Why might firms with market power engage in non-price competition?

Firms with market power may engage in non-price competition to differentiate their products and increase market share.

Non-price competition refers to the strategies used by firms to attract customers without changing the price of their products or services. This can include improving the quality of the product, offering better customer service, investing in advertising and branding, or adding extra features to the product. Firms with market power, such as monopolies or oligopolies, often engage in non-price competition as they have the ability to influence the market and set their own prices.

One of the main reasons why these firms engage in non-price competition is to differentiate their products from those of their competitors. By improving the quality of their products or offering better customer service, they can make their products more appealing to consumers, which can help them increase their market share. This is particularly important in markets where there are a few large firms competing with each other, as it can help them stand out from their competitors and attract more customers.

Another reason why firms with market power might engage in non-price competition is to create barriers to entry for potential competitors. By investing heavily in advertising and branding, they can create a strong brand image and customer loyalty, which can make it difficult for new firms to enter the market and compete with them. This can help them maintain their market power and continue to set their own prices.

Furthermore, non-price competition can also help firms with market power to maximise their profits. By differentiating their products and creating barriers to entry, they can reduce the elasticity of demand for their products, which means that they can increase their prices without losing a significant number of customers. This can help them increase their revenues and profits.

In conclusion, firms with market power often engage in non-price competition to differentiate their products, increase their market share, create barriers to entry for potential competitors, and maximise their profits. This strategy can be very effective in markets where there are a few large firms competing with each other, as it can help them stand out from their competitors and attract more customers.