economics ppt
TRANSCRIPT
Mentor- Prof. Deepika M G
Team members:
Mahesh Guleria Pallab Misra
Manohar Shetty
Milind p m Saquib Kalam
Mayur Somani
Monopolistic competition is a market structure in which:
A large number of independent firms compete. Each firm produces a differentiated product. Firms compete on product quality, price, and
marketing. Firms are free to enter and exit.
Large Number of Firms Like perfect competition, the market has a
large number of firms. Three implications are:
Small market share
No market dominance
Collusion impossible
Product Differentation Making a product that is slightly different
from the products of competing firms.
A differentiated product has close substitutes but it does not have perfect substitutes.
When the price of one firm’s product rises, the quantity demanded of that firm’s product decreases.
Competing on Quality, Price, and Marketing Quality Design, reliability, service, ease of access
to the product.
Price A downward sloping demand curve.
Marketing Advertising and packaging
Entry and Exit No barriers to entry. A firm cannot make economic profit in the
long run.
Identifying Monopolistic Competition Two indexes:
The four-firm concentration ratio The Herfindahl-Hirschman Index
How, given its costs and the demand for its jeans, does Tommy Hilfiger decide the quantity of jeans to produce and the price at which to sell them?
The Firm’s Profit-Maximizing Decision The firm in monopolistic competition makes
its output and price decision just like a monopoly firm does.
Figure on the next slide illustrates this decision.
1. Profit is maximized when MR = MC
3. The profit-maximizing price is $75 per pair.
4. The firm makes an economic profit of $6,250 a day.
2. The profit-maximizing output is 125 pairs of Tommy jeans per day.
ATC is $25 per pair, so
Profit Maximizing Might Be Loss Minimizing Some firms in monopolistic competition
have a tough time making a profit. A burst of entry into an industry can limit
the demand for each firm’s own product. Figure on the next slide illustrates a firm
incurring a loss in the short run.
1. Loss minimized when MC = MR
3. The price is $40 per month, which is less than ATC.
4. The firm incurs an economic loss.
2. The loss-minimizing output is 40,000 customers.
Is Monopolistic Competition Efficient Efficiency requires marginal benefit to equal
marginal cost. In monopolistic competition, price exceeds
marginal cost, which is an indicator of inefficiency. Making the Relevant Comparison Price exceeds marginal cost because of product
differentiation. But product variety is valued. The Bottom Line The bottom line is ambiguous. But compared to
the alternative, monopolistic competition looks efficient.
Innovation and Product Development Wherever economic profits are earned,
imitators emerge. To maintain economic profit, a firm must
seek out new products. Cost Versus Benefit of Product
Innovation The firm must balance the cost and benefit
at the margin.
Advertising Firms in monopolistic competition spend a
large amount on advertising and packaging their products.
Marketing Expenditures A large proportion of the prices that we
pay cover the cost of selling a good.
Selling Costs and Total Costs Advertising expenditures increase the costs
of a monopolistically competitive firm above those of a perfectly competitive firm or a monopoly.
Advertising costs are fixed costs. Advertising costs per unit decrease as
production increases. Figure on the next slide illustrates the
effects of selling costs on total cost.
1. When advertising costs are added to . . .
2. … the average total cost of production, …
3. … average total cost increases by a greater amount at small outputs than at large outputs.
Surf was launched in 1959 by HUL. A family brand with tough stain
removal and caring image. International to Ultra to Excel Surf Excel is available in 4 variants:
Surf Excel Blue Surf Excel Quick Wash Surf Excel Automatic Surf Excel Detergent Bar
Ariel was introduced in India in 1991 by P&G.
Ariel contains unique Fragrance in detergents with new technology based detergent
Ariel is available in 3 variants: Ariel Fresh Clean Ariel Spring Clean Ariel Front-O-Mat
SURF EXCEL ARIEL
To continue market leadership
37.8% in Indian Market
Approaching New Markets
Launching Product Extensions
Maintain Brand Loyalty
To increase market share
7.7% P&G in Indian Market
Switch Consumers from Existing Brands in the present Market
Product Innovation Increase Brand
Loyalty
SIZE SURF EXCEL
QUICK WASH
SURF EXCEL
BLUE
SURF EXCEL
AUTOMATIC
SACHET Rs.2/- Rs.2/- -
200gm Rs.23/- Rs.20/- -
500gm Rs.56 Rs.41 Rs.80/-
1kg Rs.109/- - Rs.155/-
SIZE ARIEL FRESH
CLEAN
ARIEL SPRING
CLEAN
ARIEL
FRONTO-MAT
Sachet Rs.2/- Rs.2/- -
200gm Rs.26/- Rs.26/- -
500gm Rs.55/- Rs.55/- Rs.80/-
1kg Rs.107/- Rs.107/- Rs.155/-
Major Players HUL ( blue, Quick wash, Automatic) Nirma P&G ( Tide, Ariel) Henkel India (Mir, persil, porwall,
vernel, purex,henko) Reckitt Benckiser ( Varnish)
Cross Elasticity of the demand is defined as the ratio of the percentage change in the demand for one good to the percentage change in the price of some other good.
Substitute goods: Tide, Rin, ghadi etc.
Cross Elasticity will be positive in this case
Complement goods: detergent cake, liquid soap Elasticity is always negative.
The Herfindhahl-Hirschman Index (HHI) It is the sum of squares of market share of each
company in the industry. H = s1
2+s22+…………….+sn
2
H= Herfindhahls index S1,S2……………Sn are market share of each company For detergent industry(in our case) H = (37.8) 2 + (7.7)2 + (3.7)2 + (1.5)2 + (.26)2 =
1504.15 {as market share of other companies is almost
negligible in the industry}
The four-firm concentration ratio It is a sum of market share of top 4 firms in the
industry For detergent industry(in our case) ; Surf Excel : 37.8% Ariel : 7.7% Henko : 2.9.% Nirma : 1.14% Total : 48.74 Conclusion : As 4 firm’s concentration ratio is
less than 50%,So this let us to conclude that Detergent industry has a Monopolistic market.
Surf Experienced Player Competitive Advantage with well laid
distribution and retail network Innovative advertising approaches Willingness to venture out with new variants
Ariel Strong first mover advantage in the Pricing
War Entrenched firmly in minds on basis of
superior cleaning quality Need to bring out new variants focus on aggressive advertising important
So in the monopolistic form of competition the firm doesn’t have price war like in perfect competition, in this form of competition there exist product differentiation firms compete among themselves by differentiation their products and to promote their product they incur huge selling cost in the form of:
Advertising Promotion Packaging Design price