Non-price competition

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Definition

Non-price competition refers to a situation where one of the following two things happens:

  • Buyers compete with each other to acquire a good on a basis other than price. Such competition occurs in a situation of excess demand: at the given price, the demand for the good exceeds the supply. The typical cause for excess demand is a price ceiling, though it may also be caused by sticky prices or unforeseen dramatic changes in supply or demand.
  • Sellers compete with each other to sell a good on a basis other than price. Such competition occurs in a situation of excess supply: at the given price, the supply for the good exceeds the demand. The typical cause for excess supply is a price floor.

Non-price competition is closely related to rent seeking.

A typical form of non-price competition is queueing -- long waiting lines to buy the commodity.

Examples

Public services: non-price competition among buyers

Public services, many of which are offered for free, or at the same low cost, may suffer from non-price competition. There may be long queues (waiting lines) for access to public services. Here, people are paying for the free service by spending their time in line. However, the economic value of this payment is not captured by anybody.

Limited quantity, low price: non-price competition among buyers

For commodities for which there is a market shortage, people may compete with each other to get to the few places selling the commodity. Thus, people may start waiting outside the shop selling the commodity hours before it opens (see queueing), or pay others to purchase the good for them, or travel long distances looking for shops that still have the commodity.

Frills to compete under price floors

For commodities where a price floor is set as a minimum price, and this is greater than the market price, sellers might try to compete by offering more and more frills with the commodity to attract people to compensate for the above-market price they are paying. For instance, when the government sets high minimum prices for airlines, airlines may try to compete by offering frills such as fancy food or other frills. In this case, the additional frills provide some benefit to buyers at some cost to the sellers. However, it may still be a loss in the sense that for some buyers, these frills may not have much value, but they cannot buy the basic commodity without frills at a cheaper price.

Competing based on "quality" in situations where price is zero

For many Internet-based knowledge goods, such as weblog entries and search engines, the price is by default zero. The important point here is not that the market price is nearly zero, but rather, that because transactions at such small amounts of money are not economical, the price must be set at exactly zero. This forces practically all competition between such services (when attracting buyers) to be non-price competition.

Impact of non-price competition

Further information: Non-price competition is inefficient

Non-price competition is considered a form of rent seeking and is in general considered inefficient.