No business operates in a vacuum. Managers must always be aware of the actions of their competitors. At one extreme, for companies such as Home Depot or Texas Instruments, alternative or substitute products of competitors hurt demand and cause them to lower prices. At the other extreme, companies such as Apple, Miele, and Porsche have distinctive products and limited competition and are free to set higher prices. When there are competitors, managers try to learn about competitors’ technologies, plant capacities, and operating strategies to estimate competitors’ costs—valuable information when setting prices because it helps managers understand how low competitors are willing to go on price without incurring a loss.
Because competition spans international borders, tariffs and fluctuations in exchange rates between different countries’ currencies affect costs and pricing decisions. For example, if the U.S. government imposes 25% import tariffs on certain products from Mexico, Mexican producers have to pass the additional costs on to U.S. consumers in the form of higher prices if they want to maintain their profits, making the products less competitive in U.S. markets. In contrast, if the peso weakens against the U.S. dollar, Mexican producers receive more pesos for each dollar of sales. These producers can lower prices and still make a profit; Mexican products become cheaper for American consumers and, consequently, more competitive in U.S. markets.