Question

As a student of economics, how would you evaluate the implications of non-price competition in oligopoly form of the market?

Answer 1

Non-price competition refers to a situation of the market in which oligopoly firms avoid competition by lowering price of the commodity. Instead they focus on competition through advertisements and lucrative offers for the buyers. In India, Coke and Pepsi sell their product at the same price. But in order to increase its share of the market, each firm takes to aggressive non-price competition. The firms spend heavily on the advertisements. Also, they spend heavily on event sponsorship (sponsoring games or sports) when their product is patronised.
Non-price competition leads to significant implications as under:
(i) Selling costs tend to mount up over and above the production costs.
(ii) Market price of the commodity tends to be much higher than its cost of production.
(iii) Allocation of resources is not optimum because demand is induced through advertisement rather than product-quality.
(iv) Owing to the lack of optimum allocation of resources, social welfare is not maximised. Briefly, non-price competition leads to wasteful expenditure and the loss of social welfare.