Consumers and rival firms can be affected in different ways.
A strategy changes more than the initiating firm's profit. Consumers may face different prices, quality, variety, access or search costs. Consumer surplus compares willingness to pay with what buyers pay; revenue is not its measure. Rival firms may lose sales, imitate the strategy, change costs or exit, affecting competition over time. A lower price can help current buyers while later changes in choice or service create other effects. Identify whose outcome is being considered, the counterfactual and the time horizon.
- Consumers
- Prices, quality, variety, access and search costs matter.
- Rivals
- Revenue losses differ from profit losses because costs can change.
- Time
- Immediate gains can differ from longer-run competition effects.
Compare the relevant gains and losses
Consumer surplus
Buyer willingness to pay minus payment, summed over purchases; it is not seller revenue.
Counterfactual
The counterfactual is what would likely happen without the strategy or under an available alternative. Compare those outcomes, rather than an ideal world with no costs.
Worked example: A supermarket introduces its own brand
A supermarket introduces a low-priced range sold under its own store brand. Some households switch from branded products and pay less. A small supplier loses orders, while quality tests and long-run availability have not yet been assessed.
- Lower expenditure for comparable products can benefit switching households, but willingness to pay and quality determine their full surplus change.
- The supplier's lost revenue need not equal its lost profit because avoided production costs also matter.
- If the supplier adapts or serves a different segment, long-run competition may differ from an immediate sales-loss prediction.
- A supported assessment needs price, quality, access and competitor-response evidence; it cannot be settled solely by the supermarket's profit.
Watch out for this
A firm's revenue increase is the same as an increase in consumer surplus.
Revenue is seller receipts. Consumer surplus depends on buyer valuations relative to prices for units purchased.
Check your understanding
A rival loses $100 revenue but saves $70 in relevant cost. What is its profit change under unchanged other conditions?
- -$100.
- -$30.
- +$170.