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The "Flanking in a Price War" Article
The "Lessons Learned"
The study IGA asked for on price sensitivity allowed them to react with speed and confidence to a competitive price war. Knowledge gained from this study by IGA also included the value of experimentation and that experimental design strategy is essential. By working with economists interested in pricing experiments, IGA realized that a cost-effective experiment could be controlled and provide significant value added for the company. The use of a covariance design with a Bayesian decision framework established an optimum pricing strategy, a stop rule, as well as an economic risk associated with the strategy.
In response to price war and promotion threats, it was learned that pricing for stock-up items should lowered. This had the effect of drawing customers to stores to take advantage of goods that they could stockpile at relatively low storage costs. The pricing treatment for nonstock up goods were not as critical to survival and could have been increased to offset the marginal losses incurred through the price cuts to the stock-up goods. They can now equate the drawing power of the low cost goods and their effect on pricier non-stock items. Only the most discerning shopper would shop at multiple stores. They would be drawn to the best value, low cost stock-up goods and continue their shopping for other nonstock-up items that they needed as long as they were acceptable quality.
IGA learned that the results from theory and experiment could actually pay off. The experiment didn't cost that much and allowed for discriminating use of price cuts. This made the experiment easy to test and was successfully applied. When the company applied these techniques, it was able to improve its financial situation.
It also showed the benefits of cooperating over competing. Steinberg unsuccessfully tried to put everyone else out of business. Had they approached their ambitions, not through competition but through cooperation and collaboration, Steinberg indeed may have been the sole remaining market player.
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