competition-based pricingpricing methods which determine the PRICE of a product primarily on the basis of the prices charged by competitors.
In markets where products are highly standardized (i.e. COMMODITY-TYPE PRODUCTS), customers are likely to see competing brands as close substitutes for one another, so that any price differences would cause switching to the lower-priced brand. In such markets a seller has little pricing latitude and must set the price at the going rate as determined by supply and demand. With few manufacturers supplying the product (i.e. OLIGOPOLY), any one firm will be acutely aware of the harmful effects on its market share and sales volume of a price which is even slightly higher than those of its competitors and will therefore tend to charge an identical price to competitors.
Where suppliers are required to put in a sealed price bid or tender to supply, for example, components to a manufacturer, or build a complete factory or ship, competitive conditions may be paramount. A firm must guess the likely sealed bid prices of its competitors for the work and in the light of its own cost conditions make an appropriate price bid. See COST-BASED PRICING, DEMAND-BASED PRICING.