1. Chapter 4 Evaluating the Competition in Retailing

2. Avenues for a Differential Advantage
Retailers compete for customers on five major fronts:
Price (for benefits offered ~ value)
Service level
Product selection
Location or access
Customer experience

3. A Market’s Competitive Structure
Competition generally falls into one of four categories:
Pure Competition
Pure Monopoly
Monopolistic Competition
Oligopolistic Competition

4. Pure Competition Is really more theoretical than realistic*
Due to stringent assumptions*
Forms basis for much of neoclassical economics
Assumptions: (i.e., Occurs when a market has)
Homogenous products,
Many buyers and sellers,
There’s ease of entry for both buyers and sellers.
Buyers and sellers have perfect knowledge of the market*

5. Pure Competition (cont.)
In such a situation:
Retailers face horizontal demand curve
Must sell product at the going ‘‘market’’ or equilibrium price.
Quite rare in retailing.
The 4th assumption makes this likely never possible*
Approximation of this situation is possible via e-tailing,
But even online marketplaces that post the prices of other sellers don’t have the price of all or in real time
Easy to see if we only consider nontraditional retailers who don’t have a website, etc.

6. Demand Curves* Price Quantity P.C.
Again, retailers face a horizontal demand curve in market characterized by pure competition.

7. Demand Curves* Price Quantity P.C.
Again, retailers face a horizontal demand curve in market characterized by pure competition.
That means a perfectly elastic demand curve
Easy recall tool  note it can be made into a lower-case “e”

8. Pure Monopoly Is more theoretical in the long-term*
Due to laws preventing them, but
Can be enacted by the consumer due to extreme loyalty
Occurs when there is only one seller for a product or service.
Yet this does not mean one can simply sell at whatever price s/he wants…
Law of diminishing returns (i.e., declining marginal utility)
To sell more units, one must lower the selling price.

9. Demand Curves* ? Price Quantity P.C.
So does this mean retailers with a monopoly face vertical (i.e., perfectly inelastic) demand curve since it’s essentially the opposite of pure competition?

10. Demand Curves* Price Quantity P.M. P.C.
No. It faces a declining demand curve as not all consumers demand the products equally and/or there’s a declining marginal utility associated with the product(s).
And degree of slope will be unique to situation*.

11. Monopolistic Competition
Unlike the first two, this is realistic
Most common form of competition in retailing, particularly at the national-level
Occurs when a market has:
Heterogeneous products,
Yet products are viewed as substitutes for each other,
Sellers recognize that they compete with sellers of these substitute products.
Here, retailers attempt to differentiate themselves with the products or services they offer.

12. Oligopolistic Competition
The second more realistic structure
Most common at the local-level, particularly in smaller communities, and in consolidated industries (airlines)
Occurs when a market has:
Essentially homogeneous products (e.g., gas),
Relatively few sellers (i.e., top 4 firms account for 60-80%),
Or, many small firms who follow the lead of a few larger firms,
Any action taken by is expected to be noticed and reacted to by the other sellers.
Likely to lead to:
Similar prices as everybody knows what others are doing.
“Outshopping” if prices are too high, selection too limited…

13. Differential Advantages Based Upon Non-price Variables
Competing on price alone is a no-win situation
It’s the easiest to copy
Non-price variables seek to enhance the overall value proposition and lessen imitability by others
Avenues include, but are not limited to:
Private-label merchandise with unique features or better value
Convenience (includes online channel option)
High merchandise service levels for “basics”
Clean bathrooms

14. Marketplace Equilibrium
Equilibrium exists when:
ROI is high enough to justify keeping capital invested in retailing, but
Not so high as to invite more competition
Marketplaces are out of balance, in terms of retail establishments, when they are either:
Overstored
Understored

15. Suppliers as Partners and Competitors
Partners or Competitors?
A retailer must develop a loyal group of patrons that encourages the supplier to accommodate the needs of its retail partner.
Manufacturers routinely evaluate their investments and marketing money
Toss-up between providing to retailers and marketing “direct”
Retailers must offer a differential advantage for their suppliers yet still maintain profitability.

16. Divertive Competition is
Types of Competition
Intratype
Intertype
Divertive Competition is
more likely here. Ra Ra Ra Rb

17. Four Theories of Retail Competition
The Wheel of Retailing
The Retail Accordion
Retail Life Cycle
Resource-Advantage (RA) Theory
Note: the term “theory” is used loosely here as only the last is a theory*

18. The Wheel of Retailing

19. The Retail Accordion Retailers…
Begin as outlets offering wide variety and assortment (e.g., the General store)
Evolve into more specialized stores with limited variety and assortment (e.g., the department)
Expand to offer more variety and assortment (e.g., the Supercenter)
Continue to repeat process of expansion and contraction.

20. The Retail Life Cycle

21. Resource-Advantage Theory
States that firms gain competitive advantage based upon the resources they have available.
Resources need to be:
Rare,
Nonimitable,
Nonsubstitutable, and
Valuable (i.e., able to produce value for customers)
Further, all retailers cannot achieve superior results at the same time.

22. Future Changes in Retail Competition
Changes in retail competition are likely to come from:
Nonstore retailing
New retailing formats
Integration of technology
Increasing use of private labels

23. Nonstore Retailing Includes: Growth due to:
Direct sales, catalogs, and the internet
Represents roughly 7% of total retail sales currently
Internet is only one expected to grow in the future
Growth due to:
Accelerated communication technology,
More educated consumers,
Web 2.0

24. New Retailing Formats Include: Off-price retailers Supercenters
Recycled merchandise retailers
Liquidators
Rentals

25. Integration of Technology
Include, but are not limited to:
Direct Store Delivery systems (DSDs)
Radio Frequency Identifiers (RFIDs)
Customer identification cards (e.g., Casinos)

26. What You Should Have Learned… Chapter’s Learning Objectives
The various models of retail competition.
The various types of retail competition.
The four theories used to explain the evolution of retail competition.
The changes that could effect retail competition.