In conjunction with a cost-leadership strategy we should expect to see the firm periodically use promotional pricing and informative advertising strategies. In between its promotional-pricing campaigns we might expect the firm to assume the role of price leader. Let us discuss each of these briefly.
Promotional pricing, introduced in Chapter 10, involves placing the product temporarily “on sale” in order to stimulate its sales. If the firm is the cost leader it can better afford this strategy, since its profit margins may still be acceptable at the “sale” prices. Higher-cost firms will be less inclined to use promotional pricing, since it may reduce their profit margins to less-than-acceptable levels. Thus they will tend to use it
less often, and will less likely respond to the low-cost firm’s “sale” with a matching price reduction. The low-cost firm may therefore expect a more elastic demand for its product than it would have if rivals’ costs were similar.
Advertising will be necessary to inform potential buyers that the product is being placed on sale, to remind buyers of the quality features of the product, and to inform buyers where the product is available at the sale price. Such informative advertising is often little more than a picture of the item with a price attached, perhaps including the “regular” price for comparison, and perhaps also including a few words and numbers specifying features of the product.
Since search products tend to be more or less symmetrically differentiated, there is little to be gained from persuasive advertising—that is, attempting to persuade buyers to switch products on the basis of some feature that is only slightly better than that of competitors. Persuasive advertising that relates to experience and credence attributes would be more effective, but these attributes carry only a small weight in the buyer’s purchasing decision for a search product. Thus the lack of important experience or credence attributes and the lack of strong differentiating features that can be advertised effectively mean that advertising messages for search goods are primarily informative, rather than persuasive. Since informative advertisements can be shorter and require only the facts (rather than the imagery, expensive art and camera work, and hired “celebrities” of persuasive advertising), advertising expenditures for search products will be less than for experience or credence products, other things being equal.
Finally, whether or not the cost leader periodically engages in promotional pricing, we should expect it to seek the price leadership role in order to set price at the level which best serves its own objectives. The low-cost-firm price-leadership model, introduced in Chapter 9, is appropriate for the short-run profit maximizer. If the firm’s time horizon extends beyond the short run, the sales-maximizing model (subject to a minimum profit constraint) or one of the limit-pricing models, also introduced in Chapter 9, may be appropriate, depending on the height of the barriers to entry, as discussed in Chapter 11.