Incompatibility Hypothesis: Graphical and Mathematical Explanations
The purpose of this article is to demonstrate that there are certain circumstances in markets with a hyperbola-shaped demand function that support Porter’s incompatibility hypothesis. Functions that are shaped like hyperbolas are present in markets characterised by strongly differentiated (meaning pricy) products while at the same time a wide range of very low-priced products is available. The methodology is such that the turnover function is derived from the demand function which resembles the shape of a hyperbola. This does not lead to – in contrast to what has been taught so far – a reverse U-shape but a wavelike turnover function characterised by a U-shaped valley. This effect, caused by the price elasticity of demand, should contribute - in connection with economies of scale - to the phenomenon of being “stuck in the middle” in markets where a similar demand function is present. The value of the paper is that a phenomenon caused by the price elasticity of the demand is shown, which may help explain the occurrence of the effect of being stuck in the middle. The practical implications of the article lie in the fact that there is indication that the obvious strategic positioning of enterprises and the consequences for price policy may gain a better understanding to indicate that mathematical effects deriving from the price elasticity of demand may also contribute to the effect of “being stuck in the middle”. This is demonstrated by the broken-rational demand curve resp. demand function and shows why the shift from a cost leadership strategy to a differentiation strategy – or vice versa - may be difficult.
Incompatibility Hypothesis, Porter’s Competitive Strategy, Price-Sales-Function, Strategy, Hybrid Strategy, Price Elasticity of Demand
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