ABSTRACT
This chapter deals with issues related to competition. The Cournot and Bertrand economic models are reviewed together with the implication that prices will be driven toward marginal cost with just a few competitors. Consultants recommend that products be differentiated to gain monopoly power and, in oligopolistic competition, to avoid price wars. Consultants offer suggestions as to how products and related services can be differentiated including varying warranties, after sales service, priority deliveries etc. To avoid price wars discipline in price leadership and followership together with avoidance of hasty reaction to competitor price reductions is recommended.
The “winner’s curse” is discussed, and examples provided of the tendency to overbid leading to unprofitable contracts. Experiments show that participants continue to overbid even in repeated trials and there are many examples of over-paying to win a contract or purchase a company. There are obvious implications for both buyers and sellers.
Finally, the regulatory environment is reviewed. Industry prices might be managed but any hint of collusion must be avoided. There are severe penalties in many jurisdictions for contravention of regulations and individuals can be personally at risk.
