Price And Non Price Competition And Elasticity Analysis Economics Essay

Q. Explain the difference between price and non-price competition and elasticity and the contexts which give rise to it. Visit a local super market or departmental store. Focus on the section where shampoos are displayed for sale. Observe and analyze the space allocated, brands, different brands under the same company, pricing, etc. Elaborate on the economic concepts based on your observation and learning. (50)

Introduction

In economics, market is defined as any place where the sellers of certain particular goods and services meet with the buyers of the same goods and services and a transaction can take place amongst the two.

Any market has two primary aspects, which are demand and supply. Demand and supply are the most important concepts of a market economy.

Demand is defined as the amount of goods or services that consumers will readily buy at different prices within a given time period, during which factors other than the price are held constant.

Whereas supply is defined as the amount of goods or services that producers are ready to sell at different prices within a given time period, during which factors other than price are held constant.

In this answer we will be looking at both the demand as well as the supply side of the market. Hence we will consider both the producer and the consumers’ point of view. From the consumers point of view we will be looking at the concept of elasticity while from the producers’ point of view we will consider the market structure as well as the price and non-price competition that exists in it.

Market Structure

Interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation and ease of entry into and exit from the market. Four basic types of market structure are (1) Perfect Competition-Many buyers and sellers, none being able to influence prices (2) Monopoly-Single seller with considerable control over supply and prices (3) Oligopoly-Several large sellers who have some control over the prices and(4) Monopolistic-Large number of sellers sell differentiated products which are close substitutes for one another.

Perfect Competition- A perfectly competitive market is one in which there is a large number of buyers and sellers of a homogenous product and neither a seller nor a buyer has any control on the price of the product. A perfectly competitive market is assumed to have the following characteristic –

Large number of buyers and sellers- The number of sellers is assumed to be so large that the share of each seller in the total supply of a product is very small. Thus the firms are price-takers not price-makers.

Monopoly- It is market situation in which there is a single seller of a commodity of ‘lasting distinction’ without close substitutes. A monopoly firm enjoys an absolute power to produce and sell a commodity. Monopoly firms too have to face indirect competition; there are at least two main sources of indirect competition.

One source of indirect competition is rivalry between monopoly goods and other goods produced by other monopolies and competitive firms for claiming a considerable share in consumers’ budget.

And the second source of indirect competition is from the availability and price of inferior substitutes.

Oligopoly- It is a market dominated by a relatively small number of large firms. The products 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 products. But market power also comes from their sheer size and market dominance.

Whether the sellers in an oligopolistic market compete against each other by differentiating their product, dominating market share, or both, the fact that there are relatively few sellers creates a situation where each is carefully watching the other as it sets its price. In economics we refer to this pricing behavior as mutual interdependence. This means that each seller is setting its price while explicitly considering the reaction by its competitors to the price that it establishes.

Monopolistic- It is a market in which there are many firms and relatively easy entry. These two characteristics are very similar to those of perfect completion. What enables firms to set their prices (that is to be monopolistic) is product differentiation. By somehow convincing their customers that what they are selling is not the same as the offerings of other firms in the market, a monopolistic competitor is able to set its price at a level that is higher than the price established by the forces of supply and demand under conditions of perfect competition.

Elasticity

Elasticity is defined as a percentage relationship between two variables, that is, the percentage change in one variable relative to a percentage change in another.

Co-efficient of elasticity = Percentage change in A

Percentage change in B

Price Elasticity

The measurement of sensitivity of the change in quantity demanded is to a change in price in percentage terms is called the price elasticity of demand. Demand price elasticity is defined as a percentage change in quantity demanded caused by 1percent change in price.

According to economists there are three categories of price elasticity(Ep) :

1.Relative Elasticity of Demand

Ep > 1

This occurs when a 1percent change in price causes a change in quantity demanded greater than 1percent.

2.Relative Inelasticity of Demand

0 < Ep < 1

Here the percentage change in price is greater than the corresponding change in quantity.

3.Unitary Elasticity of Demand

Ep = 1

A 1percent change in price results in a 1percent change in quantity in the opposite direction.

There are two limiting cases at the extremes of the elasticity scale –

1.Perfect Elasticity

Ep = ∞

In this case there is only one possible price and at that price an unlimited quantity can be sold.

2.Perfect Inelasticity

Ep = 0

Under this condition the quantity demanded remains the same regardless of price.

Cross Elasticity

Cross elasticity or cross-price elasticity deals with the impact in percentage on the quantity demanded of a particular product created by a price change in a related product while everything else remains constant. In economics, there are two types of relationship – substitute good and complementary good.

Substitutes are the same products but are sold by different suppliers and one supplier can be considered a substitute for the other.

Complements are the products that are consumed or used together along with one product.

The cross elasticity(EA,B) is a measure of the percentage change in quantity demanded of product A resulting from a 1 percent change in the price of product B. The general equation can be written as –

Income Elasticity

Quantity of sale is a function of or does get influenced by the consumers’ income. According to economists, income elasticity(EY) is a measure of the percentage change in quantity consumed resulting from a 1percent change in income. The general equation can be written as –

EY = % change in quantity consumed

% change in income

Some products will be demanded by consumers whose incomes are low, but as incomes rise and consumers’ feel ” better off ” they will shift consumption to goods more commensurate with their new economic status. Commodities of this type are usually referred to as inferior goods.

So, in the concept of income elasticity there are three categories –

Income elasticity > 1 :- Superior goods

Income elasticity > 0 and ≤ 1 :- Normal goods

Income elasticity < 0 :- Inferior goods

Price Competition

Price competition involves competing firms trying to beat each other in terms of the prices they sell their product at. Firms competing in prices respond quickly and aggressively to their competitors’ prices. These firms try to capture a larger share of the market by selling the products at the lowest price.

Match and beat the price of the competition. To compete effectively, need to be the lowest cost producer.

Must be willing and able to change the price frequently.

Need to respond quickly and aggressively.

Competitors can also respond quickly to your initiatives.

Customers adopt brand switching to use the lowest priced brand.

Sellers move along the demand curve by raising and lowering prices.

Non Price Competition

– Emphasize product features, service, quality etc. Can build customer loyalty towards the brand.

– Must be able to distinguish brand through unique product features.

– Customer must be able to perceive the differences in brands and view them as desirable.

– Should be difficult / impossible for competitors to emulate the differences (Patents).

– Must promote the distinguishing features to create customer awareness.

– Price differences must be offset by the perceived benefits.

– Sellers shift the demand curve out to the right by stressing distinctive attributes.

Points of Difference between Price and Non-price Competition

The major difference between price and non price competition is that price competition implies that the firm accepts its demand curve as given and manipulates its price in order to try and attain its goals, while in non price competition it seeks to change the location and shape of its demand curve.

The non price competition is a marketing strategy in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship. The firm can also distinguish its product offering through quality of service, extensive distribution, customer focus, or any other than price.

In case of price competition the firm tries to distinguish its product or service from competing product on the basis of low price.

Non Price competition involves promotional expenditures, marketing research, new product development and brand management cost. The promotional expenditures includes advertising, adding staff, the location convenience, sales promotion, coupons, special orders or free gift. Firm’s prefer non-price competition, inspite of additional costs involved it is usually more profitable than selling at lower price and avoids the risks of price war.

Although any firm can use non price competition, it is most common among Oligopolies and Monopolistically competitive firms, because firms can be extremely competitive. In order to distinguish themselves they use non-price means.

Major Factors influencing Pricing Decisions –

Organisational and Marketing Objectives

Types of pricing Objective

Buyers perceptions

Supply and Demand is an economic model of price determination in the market. In the competitive market the unit price of the particular good will vary until it settles at the point where the quantity demanded by the consumer( at the current price) will equal the quantity supplied by the producer(at the current price), resulting in an economic equilibrium price and quantity.

Store Visited – Big Bazaar, Vasant Square Mall

Details of Display – The shampoo segment was mainly divided amongst 3 racks

The display was as follows –

1st Rack – Head and Shoulders, Clinic All Clear, Garnier Fructis, Clinic Plus, Vivel

2nd Rack – Pantene, Loreal, Dove, Sunsilk, Fiama Di Wills

3rd Rack – Nyle, Chik, Halo, Himalaya, Vatika

Even a glance at the display is sufficient to state that the higher priced shampoos covered a greater as well as more distinct position to be visible to the consumers. It was also noticed that mostly shampoo brands of similar companies were kept togethar.

The main leaders in the shampoo segment of the market were ITC, Hindustan Unilever, Loreal and Procter and Gamble.

All these companies had more than one brand in the market such as Hindustan Unilever – Dove, Sunsilk etc. Procter and Gamble – Pantene, Head & Shoulder etc. Loreal – Loreal, Garnier etc.

Not just various brands of different companies but each brand too had various categories of shampoos such as beauty shampoo, anti-dandruff shampoo, shampoo for oily hair, shampoo for dry hair, shampoo for shine, shampoo for coloured hair, shampoos for kids etc.

There were three main segments for the differences in the category of shampoos but all the three segments were mainly differentiated on the basis of prices more than quality because it was not much of an issue for the consumers to pay more for better quality.

After studying the shampoo segment in the market we got to understand that the shampoo market has got a monopolistic market structure. Monopolistic is one market in which there are many sellers and hence entry of a firm is relatively much easier. Since it’s a monopolistic market hence they are engaging in both price and non-price competitions trying to differentiate the product. For example regarding price competition – Chik came into market at the price of Re.1 and even came up with shampoo sachets for 50p. And advertisements are also examples of non-price competitions. And as far as non-price competition is concerned Loreal and Sunsilk are classic examples. But to be frank brands like Sunsilk, Pantene, Loreal compete both in price and non-price competitions. But as far as low range shampoos are concerned, such as Chik, Halo, Ayur etc. compete only in prices.

Hair care is one such division in which consumers are very careful while switching brands. Generally they do not as it affects the hair. And hence maintaining a good quality of product regarding this segment is a basic element to attract new customers.

PANTENE and DOVE has stood on that part as there is a very less deviation of customers from these brands. It has that attraction power that its place in the display shelf has remained unaffected.

However in a monopolistic firm the marginal revenue should be equal to marginal cost in order to maximize its profit.

Oligopoly- It is a market dominated by a relatively small number of large firms.