With the right product differentiation strategy, you can steal customers from your competition without provoking a price war.
An aspiring entrepreneur notices the heavy foot traffic outside a busy specialty coffee shop near a university. Sensing untapped profit potential, she opens a competing coffee shop across the street. But when the incumbent lowers its prices and the entrepreneur is forced to respond in kind, she finds herself struggling to stay afloat. What could she have done differently to capture a share of the market without causing a price war?
Professor Michael Riordan is using a game theory approach to study how incumbents react to the entry of new firms. “The key issue is designing products to avoid head-to-head competition,” he says, “so that there is not a substantial number of consumers in the market who are more or less indifferent between your product and your competitor’s line. Because if there are, it will be tempting to try to attract them through a lower price.”
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