Price competition, which is where a company tries to distinguish its product or service from competing products on the basis of low price. In this the firm manipulates its price so as to compete in the market. To be successful in the market, the cost of the product should be lower than the others and for achieving that the company should be able to change the price of the product.
NON- PRICE COMPETITION
There is more emphasis on the product features and also the quality of the product. In this the promotion of the product should be such that the distinguishing of our product is visible and the customers are able to judge the difference in the product. It involves promotional expenditures like advertising, special offers, product development etc. Firms prefer non-price competition in spite of all the promotional costs involved such as advertising of products, location convenience, sales promotion of the product, development of product etc. because it is usually more profitable than selling for the low price. It is more common in oligopolistic market and monopolistic competitive market because there can be huge competition in these competitive markets
MARKET COMPETITION TYPES
PRICE COMPETITION:
PERFECTLY COMPETITIVE MARKET: In this type of competitive marketing, there are large numbers of competing companies. There are so many buyers and suppliers with no differentiation of the product in the market so the product is same. The prices are not set by the firms but by the demand in the market of the product. So in this, the actual goal is to make as much profit as possible. They are the price takers. This is in actual sense a rare phenomenon There is PERFECT MOBILITY OF FACTORS OF PRODUCTION i.e. factors of production are freely mobile between the firms like Labour can move from one firm to another, there is no trade union, similarly capital can also move from one firm to another and ENTRY is easy as there is no entry barrier for new firms nor is there any barrier for the firms who want to exit. A firm may enter industry or quit it as well with its own will which is why when firms in the industry make SUPERNORMAL PROFITS(profit attained after all kinds of costs), new firms enter increasing the production of the homogeneous product, hence eliminating the profits in turn eliminating the supernormal profits. So when the profits decrease the firms leave or exit. This is also called ZERO PROFIT CONDITION
PRICE: Since there are many firms selling the homogenous product in the market so the market share of single firm is very small such that it cannot affect the market price by changing its supply so we can say that individual firm has no control on the market price, instead the market price is determined by the market demand and market supply. My price is the same as demand is not increasing or decreasing so i will make quantity Q1
The demand curve DD' represents the market demand for the commodity and SS' represents the supply created by all the firms of the industry. At this price, a firm can sell any quantity which means that the demand curve for an individual firm is straight horizontal line as shown in the graph line dd1 with INFINITE ELASTICITY
The straight horizontal line implies that price is equal to the marginal revenue i.e AR=MR where it is the right price to sell and the quantity .So I will make quantity Q because if I make more quantity than that then my marginal cost will increase hence decreasing my profit.
The price is determined by demand and supply in a perfectly competitive market at OP and hence the price equals marginal revenue .At point E, therefore SMC=MR. A perpendicular drawn from E to output O determines output OQ. At output, firm is in equilibrium and is making maximum profit. Firm's max. profit is PEE'P' which is PP'*OQ where PP' is per unit SUPER NORMAL PROFIT at output OQ.
Monopoly is the market where there is a single seller of the commodity and has the power to produce and sell a commodity. It is the exact opposite of the Perfectly Competitive Market but it also faces competition from other monopoly firms and second being presence of other inferior substitutes which is why pure monopolies are hardly found and in these there is no distinction of firm and the industry. A monopoly may raise its price but it will lose sales. In order to sell more, it must lower its price.
In Monopoly, the demand curve is has a negative slop. Marginal revenue curve is twice that of AR curve i.e. marginal revenue curve is twice as steep as average revenue curve. If there is increase in price, the demand decreases and vice-versa so it is ELASTIC. Demand is responsible for the revenue earned. If the demand decreases so AR and MC decreases so my revenue will also decrease. If MR<AR so what quantity do I make, it is where MC=MR but I will sell the product at P because people are ready to buy the commodity at that price, so ML would be my normal profit and P'L would be the SUPERNORMAL PROFIT
It refers to a market in which large number of sellers sell differentiated products which act as close substitutes for each other. It is a combination of both perfect competition and monopoly because there are many sellers in the market and monopoly because each firm can produce its product which the other firms cannot copy. There is also product differentiation in terms of size, colour, design, packaging, guarantee etc. with the purpose of making consumers believe that the product is different from the others There is expenditure on the advertisements, schemes etc.
Demand leads to revenue earning so Demand=Average Revenue. The quantity I need to make is Qm because there is where MR=MC and I could earn maximum revenue. So I would sell my product at price Pm as people are willing to pay for the product so the grey area acts as the SUPERNORMAL PROFIT
PRICE; The firms have the power to set the price of their product
ENTRY: It is easy as well is the exit. As soon as the firms start earning profit, new firms enter leading to more production and less demand, hence reducing the profit margin leading to pulling out of the firms which leads to increase in profit earnings of the existing firms.
ELASTICITY: With product differentiation it is perceived by the firm that the demand graph of their product is more elastic than the other competitors in the market .The perceived demand curve is more elastic than the demand curve of the firm .The basis of perceived demand curve is firm's belief that if it changes the price of its product, the other firms will not notice it as there are many firms present. The individual firm perceives that if it cuts its own product, it would go unnoticed and demand for its product would rise .If one firm decreases it's price and others do not, the product becomes cheaper and customers switch over to the product with lower price
EXAMPLE: example is Clothing because
There are many firms vying for control of one market i:e clothing
Each firm offers different varieties of the same product
Close substitutes of each clothing is sold by the competitors
Firms advertise their clothing so people buy them
OLIGOPOLISTIC COMPETITIVE MARKET:
It is the market where there are few sellers selling either same product or differentiated product. Firms selling same product are called pure or homogenous oligopoly like sugar and the ones which are selling differentiated products are called differentiated oligopoly like computers. In this sellers are less and the market share of a firm is large so a single firm has effect on other rival firms as well. There is always tough competition in terms of price wars
Q2 Visit a local supermarket or departmental store. Focus on the section where shampoos are displayed for sale. Observe and analyse the space allocated to brands, different brands under the same company, pricing etc. Elaborate on economic concepts based on observation and learning?
The shampoo market in India has grown at a very fast pace in the recent years as more and more people have started using shampoos.The total shampoo market has grown to 930 Crores and is continuously growing. A study shows that an Indian needs more shampoo (6ml) in one hair wash as compared to 4ml used in western countries because most Indian women have long hair which is why in most of the supermarkets and departmental stores shampoos act as a main attraction
Many companies are selling different shampoo brands in India. Basically this market is segmented on benefit platforms. People who like cosmetic shampoos like to use shampoos like Dove, Sunsilk, Pantene etc. but the people who like herbal shampoos can opt for Vatika, Himalaya or Ayur shampoos. There are also anti dandruff shampoos present in the market like Heads & Shoulders etc.
With the sachet introduction into the market, consumer loyalty has further come down as the sachet accounts for 70% of the market share. In addition to that rural India prefers buying sachet instead of the whole bottle
There are couple of major big companies which are selling different competing brands of shampoos like Hindustan Unilever Limited. HUL is selling Sunsilk, Dove, Clinic Plus and Clinic All Clear. PROCTER AND GAMBLE (P&G) is selling Pantene and Heads & Shoulders. L'Oreal has the shampoo Garnier. DABUR sells vatika. Himalaya is the product of Himalaya Drug Company. Ayur shampoos are a product of RDM traders Pvt. Ltd.
I visited Reliance departmental store to analyse the space allocated to different shampoo brands, different brands under the same company etc
LAYOUT: The shampoos were kept as per the planogram given to the departmental store by the company. The shampoos were kept in a specific area on different shelves. The area is called bay area in which there are six shelves. The shelves are made keeping into mind the average height of the Indians . The shampoos were kept on fourth, fifth and sixth shelves from below.
PRODUCT LINE: When offering product line, companies develop different modules which can be added so that they can meet the customer needs or requirements. Like the homemakers make a model first and show it to the person before making the type of home which the person needs, shampoo companies also form the shampoos which can make the hair of the people better and thus meeting the customer requirements. The products i.e. the shampoos present were of HUL (Hindustan Unilever Limited) and P&G i.e. Dove, Clinic Plus, Triss, Pantene, Sunsilk, Clear, Head and shoulders.
PRICING STRATEGY:
PRODUCT LINE PRICING: Companies develop product lines hence introducing difference prices for those products like in the case of shampoos different quantities of shampoos are there with different price like there are shampoo sachet, to 100 ml shampoos, 200 ml shampoos and 400 ml shampoo bottles and if different quantities are given by the companies then the price is also different for all these hence customers have the choice to select any shampoo of the same company having different quantities as a result normally customers tend to buy the shampoo
PRODUCT BUNDLING PRICING: In this type of pricing strategy, sellers use bundling of the product. Pure Bundling occurs when firm offers its product only as a bundle like shampoo and a conditioner and in Mixed Bundling, seller sells the products both individually and in bundles while doing so normally charging less for the bundle than if those products were purchased individually hence inducing the customers to buy the product
Products are kept in Reliance departmental store as per a PLANOGRAM sent by the company to the stores under which the reliance company gives instruction which product should be kept where and on which shelf and how much space should be allotted to it which in fact depends on the demand of that product
The shampoos are kept on different shelves i.e. on shelves fourth, fifth and sixth
Those shampoos are kept on the top shelve which is the sixth shelve which have high demand and therefore are kept in more visibility area like in this case it was Dove shampoo and conditioner which are have high demand and the space allotted is four rows to the shampoo and the conditioner
On fifth shelve come the shampoos which have demand but less than the top shelve ones like Clinic Plus, Pantene, Sunsilk, Garnier fructis although Triss may not have that much demand .Pantene is allotted four rows, two rows are allotted to Sunsilk, two to Clinic Plus
Then comes the fourth shelve from bottom which has Clear shampoo and Head and shoulders of which Head and Shoulders is allotted four row whereas two rows are allotted to Clear shampoo
There is competition between HUL's DOVE and P&G's Pantene as their prices are the same
There is also competition among HUL's products I.e. between Sunsilk, Dove, Clinic Plus etc. so increase in demand of one shampoo decreases the demand of the other one , so increase or decrease in demand of one shampoo has effect on other shampoos as well
