Our story starts during the 1990s. When Procter & Gamble (P&G) first advertised Febreze as a room deodorizer, they thought it would be an instant success. However, the households that most needed it did not respond and sales were tepid. Realizing they had targeted the wrong people, P&G had to reconsider their market. The results were new ads that had a homemaker smiling as she sprayed Febreze after completing her chores.
P&G was successful because they understood our habits. Once businesses know the patterns we habitually follow, they can figure out how to insert their products into our lives. For P&G, that meant connecting Febreze to homemakers’ cleaning habits.
According to the NY Times Magazine, Target also understood how to use our habits to increase their sales. The key was data that let them identify which shoppers might soon become parents. Knowing that new parents altered their established shopping habits, they offered coupons that would expand what they bought at Target precisely when they were susceptible to change.
Our bottom line: Based on their understanding of our habits, P&G and Target used different competitive methods. How they competed depended on their market structure.
The Economic Lesson
Moving from most to least competitive, there are 4 basic market structures: perfect competition, monopolistic competition, oligopoly, monopoly.
Oligopoly and monopolistic competition frequently necessitate product differentiation. As an oligopoly, P&G faces few firms with similar products. By contrast, as a monopolistically competitive firm, Target competes against many firms selling the same items.
Both, though, have to let consumers know what is special about what they sell. For P&G, ads displayed Febreze as a reward. For Target, strategically timed coupons differentiated them from others who might not have the same information about their customers
In The Power of Habit, a new book by Charles Duhigg, you can read more about how our habits affect our purchases.
An Economic Question: Focusing on a firm such as Coca-Cola, explain specific ways in which an oligopoly competes.