Regulation by Competition

Regulation by Competition

 

From a buyer’s point of view, composition is the mainspring of good pricing. As was discussed previously, most producers do not have the same real costs of production. Even when their costs are the same, their competitive positions can be quite different. Hence, their prices also can be quite different. Consider the following example. Assume that a supply manager is ready to purchase 10,000 specially designed cutting tools. He sends the specifications to five companies for quotations. All five respond. For the sake of simplicity, assume that direct costs in those five companies are identical. Further, assume that each company uses the same price-estimating formula; overhead is figured as 150 percent of direct labor, and profit is calculated as 12 percent of total cost.

 

Even with all the controlling figures fixed, the companies mare than likely would not quote the same price, because the cost of production and profit are only two of the factors a seller considers in determining an asking price. In the final analysis, the factors stemming from competition ultimately determine the exact price each firm will quote. That is, when faced with the realities of competition, price any specific firm will quote will be governed largely by its need for business and by what it thinks its competitors will quote, not by costs or profits.