible outcome, which is eight years in jail if
he denies the robbery while the other robber confesses
and implicates him. If each prisoner
confesses, they each end up with five years in jail, which
is far worse than the one year they would get if they
both deny the robbery and are convicted of
being in possession of stolen goods.
Table 11.2: The prisoner’s dilemma payoff matrix (jail
sentences in years)
Op�ons for Prisoner B
Deny Confess
Op�ons for Prisoner A

Deny 1 year; 1 year 8 years; 0 years
Confess 0 years; 8 years 5 years; 5 years
In each of the situa�ons men�oned above, the players in
the game are mo�vated to avoid the worst outcome. Each
strategy has two outcomes that differ in
value depending on what the other player does at the
same �me—one of these outcomes is worse than the
other. For example, if Prisoner A denies
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involvement in the robbery, the payoff will be either 1
year if Prisoner B also denies or 8 years if prisoner B
confesses and implicates. On the other hand, if
Prisoner A confesses, the payoff will be 0 years if
Prisoner B denies or 5 years if Prisoner B also confesses.
The worst outcome for each strategy is 1 year for
denial and 0 years for confessing. The best of these worst
outcomes is 0 years and so the best strategy for a person
who dislikes jail is to confess. Choosing
the op�on that has the best of the worst outcomes is
called the maximin strategy, which signifies the maximum
of the minimum outcomes.
Now let’s refer to the case of the mutual-dependence-
recognized oligopolies choosing the level of their
adver�sing budgets. If Firm A keeps adver�sing at $4
million, the profit payoff to Firm A is $10 million if

Firm B also keeps adver�sing at $4 million, but profit
falls to $5 million if Firm B raises its adver�sing to
the $6 million level. Alterna�vely, if Firm A increases
adver�sing to $6 million, the payoffs are $12 million if
Firm B maintains adver�sing at $4 million, but
only $8 million if Firm B also increases its adver�sing to
$6 million. The worst of these payoffs is $5 million and
$8 million, respec�vely. The best of these
worst outcomes, $8 million, is likely to occur because the
managers of both firms are risk-averse and prefer larger
profits to smaller profits and will be
mo�vated to follow the maximin strategy of increasing
adver�sing to the higher level.
The prisoner’s dilemma problem applies to the
oligopolists’ prices, adver�sing, product quality choices,
and distribu�on system choices. Thus, they are at
constant risk of reducing their profits by cu�ng prices or
launching nonprice strategies that actually reduce their
profits because their rivals were mo�vated
to do the same thing at the same �me. These examples
illustrate the incen�ve for oligopolists to make agreements
to maintain prices and nonprice
variables at current levels. Such agreements are known as
price fixing, in the case of agreements to hold prices at
current levels (or to raise them
simultaneously), or collusive agreements when two or more
firms agree to maintain at current levels or increase or
reduce other strategic variables
simultaneously or at about the same �me. As you will
probably be aware, collusive agreements are illegal and
are policed by the An�trust Division of the
U.S. Department of Jus�ce. Firms can be fined millions
of dollars for engaging in collusive behavior and the
managers of such firms will also receive huge
fines and jail terms as well. Clearly, when invited or

tempted to collude with the managers of a rival firm—
walk away and don’t even think about it! Even
talking to managers of rival firms might be construed as
circumstan�al evidence of collusive behavior, so choose
your friends and acquaintances carefully.
Be�er to be subject to the prisoner’s dilemma problem
out in the business world than to be subject to the
problems of a prisoner on the inside!
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Summary
In this chapter we have examined nonprice compe��on,
meaning the use of the firm’s strategic variables other
than price, namely product quality,
promo�on, and place of sale. Each of these nonprice
strategic variables is a demand shi�er causing the firm’s
demand curve to shi� outwards to the right, if
augmented, or inwards to the le� if diminished. Nonprice
compe��on essen�ally focuses on product differen�a�on
and thus has no applica�on to pure
compe��on where products are iden�cal. Nonprice
compe��on is an important adjunct to price compe��on
in monopolis�c compe��on, oligopolies, and
even monopolies, since the monopolist can a�ract demand
away from indirect compe�tors. The manager’s problem is
to adjust the nonprice variables such
that the firm’s product is seen as the superior value
proposi�on by its target customer, where value is equal

to quality over price, and quality is broadly
defined to include aspects of all three nonprice strategic
variables. Using the value proposi�on approach allows us
to note that some nonprice compe��on
raises the value proposi�on by reducing the total price
that the customer has to pay. For example, informa�ve
adver�sing reduces the customer’s search
costs, and opening addi�onal sales outlets reduces the
customer’s transac�ons costs.
We saw that there will be diminishing returns to the
augmenta�on of any one nonprice variable and, thus, the
op�mal level of that variable needs to be
found. The usual profit-maximizing condi�on, that the
marginal cost associated with the last unit sold should be
no greater than the marginal revenue
received from the sale of that last unit, is again u�lized,
but we noted that the marginal cost now includes not
only produc�on costs but also the
incremental cost of product quality augmenta�on,
promo�on, and distribu�on. The marginal revenue from
the last unit sold comes not from a movement
down a demand curve but from a shi� outward of the
firm’s demand curve.
Thus, as nonprice variables are changed, both the demand
curves and the cost curves will shi� outwards and
upwards, respec�vely. We u�lized a new
analy�cal technique, involving locus curves, to show the
path traced by the profit-maximizing price (i.e., average
revenue) in each quality scenario and
similarly, we used a locus curve to trace the average
selling costs associated with each profit-maximizing output
level. Introducing curves that are marginal
to each of these average locus curves allowed us to find
the output level where the marginal equality condi�on was

sa�sfied, and this in turn iden�fied the
op�mal level of the price and nonprice strategic variables,
determined simultaneously.
In the real world, informa�on search costs would typically
make it economically inefficient to implement the
theore�cal solu�on. But, understanding the
process involved will assist the managers in u�lizing
whatever informa�on they can obtain at reasonable costs.
We noted that if records are kept of monthly
sales levels and adver�sing levels, then correla�on
analysis can be conducted to ascertain the apparent
marginal impact of adver�sing on sales. By u�lizing
dummy variables to indicate the periods before and a�er
a product improvement is introduced, or a new
distribu�on channel is opened, regression analysis
can be u�lized to es�mate the impact of the change in
product quality or the distribu�on system.
Finally, we focused on the mutual-dependence-recognized
problem of the oligopolist, who must expect rivals to
react to both its price and nonprice
compe��on ini�a�ves. Indeed, since nonprice compe��on
needs to be premeditated due to the inevitable lags
between deciding to take ac�on and
implemen�ng ac�on, oligopolists try to "steal a march"
on their rivals by preemp�vely introducing nonprice
ini�a�ves using the maximin decision criterion.
As a result, they fall foul of the prisoner’s dilemma
problem that occurs when par�es have conflic�ng interests
and are not able to effec�vely communicate
with each other to ensure that no one is taking self-
serving ac�on that will damage the other par�es.
Ques�ons for Review and Discussion

Click on each ques�on to reveal the answer.
1. It is some�mes said nonprice compe��on is hard to do well,
whereas any fool can cut prices. Discuss this in the context of
an oligopoly.
ns/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12
.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo
Non-price compe��on requires more �me for planning
and implementa�on, more crea�ve thinking to come up
with good ideas for effec�ve
promo�onal campaigns, more resources that need to be
invested prior to execu�on of the plan, and more scope
for something to go wrong – anything
might happen in the period between the decision to
engage in non-price compe��on and the implementa�on
of that strategy. In oligopolies, rival firms
might launch a campaign that preempts or nullifies yours,
or events may happen that cause your strategy to be
inappropriate. Yet the "prisoner's
dilemma" effec�vely forces oligopolists to engage
con�nually in non-price compe��on and to con�nually
"raise the ante" in case a rival does the same
thing.
2. Why should we expect diminishing returns to apply to the
effec�veness of adver�sing and promo�onal ac�vi�es?
Outline several reasons.
ns/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12
.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo
We expect diminishing returns to adver�sing because
while adver�sements may be perceived as interes�ng
and/or entertaining at first, repeated

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