Price Competition Versus Non Price Competition Economics Essay

Price Competition Versus Non Price Competition Economics Essay When there is competition in firms on the basis of change in price, it is known as price competition. Price competition can involve discounting the price of a product (or range of products) to increase its demand. Various forms of market indulge in price wars in order to earn a large market share and a profit margin. As price of a product increases or decreases, it leads to fluctuations in the demand of the product of particular firms. So all the firms always keep a watch on the market forces of demand and supply, the derived equilibrium price, competition etc. in order to skim the market. Non price competition When there is competition in firms on the basis of factors other than price such as advertising, sales promotion, product differentiation, branding etc., it is known as non-price competition. Price competition vs. non-price competition Price Competition Non Price Competition Competition between the firms based on price where one firm tries to beat or match the price of the other. Firm tries to be the lowest cost giver for the product in the market. The firm must have the vision to respond to the strategy of other firm very quickly. High cross price elasticity must see more of price competition. Here the firms compete with each other with the strong factors like product differentiation, quality of the product etc. The firm tries to build consumer loyalty so that it can sell its product to the maximum number of consumers and increase its market share. They promote awareness in the consumer for the differentiation of their product. High own price elasticity must see more non price competition. Effect of price on Quantity Demanded Quantity Supplied An increase in price has an inverse relationship with the quantity demanded and a positive relationship with the quantity supplied i.e. an increase in price decreased the demand and increases the quantity supplied and vice versa. Determination of Equilibrium price The market forces of demand and supply determine the equilibrium price. This equilibrium price becomes the basis for firms in perfect or imperfect competition to charge a price for their product. Thus the firms make a cost minimising production function Figure 2: Equilibrium price: Supply and Demand forces Supply_curve_shift In the figure, equilibrium price is p0 and equilibrium quantity is QO i.e. when quantity demanded is equal to quantity supplied equilibrium is achieved. These points only show the equilibrium state but do not show the response of the change of quantity demanded and supplied with respect to price. Here comes the importance of elasticity of demand and supply. ANALYSIS OF DIFFERENT MARKET SITUATIONS WHICH GIVE RISE TO PRICE AND NON-PRICE COMPETITION Elasticity and price and non-price competition play a vital role in determining various forms of market structure, their price, demand and supply, total revenue, shape of the demand curve etc. the market structure can be delineated as follows: MARKET Market Structure Imperfect competition Monopoly Perfect Competition Monopolistic Oligopoly Market is not merely a geographical expression but it can be any place where buyers and sellers are in regular contact and they have a perfect knowledge of price. BASIC FEATURES OF MARKET Very large number of buyers and sellers exist in a market. Both homogeneous as well as heterogeneous products are available in a market. Free mobility (movement) of and services goods in a market area. Firms are free to enter and exit. FORMS OF MARKET Perfect competition Monopoly Monopolistic Oligopoly PERFECT COMPETITION Perfect competition is a market situation where large number of buyers and sellers exist. In this market, firm is a price taker whereas Industry is the price maker. FEATURES OF PERFECT COMPETITION Large number of sellers and buyers exist in perfect competition. Homogeneous products are sold in this market where the price may increase or decrease but for the whole industry otherwise it will be a given price. In this market, price remains uniform for two reasons Homogeneous products Perfect competition Firms are free to enter and exit. Price = average revenue = marginal revenue because of price uniformity. Price has no role to play due to homogeneous goods. Price remains uniform but not constant. Example stock market. Non-price competition is not possible as the products are homogeneous, advertising, promotion and branding help the firms to differentiate and create niche in the market. D S P=AR=MR=D S D INDUSTRY FIRM Figure 1.1-Price determination under perfect competition MONOPOLY MARKET It is a market situation where a single seller exists with a large number of buyers and no close substitute is available of monopoly product. FEATURES OF MONOPOLY MARKET Single seller exists in monopoly market with large number of buyers. Close substitutes are not available of the monopoly products as it may work as an obstacle for the growth of the monopoly product. Entry of new firm is very difficult in monopoly market. The existing monopoly power will take all legal as well as illegal concepts to stop the entry of new firms. Price discrimination is one of the most striking features of a monopoly market. It may be defined as charging different price from different customers for the same product on the basis of segments of consumer, quantity to be purchased and degrees of elasticity of demand. Selling cost or cost of advertisement is negligible. Demand curve facing a monopoly firm is downward sloping but less elastic and MR is always less than AR. PRICE MR AR=D QUANTITY Figure 1.2-Demand curve under monopoly market Price leadership is present in monopoly as the firm can charge a high price and take the advantage of being a sole seller but they can charge a reasonable price because it helps in long run growth. In the long run, new firms may enter the market and the existing firms market share may fluctuate. So in their own interest monopoly firm charge a reasonable price. MONOPOLISTIC COMPETITION It is a market situation where elements of both monopoly as well as competition coexist together and differentiated products are sold in the market. FEATURES OF MONOPOLISTIC COMPETITION MARKET Very large number of buyers and sellers exist. This is a virtual market which exists in reality. Differentiated or heterogeneous products are available in this market. Each seller is selling different products from others creating a monopolist tendency. In this market, price always remains in a very close range as the commodities are perfect substitutes of each other. The demand curve facing the monopolistic competition market is again downward sloping but more elastic. In this market MR curve is always less than AR i.e. the additional revenue earned is always less than the average revenue. Firms are free to enter and exit. Price competition is there in monopolistic competition market. Because of the availability of close substitutes, a change in price of one product affects the demand of other product. Price AR=D MR Quantity Figure 1.3-Demand curve under monopolistic competition Non-price competition under this form of market is possible due to availability of close substitutes of the product. The firm in order to attract more customers and retain them would compete with each other on the basis of non-price factors on promotional front i.e. advertisement etc. However, the elements of price competition are also present in this form of market but the price always keeps in a very close range. Example, Once Coke increased its price from Rs.20 to Rs.22 in order to compete with Pepsi. OLIGOPOLY MARKET It is a market situation where few sellers exist with large number of buyers and both homogeneous as well as heterogeneous products are available. There is intense competition among them as far as price and output policy is concerned. FEATURES OF OLIGOPOLY MARKET The number of sellers are more than 2 and less than or equal to 10. Both homogeneous and heterogeneous products are sold. Both collusive as well as non-collusive form of oligopoly market exists. The demand curve in oligopoly market is very difficult to determine (Indeterminate demand curve). There is non-price competition in collusive oligopoly and price competition in non-collusive oligopoly. The demand of other firms is determined by the price variation of any of the existing firms. Until and unless the rivals reaction is not known when there is a change in price, the demand curve cannot be determined. Lets discuss the concept of elasticity so that we can know about the different degrees of elasticity in various forms of market. ELASTICITY Elasticity is the degree of responsiveness for a commodity to a change in its price. Elasticity measures the sensitivity of one variable to another. When a consumer is giving response to the price change he is more elastic whereas if a consumer is not giving response to the price change, he is less elastic. DIFFERENT TYPES OF ELASTICITY Price Elasticity of Demand Price elasticity of Supply Income elasticity of Demand Cross Elasticity MEASUREMENT Elasticity can be measured by following three methods Proportion method/percentage method Geometric method/point elasticity method Expenditure or total outlay method Terminology of elasticity Term Numerical measure of elasticity Verbal Description Price elasticity of demand(supply) Perfectly or completely inelastic Zero Quantity Dd(supplied) does not changes as price changes Inelastic Greater than zero, less than one Quantity Dd(supplied) changes by a smaller % as does price Unit Elasticity One Quantity Dd(supplied) changes by exactly the same % as does price Elastic Greater than one, but less than infinity Quantity Dd(supplied) changes by a larger % as does price Perfectly, completely, or infinitely elastic Infinity Purchasers(sellers) are prepared to buy(sell) all they can at some price and none at all at an even higher(lower) price. Income Elasticity of Demand Inferior good Negative Qty dd decreases as income increases Normal good Positive Qty dd increases as income increases Income-inelastic Less than one Less than in proportion to income increase Income-elastic Greater than one More than in proportion to income increase Cross Elasticity of Demand Substitute Positive Qd of some good and price of a substitute are positively related Complement Negative Qd of some good and price of a complement are negatively related COMPARISON OF MARKETS ON THE BASIS OF ELASTICITY Market forms Price elasticity of demand Perfect competition The demand in perfect competition is perfectly elastic which means with or without change in price, quantity demanded may increase or decreases to any extent. Monopoly The demand in monopoly market is less elastic. A change in price will not affect the demand by much. As there is only single seller in monopoly market, buyers do not have much options in front of them therefore the demand is less elastic. Monopolistic The demand is more elastic in monopolistic competition. It simply means that as soon as there is a change in price, there will be a greater change in quantity demanded. The demand curve facing a monopolistic competition is downward sloping but MORE ELASTIC. Oligopoly In oligopoly market, the demand curve can be both more elastic and less elastic depending upon the rivals reaction to change in price. CONCLUSION In current market scenario, most firms compete on the basis of non-price competition. Though there are some discrepancies in the prices charged by different firms, firms most often prefer and follow non-price competition because it leads to consumer welfare as well as firms profit in long run. PART II I visited Reliance Fresh (a departmental store) in order to conduct a research on floor cleaning detergents. As I entered the store I observed that on the left hand side there is a rack with five shelves on which all the toiletries items are displayed. Floor cleaning detergents are kept on three upper shelves of the rack. Adequate space is provided for the floor cleaning detergents and they can be seen easily from both sides of the rack. Glass cleaning detergents are also put along with floor cleaning detergents. On the topmost shelf, DOWSIL which is the in house brand of reliance chemicals is putted. The store is promoting DOWSIL because the profit margin is high as compared to other brands as it is a product of reliance chemicals. And they are giving a complementary floor cleaning brush with DOWSIL in order to attract larger number of customers. It is priced lower than other brands available. BRANDS I saw six floor cleaning detergent brands that were available. They are: LIZOL DOMEX CIF Easy off bang Mr Muscle DOWSIL perfumed floor cleaner(phenyl) COMPANY FLOOR CLEANERS VARIANT QUANTITY AMOUNT (Rupees) RECKITT BENCKISER LIZOL BLUE 975ML 99.00 BLUE 500ML 52.00 PINK FRAGRANCE 500ML 54.00 LEMON EXPLOSION 500ML 54.00 BEACHPOWDER (LIQUID) 500ML 50.00 HINDUSTAN UNILEVER CIF 500ML 78.00 250 ML 53.00 120ML 27.00 HINDUSTAN UNILEVER DOMEX WHITE 500ML 54.00 WHITE 1 LTR 108.00 HINDUSTAN UNILEVER DOMEX 2IN 1 BLACK 500ML 50.00 SC JOHNSON MR. MUSCLE (floor cleaner) 500ML 50.00 RECKITT BENCKISER EASY OF BANG 400ML 65.00 RELIANCE CHEMICALS DOWSIL PERFUMED 1LTR 66 2LTR 149 3LTR 250 I asked consumers some questions such as How do you choose your floor cleaning detergent? Do you go by advertisement, if yes what are the features that attract you the most? This helped me to come to these inferences: People go by experimental ads i.e. the ads which actually show how their product is different from others and the offers that they are getting such as buy 2 and get 1 free. Price, packaging and product quality matters for them but they dont know much about the ingredients. Here the demand of floor cleaners goes on increasing with the cost, packaging changes and the attractiveness of the advertisement. In my observation I can say that the floor cleaning detergent market is an oligopoly market structure because there are only 6-7 main players present in the market while considered individually. Entry is relatively easy but each brand is a different product in itself, hence even though firms are competing with each other each one is a monopoly by itself. ECONOMIC CONCEPTS BASED ON OBSERVATION Price and non-price competition All the brands compete with each other. The competition is price and non-price depending upon the elasticity. The brands mainly compete with brand differentiation. The different brands fight with packaging, new innovation and advertisements. So here we can say the floor cleaning market is having mainly non price competition as the prices are relatively same. On the other hand, local in-house brands are competing on price; they are placing themselves relatively cheaper than others in order to increase their sales The competition here determines the place and position of the firm which is named as producer. Elasticity of demand The demand in floor cleaning detergents market is more elastic i.e. if one brand increases its price, demand for other brand increases as it is consumers behaviour to shift to substitutes when price of a particular product increases. Packaging and product quality The market share depends upon the amount of work the firm puts on in differentiating its product from the other ones. For example when seen the differentiation LIZOL and DOMEX are coming in many variants which gives consumers a wide choice of variants according to their need. They are focusing more on packaging and product quality. This helps in increasing the demand of a particular brand. So we can say that here DOMEX has created its monopoly in the market till the time another firm gets into this very idea i.e. responds to it with its product with some new innovation in this segment of the consumer to challenge its monopoly When this happens the players in the market get into competition again introducing new product with some new difference. Pricing strategy Big brands such as DOMEX and LIZOL are following price skimming policy as they are relatively charging high prices than other brands in order to skim the market. On the other hand, there are some local brands such as DOWSIL which are competing with other brands on price. They are following price penetration policy. As compared to other brands, these brands are relatively cheaper. CONCLUSION This floor cleaning detergents market actually is a good field to study the economic concepts like market structure, elasticity and competition, and cost factor. According to me, this segment of the market is catering to the high income consumers, there is non-price competition. Since here consumers are less-price sensitive and are affected by the advertisements or product development undertaken by the firm. Hence, we do not see much price competition in this segment. But there are some local players who are competing with other brands on the basis of price. Instead firms catering to this segment only try to price themselves as cheaply as possible to attract the maximum number of consumers. In this survey, I have tried my level best to touch up on the different economic aspects that are prevailing in the floor cleaning detergent market.