Rivalry occurs among firms that vie for patronage by means aside from price competition. Competing solely on price makes sense only when the classical free enterprise model's premises, notably homogeneous goods and firms-both suppliers and customers--holds true. Although simpler analytically and more apt to yield definite equilibria, price competition seldom produces an even temporarily positive economic profit greater than zero. Hence, the few business executives aware of these facts are unlikely to try to deduce practical strategies from this model, while those less well informed are unlikely to learn how they erred. As a premise of undifferentiated goods and firms demonstrably does not fit the U.S. man-made fibers industry after 1948, the various sorts of rivalry used by the firms composing this industry, either instead of or to supplement price competition, merit consideration.
Rivalry based on nonprice activities resists assessment. Its effects are extremely hard to quantify in both theory and practice. Such efforts also are often inherently subjective in character and therefore notoriously hard to evaluate objectively. The crucial matter of the direction of causality is so uncertain as to often be indeterminate. For instance, one intuitively expects advertising to produce sales, and not the reverse. But what is causality's true direction if, as often happens, this year's advertising budget is set as a fixed proportion of sales one, two or more calendar years ago? Then, either sales cause advertising or both are inextricably interdependent. Uncertainty about the timing and the effects of nonprice activities further complicates the problem of evaluation. Nevertheless, an attempt was made to understand and quantify rivalry in the U.S. man-made fibers industry including its trade-offs with price. This originally was done to better understand and predict price versus nonprice trade-offs in the U.S. man-made fibers industry. Only later was the question raised about whether the method has general merit. This chapter's first major section treats these issues.
Economists theoretically know how to optimize any mix of price and nonprice activities. In theory, one need only do four things. First, ratio each input's--including nonprice activities--marginal physical product to its price. Second, track those