Question No 4: Recall that price elasticity is a function of (i) the number of available substitutes, (ii) the price level relative to customers’ budgets, (iii) and the durability of the product. Describe these factors for the firm’s primary product. Based on this analysis, does the firm face elastic or inelastic demand with regard to its primary product?

Anwer: The price elasticity of demand (PED) is a measure of how much the quantity demanded changes with a change in price. The PED for a given good is determined by one or a combination of the following factors:

Availability of substitute goods: The more possible substitutes there are for a given good or service, the greater the elasticity. When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price. Conversely, if no substitutes are available, demand for a good is more likely to be inelastic.

Proportion of the purchaser's budget consumed by the item: Products that consume a large portion of the purchaser's budget tend to have greater elasticity. The relative high cost of such goods will cause consumers to pay attention to the purchase and seek substitutes. In contrast, demand will tend to be inelastic when a good represents only a negligible portion of the budget.

Degree of necessity: The greater the necessity for a good, the lower the elasticity. Consumers will attempt to buy necessary products (e.g. critical medications like insulin) regardless of the price. Luxury products, on the other hand, tend to have greater elasticity. However, some goods that initially have a low degree of necessity are habit-forming and can become "necessities" to consumers (e.g. coffee or cigarettes).

Duration of price change: For non-durable goods, elasticity tends to be greater over the long-run than the short-run. In the short-term it may be difficult for consumers to find substitutes in response to a price change, but, over a longer time period, consumers can adjust their behavior. For example, if there is a sudden increase in gasoline prices, consumers may continue to fuel their cars with gas in the short-run, but may lower their demand for gas by switching to public transportation, carpooling, or buying more fuel-efficient vehicles over a longer period of time. However, this tendency does not hold for consumer durables. The demand for durables (cars, for example) tends to be less elastic, as it becomes necessary for consumers to replace them with time.

Breadth of definition of a good: The broader the definition of a good, the lower the elasticity. For example, potato chips have a relatively high elasticity of demand because many substitutes are available. Food in general would have an extremely low PED because no substitutes exist.

Brand loyalty: An attachment to a certain brand (either out of tradition or because of proprietary barriers) can override sensitivity to price changes, resulting in more inelastic demand.

Reckitt Benckiser generates 95% of total revenue from household and toiletries products. Thus, this is the primary range of products that they operate upon.

Sales comparison (In BDT Million) for the Reckitt Benckiser and its competitors are:

Year Reckitt Benckiser Unilever Marico2011-12 2412 7444 60362012-13 2432 8520 61202013-142015

26703373

87909010

64358542

With regards to its primary product, the firm faces inelastic demand as the firm produces more than one product in a single category. This is based on three reasons:

Brand Awareness: Reckitt Benckiser has a strong brand presence in the market. Their customer segment stick their brands irrespective of price changes in the market. Thus, their demand is inelastic to a good extent.

Category pricing: Reckitt Benckiser has multiple products in the same category. Their household and toiletries products resemble a category with multiple products. The price is inelastic when it transfers from a specific product to a larger category.

Number of available substitutes: Reckitt competes in a market where there are many national and international competitors. Yet, they have been posting growth in sales even though their competitors are active in the market. Reckitt even does less advertising on different medias in comparison to Unilever. So, although there are high number of substitutes in the market, their demand seems to be inelastic

Price Level relative to Customers Budget: The advantage of producing consumer goods are, these goods mostly cater to the basic needs of people. So unless there is a huge shift in product prices, the price is relatively inelastic to the market situation

Durability of Product: Consumer goods have long expiry dates of almost 1 to 2 years. But that hardly pays a role because their utility generally is over after 2 to 3 months due to constant usage.

5. How would you describe the market structure of the industry in which your firm operates? To arrive at an answer you should discuss (a) the number of competitors, (b) product similarity, (c) barriers to entry, and (d) the importance of non-price competition. (Be sure to define the geographic nature of the market. Is the market best described as local, national, or international?) How much pricing power does the firm have? Are economies of scale a barrier to entry in this industry?

Answer: The market structure of consumer goods markets can be derived from the standard market classifications of economics. The market structures all over the world include:

Economists assume that there are a number of different buyers and sellers in the marketplace. This means that we have competition in the market, which allows price to change in response to changes in supply and demand. Furthermore, for almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price.

In some industries, there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods.

A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on Viagra.

In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. Assume, for example, that an economy needs only 100 widgets. Company X produces 50 widgets and its competitor, Company Y, produces the other 50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well.

There are two extreme forms of market structure: monopoly and, its opposite, perfect competition. Perfect competition is characterized by many buyers and sellers, many

products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.

Traditionally, the most important features of market structure are:

1. The number of firms (including the scale and extent of foreign competition)2. The market share of the largest firms (the extent to which the market is divided

between the largest firms)3. The nature of costs ( Features the potential for firms to exploit economies of

scale and also the presence of sunk costs which affects market contestability in the long term)

4. The degree to which the industry is vertically integrated - vertical integration explains the process by which different stages in production and distribution of a product are under the ownership and control of a single enterprise. A good example of vertical integration is the oil industry, where the major oil companies own the rights to extract from oilfields, they run a fleet of tankers, operate refineries and have control of sales at their own filling stations.

5. The extent of product differentiation (which affects cross-price elasticity of demand)

6. The structure of buyers in the industry (including the possibility of monopsony power)

7. The turnover of customers (sometimes known as "market churn") – i.e. how many customers are prepared to switch their supplier over a given time period when market conditions change. The rate of customer churn is affected by the degree of consumer or brand loyalty and the influence of persuasive advertising and marketing

Based on above discussion, we can summarize the characteristics of market structure as:

Based on these characteristics, the industry that Reckitt participates in can be classified as:

Number of Firms: Few dominant firms

Type of product: Homogenous

Barriers to entry: High

Supernormal Short Run Profit: Possible

Supernormal Long Run Profit: Not possible

Pricing Power: Price taker

Non price competition: Important

Economic: Low Allocative

As from the analysis above, the industry acts mostly as an oligopoly, with some attributes of perfect competition. Thus, it can be concluded that the fmcg goods industry in Bangladesh right now is oligopoly with some attributes of perfect competition.

Question no. 6 Calculate the company’s sales and profit growth rates for (a) the past year and (b) the past three years. Do the same for the firm’s rivals (firms with the same industry classification). Has the firm’s growth rates matched its rivals? Summarize the company’s performance relative to the rivals?

Answer: Reckitt Benckiser faces competition mostly from Unilever and Marico. Based on the data we collected from the previous few years, the performance of RB with respect to its competitors can be summarized as follows:

After collecting data on the sales of the three competitors, we find the growth rates as:

YearReckitt Benckiser Sales

RB Growth Unilever Sales

Unilever Growth

Marico Sales

Marico Growth

2011-12 2412 7444 6036

2012-13 2432 0.008291874 8520 0.144545943 6120 0.013916501

2013-14 2670 0.097861842 8790 0.031690141 6435 0.051470588

2015 3373 0.26329588 9010 0.025028441 8542 0.327428127

From this analysis we can see that last year Reckitt Benckiser had 0.26, or 26% growth in their respective industry. To understand if this growth is better than their competitors, we need to plot it in a trend line.

Plotting this data on a trend line we find:

2012-13 2013-14 20150

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Chart Title

RB Growth Unilever Growth Marico Growth

Chart: Growth comparison of three firms in FMCG industry

From the trend line, its apparent that, growth wise RB stands second in comparison to Unilever and Marico. Marico is recording the highest growth in sales. Reckitt Benckiser is next to Marico and Unilever third.

The growth rates only give a partial picture of the firms as sales wise, Unilevers sales figures are much higher than Marico and Reckitt Benckiser. So although its having lower growth, it has higher revenues.