TYPES OF MARKET SIGNALS
Market signals have two different functions: they can be truthful indicators of a competitor’s motives, intentions or goals or they can be bluffs. Bluffs are signals designed to mislead other firms into taking or not taking action to benefit the signaller. Discerning the difference between the two can often involve subtle judgements. Market signals take a variety of forms, depending on the particular competitive behaviour involved and the medium employed. The important types of market signals are as follows:
Prior announcement of moves
This is a formal communication made by a competitor that it either will or will not take some action, such as instigating a price change. Such an announcement does not mean with certainty that the action will be taken. Announcements can be made that are not carried out, either because nothing was done or a later announcement nullified the action.
In general, prior announcements can serve a number of signalling functions that are not mutually exclusive:
Pre-empting other competitors. They can be an attempt to indicate a commitment to take action for the purpose of pre-empting other competitors. For example, indicating that it is going to launch a new product well before it is ready for the market place, seeking to get customers to wait for the new product rather than buy a competitor’s product in the meantime.
Threats to competitors. Announcements can be threats of action to be taken if a competitor follows through with a planned move. For example, a firm
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might hear that its competitor is about to lower its price. The firm might then announce that it too is to introduce a price reduction below that indicated by its competitor. Such an announcement would indicate that the firm is quite happy to engage in a price war and this may well deter the other firm from making the first price reduction.
Tests of competitors’ feelings. A firm may be contemplating the introduction of a new type of after-sales agreement but is unsure whether competitors will view this with pleasure or displeasure. By making an announcement about the new scheme the firm can test competitors’ reactions to its proposals.
Minimizing the provocation of a forthcoming strategic adjustment. This kind of approach seeks to minimize unwelcome retaliation and warfare resulting from a strategic adjustment. It usually takes the form of announcing the strategic adjustment and providing full information as to why the firm believes that the adjustment is necessary. Caution has to be exercised when interpreting such signals since the firm may simply be trying to disguise an aggressive move.
Internal marketing. Announcements can sometimes serve the purpose of seeking internal support for a move. Committing the firm to do something publicly can be a way of extinguishing internal debate about its desirability.
One of the most difficult tasks is to determine whether a prior announcement is an attempt at pre-emption or a conciliatory move. One can attempt to assess this by studying the lasting benefits that might accrue to competitors from pre-emption. If such benefits exist then it could well indicate announcements prelude pre-emption. Conversely, if the competitor acting in its own narrow self-interest could have done better through a surprise move, then conciliation may be indicated. An announcement that discloses an action much less damaging than it otherwise might have been, given the capabilities of the competitor, may usually be viewed as conciliatory. Announcements much in advance of a move tend to be conciliatory.
Announcements can be bluffs because they need not always be carried out. As such they may simply be viewed as mechanisms designed to produce some response from competitors not to continue with a line of action they may be contemplating instigating. Occasionally, it can be a bluff designed to trick competitors into expanding resources in gearing up to defend against a non-existent threat.
The medium in which a prior announcement appears may be a clue to its underlying motives.
Announcement of results or actions after the fact
These often take the form of announcements about sales figures, additions of capacity and so on. They ensure that other firms know about the data
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released and this may in turn influence the latter’s behaviour. Such announcements can be misleading, though this is not always the case.
Public discussion of the industry by competitors
Competitors often comment on industry conditions and on prospects for the future. These commentaries are often full of signals which testify to the commenting firm’s assumptions about the industry and presumably by implication the strategy they are developing. In addition to commentary on the industry generally, competitors sometimes comment on their rival’s direct moves. Such commentary can signal displeasure or pleasure with a move.