What effect does a price drop by a competitor have on your own demand?

When a competitor drops their prices, it can lead to a decrease in your own demand if consumers start to prefer the cheaper alternative. This is particularly relevant in markets where products are similar or have close substitutes. As customers are lured by the lower price offered by the competitor, they may divert their purchasing decisions away from your product, thus reducing the quantity demanded for yours.

In many cases, consumers behave rationally and will opt for better deals, leading to a direct relationship between the price of competing products and the demand for your own. This phenomenon is greatly influenced by the concept of price elasticity of demand; however, in this situation, the competitor lowering their prices serves as a primary factor leading to a decrease in demand for your product.

Therefore, the understanding of this market behavior emphasizes the importance you must place on competitor pricing strategies and their implications on your own pricing and demand forecasts.