Question

8. Explain how investment by one firm can influence the drive of investment by another firm. In your small group, briefly discuss one or two examples that you see in real life.

Answer 1

Firms in a typical market are competitors, for they try to compete with each other in order to attract more customers and thus make more sales and earn higher profits.

When one firm engages in investment, it means the firm is investing in its technology or advertising in order to be either able to produce goods at a lower cost or attract more customers. The bottom line here is to make more sales and thus earn higher profits.

This leads to the investing firm being able to capture a larger portion of the market share and leaving less room for the other competitors.

This induces the competitor firm to engage in investment as well so as to keep its market position stable and not get out of competition.

For example, during 2000, when Pepsi, one of the biggest names in the soft drink industry engaged in gruesome advertising to increase sales, Coca Cola responded in the same way and invested a lot of money to advertise its new products.

This was necessary on the part of Coca Cola to not let the market slips from its hands and engage in competition again by investing on the similar lines as of its competitor firm.