Price Competition vs. Quality Competition: Evidence from a Survey

The argument that Japanese firms which operate under a price competition paradigm should change their strategy from price competition to quality competition to improve their productivity is prevalent, but empirical evidence to support this argument has rarely been presented. This study, using data from an original firm survey, presents findings on firms' strategy on price/quality competition and on the relationship between this competition strategy and firm characteristics. The results indicate, first, that the majority of firms prefer quality competition to price competition and this tendency is stronger among firms operating in the service industries. Second, firms which employ a quality competition strategy tend to have highly educated employees, to actively invest in intangible assets such as R&D, and demonstrate a higher tendency to engage in innovation. Third, the profitability of firms that employ a quality competition strategy is higher than firms with a price competition strategy, but the difference in productivity between the strategies is unclear.