To explain a competitive pressure, trace a chain: the pressure, its effect on the firm’s sales or price, the effect on revenue, and the response the firm might make. It appears in short explanation questions on any case with more than one seller.
It uses the features from identifying structural features and prepares you for describing pricing constraints.
What does a good chain look like?
Each link should be a cause and an effect joined by a reason word such as “because”, “so” or “which means”.
- Pressure: what has changed in the market.
- Effect on the firm: sales fall, or the firm must cut price to keep them.
- Effect on revenue or profit: use numbers if the case gives them.
- Possible response: lower price, improve quality, cut cost, or accept lower sales.
Use “may” or “is likely to” for the response, because the case rarely tells you what the firm decides.
Worked example
Warung Selera is a fictional café in the town of Bukit Mawar. It sells 200 lunch sets a day at RM10, so daily revenue is RM2,000. A new café, Dapur Anjung, opens next door selling a very similar lunch set at RM8. After the opening, Warung Selera sells only 140 lunch sets a day at RM10. It then lowers its price to RM9 and sells 170 sets.
Question: Explain how the new café affects Warung Selera.
Step 1, pressure: a close rival now offers a similar lunch set at a lower price (RM8 against RM10).
Step 2, effect on sales: some customers switch to the cheaper, similar option, so daily sales fall from 200 to 140.
Step 3, effect on revenue: at RM10, revenue falls from RM2,000 to 140 × RM10 = RM1,400, a fall of RM600.
Step 4, response: Warung Selera cuts its price to RM9 and sales recover to 170. Revenue is now 170 × RM9 = RM1,530. That is better than RM1,400 but still below RM2,000.
Conclusion: The rival has forced the café to choose between losing customers and accepting a lower price. Revenue ends RM470 lower than before, and the café may also look for ways to lower its costs or make its lunch set different.
The mistake to watch for
A common slip is to state the pressure and stop.
Mistaken answer: “Dapur Anjung is a competitor, so Warung Selera is affected badly.”
The student named the rival but never linked it to sales, price or revenue, and “badly” has no evidence behind it.
The correction is to add the next link every time: what happened to sales, then to revenue. Use at least one number from the case.
Check yourself
1. A fictional bicycle shop, Roda Cepat, sells 50 bikes a month at RM600. A rival opens nearby selling similar bikes at RM550, and Roda Cepat’s sales fall to 38 a month at the old price. Calculate the fall in monthly revenue at RM600.
Show answer
Before: 50 × RM600 = RM30,000. After: 38 × RM600 = RM22,800. Fall: RM30,000 − RM22,800 = RM7,200.
2. Write a four-link chain for the situation in question 1.
Show answer
A close rival sells similar bikes for RM50 less (pressure), so some buyers switch and sales fall from 50 to 38 (effect on sales), which cuts revenue by RM7,200 a month (effect on revenue). Roda Cepat may respond by lowering its price or improving its service.
3. Why might competition have a weaker effect if the two shops sold quite different bikes?
Show answer
If products differ, buyers may value the features of one shop’s bikes and be less willing to switch for a small price difference. The rival’s lower price then pulls fewer customers away.
Where this leads next
Next, distinguish product differentiation from monopoly, because differentiation is one way a firm responds to pressure. Then try the market structures practice set. The percentage-base explorer is useful when you need to check percentage changes in sales.
If you follow the chain in class but struggle to write it unprompted, our teachers can work on that in online one-to-one Economics tuition.