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Market and types of price and nonprice competition in India

Introduction

One of the very first challenges of a firm is to compete with itself, by minimizing the cost as possible of the product and services that can be made available in the market. Price and cost have a direct relationship, we can observe price from a consumer point of view and cost from producer, because “what will be the price” and output is the most important question to address. The pricing and output decision actually depends on how much expense the producer had incurred while production and what kind of market structures the firm is entering into. The ability of firms to control the price and use it as a competitive weapon is the most important indicator of the degree of competition. In this answer I will try to analyse the market and the type of price and non price competition the firm face.

Price competition non price competition

Price competition means when competition is based on the price of the non price competition plays a secondary role in determining the degre

Product, rather than product differentiation. To compete in this scenario e of competition. Non price competition involves firms trying to gain

the producer should keep the cost minimum. An advantage over on e another by differentiating their product using

Characteristics such means as advertising, promotion, innovation etc.

Must be willing and able to change the price frequently. Characteristics

The competitors may also respond quickly to this initiative emphasize product feature, service, quality etc

In this competition the customers adopt the lowest priced brand can build customer loyalty

Sellers move with the demand curve by fluctuation of prices. Should be difficult for competitors to emulate the differences.

Promotes the distinguishing feature to create awareness.

Price differences must be offset by the perceived benefits

Sellers shift the demand curve to the right by stressing distinctive

attributes.

Perfect competition

Imperfect Competition

Oligopolistic

Monopoly

Monopolistic

Perfect competition

In a perfectly competitive world there really is no overt competition between economic units. As buyers and sellers make business decisions, they do not have to take into account the effect of their actions on other participants in the market. In perfect competition there are large number of sellers and buyers in the market to exert significant influence over price. In this market the firm is a price taker.

Characteristics

Number and size (sellers) many small sellers. No sellers are able to exert a significant influence over price.

Number and size (buyers) many small buyers. No buyer is able to exert a significant influence over price.

Product differentiation product undifferentiated. Consumer demand based on price.

Conditions of entry and exit easy entry and exist. Resources are easily transferable among industries.

The firm in perfect competition maximizes by producing at the rate of output where price equals marginal cost.

In the short run, managers of a firm should shut down the operation if price is below average variable cost.

If price is greater than average variable cost but less than average total cost, the firm should continue to produce in the short run because a contribution can be made to fixed costs.

In the long run, economic profit is eliminated by entry of new firms.

In perfectly competitive market, the value of the last unit exchanged equals the opportunity cost of producing it capital moves to its highest valued use, and production takes place at the minimum point on the average cost curve.

Monopoly

Monopoly is the form of market organization in which a single firm sells a product for which there are no close substitutes. Thus, the monopolist represents the market and faces the market’s negatively sloped demand curve for the product. In monopoly the firm is the industry with a unique product which further creates a absolute market power subject to government regulation. Market entry and exit most directly affects the ability of a firm to earn economic profits in the long run. In monopoly market entry and exit is very difficult or legally impossible. Non price competition is not necessary in it.

A monopoly firm’s ability to set its price is limited by the demand curve for its product and, in particular, the price elasticity of demand for its product.

The ability of a monopoly to set its price is further limited by the possibility of rising marginal costs of production. If this is the case, then surely at some point the increasing cost of producing additional units of output will exceed the decreasing marginal revenue received from the sale of additional units.

A firm that exercises a monopoly power should set it price level that results in MR=MC.

Monopolistic competition

Monopolistic competition is the form of market organization in which there are many sellers of a heterogeneous or differentiated product and entry into and exit from the industry are rather easy in the long run. Differentiated products are those that are similar but not identical and satisfy the same basic need, it may also be based on a more convenient location or more courteous service. The market power in this completion is based on product differentiation.

If the total demand were increasing while newcomers entered the market, the direction and extent of the shift in demand would be uncertain.

In long run firms would be earning normal profit. If firms either earned above normal profit or incurred losses, then the entry or exit of firms, along with the fixed capacity by existing firms, cause each firm’s demand curve either to increase or decrease until firms in the market earned only normal profits.

Oligopoly

Oligopoly is a market dominated by a relatively small number of large firms. The product they sell may be either standardized or differentiated. Part of the control that firms in oligopoly markets exercise over price and output stems from their ability to differentiate their product. But market power also comes from their sheer size and market dominance.

Analysis and interpretation

Market types

Market characteristics perfect competition monopolistic competition oligopoly monopoly

Number and size of very large number large number of relatively small number of one

Firm of relatively small firm small firms relatively large firms

Type of product standardized differentiated standardized or differentiated unique

Market entry and exit very easy easy difficult very difficult

Non price competition impossible possible possible or difficult not necessary

Perfect competition monopoly monopolistic competition oligopoly

Market power? No yes, yes yes

Mutual interdependence no no no yes

among competing firms?

Non price competition? No optional yes yes

Easy market entry or exit? Yes no yes, relatively easy no, difficult

Elasticity

The demand curve slopes downward to the right; this means that lower the price, the greater is the quantity of the product consumed. We will discuss the question of how sensitive the change in quantity demanded is to a change in price. The measurement of this sensitivity in percentage terms is called the price elasticity of demand (PED).

E_d = \frac{\%\ \mbox{change in quantity demanded}}{\%\ \mbox{change in price}} = \frac{\Delta Q_d/Q_d}{\Delta P/P}

(Reference: Managerial economics, Paul. G . Keat (6th edition, Pearson education)

Mostly price elasticities are negative, although people ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Giffen goods have a positive PED. In general, the demand for a good is inelastic when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.

Value

Descriptive Terms

Ed = 0

Perfectly inelastic demand

- 1 < Ed < 0

Inelastic or relatively inelastic demand

Ed = 1

Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand

- ∞ < Ed < - 1

Elastic or relatively elastic demand

Ed = - ∞

Perfectly elastic demand

(Source: http://en.wikipedia.org/wiki/Price_elasticity_of_demand)

C:\Users\Avi\Downloads\Price elasticity of demand - Wikipedia, the free encyclopedia_files\220px-Elasticity-inelastic.png C:\Users\Avi\Downloads\Price elasticity of demand - Wikipedia, the free encyclopedia_files\220px-Elasticity-elastic.png

Perfectly inelastic demand perfectly elastic demand

elast.gif

Cross price elasticity of demand

The cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good.

The formula used to calculate the coefficient cross elasticity of demand is

E_{A,B} = \frac{\%\ \rm{change}\ \rm{in}\ \rm{demand}\ \rm{of}\ \rm{product}\ A}{\%\ \rm{change}\ \rm{in}\ \rm{price}\ \rm{of}\ \rm{product}\ B}

(Reference: Managerial economics, Paul. G . Keat (6th edition, Pearson education)

C:\Users\Avi\Downloads\Cross elasticity of demand - Wikipedia, the free encyclopedia_files\200px-Cross_elasticity_of_demand_complements.svg.png

C:\Users\Avi\Downloads\Cross elasticity of demand - Wikipedia, the free encyclopedia_files\magnify-clip.png

Two goods that complement each other show a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls

C:\Users\Avi\Downloads\Cross elasticity of demand - Wikipedia, the free encyclopedia_files\200px-Cross_elasticity_of_demand_substitutes.svg.png

C:\Users\Avi\Downloads\Cross elasticity of demand - Wikipedia, the free encyclopedia_files\magnify-clip.png

Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises

C:\Users\Avi\Downloads\Cross elasticity of demand - Wikipedia, the free encyclopedia_files\200px-Cross_elasticity_of_demand_independent.svg.png

C:\Users\Avi\Downloads\Cross elasticity of demand - Wikipedia, the free encyclopedia_files\magnify-clip.png

Two goods that are independent have a zero cross elasticity of demand: as the price of good Y rises, the demand for good X stays constant

(Source: http://en.wikipedia.org/wiki/Cross_elasticity_of_demand)

Income elasticity

We can measure the responsiveness in the demand for a commodity to a change in consumer’s income by the income elasticity of demand. This is given by the percentage change in the demand for the commodity divided by the percentage change in income, holding constant all the other variables in the demand function, including price.

Formula

\epsilon_d = \frac{\%\ \mbox{change in quantity demanded}}{\%\ \mbox{change in real income}}

(Reference: Managerial economics, Paul. G . Keat (6th edition, Pearson education)

A negative income elasticity of demand is linked with inferior goods; an increase in income will give a fall in the demand and may lead to changes to more luxurious substitutes.

A positive income elasticity of demand is linked with normal goods; an increase in income will give rise in demand. If income elasticity of demand of a commodity is less than 1, it is a necessity. If the elasticity of demand is greater than 1, it is a luxury good or superior good.

315px-Income_elasticity_of_demand_-_inferior_goods.svg.png

Inferior goods demand falls as consumer income increases

If IEoD > 1 then the good is a Luxury Good and Income Elastic

If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income Inelastic

If IEoD < 0 then the good is an Inferior Good and Negative Income Inelastic

(Source: http://economics.about.com/cs/micfrohelp/a/income_elast.htm)

The shampoo market in India is growing at a faster pace significantly since 1970 after the concept of liberalization and globalization came into existence, and after that it became a lifestyle and a necessity in the urban and semi urban homes.

The details of the store visited are:

Name: 6 ten

Place: New Delhi ( india)

Type: Departmental Store.

According to the research done the high price shampoo with better quality was place in the middle section, so that consumer could see those shampoos first and can make them their first preference.

All other brands having almost same pricing were placed on the top section, while the cheap and local shampoos were at the bottom.

Some of the brands that came across were Dove, Pantene, L’Oreal, Garnier fructis, fiama di wills ,Clinic plus, clinic all clear, vivel . Big player s in shampoo market are ITC, Hindustan uniliver, proctor and gamble, Dabur, Johnson& Johnson.

Pricing of Pantene, dove, L’Oreal was almost the same for the consumer that can afford good quality product. While fiama, clinic all clear, vivel were relatively little low priced.

During the research one interesting thing that came in mind was some international brands followed good marketing concepts like skimming and penetration. Example L’Oreal came with L’Oreal shampoo to skim the market and when more players came in, to retain their market share garnier was launched.

According to me, Indian shampoo market is into monopolistic competition because of many producers and buyers in the market. Today non price competition plays a vital role in this market, each firm or producer is trying to sell its product on the basis of product differentiation which further decides the market power and share of the firm. For example –medicated, beauty, anti hair fall, anti dandruff, shampoo for dry, normal, oily hairs.

Mutual interdependence among competing firms is absent due to, as discussed earlier every firm wants to achieve its core competence in various category of shampoo.

It is difficult to tell the elasticity in this, because of the fact India is a land of different culture with second largest population and the demand of people here depends on various factors like taste and preference, income, availability, requirement, brand loyalty etc. so after conducting a short survey with 20 people some of the key points to notice was

1) People were willing to pay more for good quality and effective product

2) Demand for the aware product

3) Consumer switches to the substitutes, according to availability.

Since a monopolistically competition firm produces a differentiated product, the demand curve it faces is negatively sloped, but since there are many close substitutes, the demand curve is highly price elastic (- ∞ < Ed < - 1). The price elasticity of demand is higher the smaller is the degree of product differentiation.

Recommendations

In monopolistic competition a firm should follow the MR=MC rule to maximize its profit (or minimize its loss).This rule is a concept called equalizing at the margin, which can also be used to decide on the optimal expenditure level of a non price factor that influence a firm’s demand. For example, let us consider advertising expenditure. Suppose

MCA = cost of advertising associated with an additional unit of sales of a firm’s product

= total cost of advertising/ delta change in quantity demanded

And,

MRA = marginal revenue resulting from advertising

= total revenue/ delta quantity minus delta total cost other than advertising / delta

quantity

= MR – MC (other than advertising)

We can therefore say that a firm will increase its advertising expenditure up to the point at which MRA = MCA.

In long run the firm break even and produce on negatively sloped portion of their LAC curve which brings normal profit because of newcomers entry in market, so it is recommended that firms should ear maximum possible profit in short run before entering into long run.

Conclusion

Increasing competition in the Indian market has led producers to think more seriously. Name the product category and most of the global brands are available there. In every product category, the Indian consumer has at least half a dozen choices. This has led to a positive competition among the firms to catch the customer and retain them with their brands . the prices have fallen and the quality has significantly improved.

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