Introduction
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. A high PED indicates that a small change in price will result in a large change in quantity demanded. In a competitive market, where there are many buyers and sellers of similar products, firms often face high PED. This has significant implications for their pricing strategies.

Characteristics of a Competitive Market
A competitive market is characterized by the following features:


⭐Large number of buyers and sellers: This prevents any single firm from having significant market power to influence prices.
⭐Homogeneous products: Products are largely identical or substitutable, giving consumers many choices.
⭐Perfect information: Buyers and sellers have access to complete information about prices and product quality.
⭐Free entry and exit: New firms can easily enter the market if there are profits to be made, and existing firms can exit if they incur losses.


These features collectively contribute to high PED for individual firms in competitive markets. Since products are similar and buyers have numerous options, a small price increase by a single firm could lead to a significant drop in demand as consumers switch to competitors. Conversely, a price decrease might attract many new customers from rivals.

Implications of High PED for Pricing Strategy
The high PED in a competitive market has several implications for a firm's pricing strategy:


⭐Limited pricing power: Firms with high PED have limited ability to set prices above prevailing market levels. If they attempt to raise prices, they risk losing customers to competitors who are selling similar products at lower prices.
⭐Price as a key determinant of demand: Price becomes a crucial factor in determining the demand for a firm's product. Even a slight price difference can significantly impact sales volume.
⭐Focus on cost minimization: To remain profitable, firms with high PED must focus on minimizing their production costs. This involves efficient use of resources, economies of scale, and innovation to reduce production expenses.
⭐Non-price competition: Firms cannot rely solely on price to attract customers in a competitive market. They must engage in non-price competition, such as:

⭐Branding: Building a strong brand image to differentiate their product from competitors.
⭐Customer service: Offering excellent customer service to build customer loyalty.
⭐Product differentiation: Introducing new features or variations to their product to make it stand out from the competition.



Examples
Several industries exemplify the competitive market dynamic and high PED. The grocery industry, for example, is highly competitive with numerous large retailers like Walmart and Kroger offering similar products. They compete primarily on price and cost efficiency, often resorting to price matching and promotional strategies. The airline industry is another example, with numerous airlines vying for passengers on similar routes. They frequently use price wars and discounts to attract customers and fill seats, showcasing the sensitivity of demand to price fluctuations.

Conclusion
In a competitive market, high PED dictates that firms must prioritize cost efficiency and non-price competitive strategies. They have limited control over prices and cannot rely solely on price adjustments to attract customers. By minimizing production costs and differentiating their products through branding, customer service, and product innovation, firms can thrive in a competitive environment even with high price elasticity of demand.

Sources:

Mankiw, N. G. (2014). Principles of microeconomics. Cengage Learning.
Krugman, P. R., & Wells, R. (2013). Economics. Worth Publishers.