Understanding Markets: Dyson Goes without Blades - Case Study Example

 Executive Summary This report is an analysis of how the theory demand may relate to Dyson Air Multiplier. Dyson Air Multiplier fan is a new technology, which works without blades and the company expects it to revolutionise the fan industry. It is safer, easy to clean and assemble and above all faster than the conventional fans. The potential customers feel that this fan without blades has got some utility for them. They see several advantages in the use of this fan. The design of the fan is an appealing one and has got an attraction to most of the customers. Though the level of satisfaction is high among the customers, the price of the fan is considered to be very high. Dyson Air Multiplier has got price as well as income elastic demand. This is because the customers value the product but are reluctant to purchase due to high price. Thus, if the price of the product falls, we can expect the fan to find great increase in its demand. Likewise, if the income of the potential customers rises, we once again can look for a sharp increase in the demand for the fan and great trouble for the competitors. Although the fan is a new design and an appealing one, the fan is still only a substitute for the other fans with blades. Moreover, there are other brands among the conventional fans preferred by customers to Dyson Air Multiplier. The fan thus has failed to become a monopoly of a unique kind and has got strong competition to face in the market. Dyson, therefore, has just managed to mitigaite the level of competition. Background “I wonder if a Korean would think this kind of fan could kill you...,” says an anonymous customer about such an astonishing fan, Dyson Air Multiplier (qtd. in boingboing). Dyson Air Multiplier, a fan invented by Sir James Dyson, works without any blades or grille (Sayid, 2009). The Multiplier is able to blow air at a speed matching that of the conventional fans and it is easy to clean and assemble (Beschizza, 2009). Dyson produces the fan in Wiltshire and currently sells in 19 countries of the world. The company has got the plans to sell it soon in US, UK, Australia and Japan and the sales forecasts indicate that the demand of the fan will remain steady in these countries as well (Liverpool Daily Post). This report at first assesses the likely demand of Dyson Air Multiplier in the marketplace in the light of economic theory; it then discusses the consumer behavior relating to the fan and price as well as income elasticity and finally looks into the likeliness of the fan creating a monopoly. The likely demand for the Air multiplier Almost unconscientiously, all of our buying decisions depend upon a number of considerations or factors forming the bases for what we call the law of demand. The demand for a product refers to the quantity of any good or service at a given price in a given time period. It increases when the price of a product falls provided all factors affecting demand other than price are constant, a condition called ceteris paribus (Maunder et al., 1990:. 48). Two major reasons account for why consumers behave in this given way. Firstly, the consumers tend to substitute highly priced goods for less expensive ones and thus buy more of cheaper goods: known as the substitution effect. Secondly, as the price of a good or a service rises, the real income or the purchasing power of the customer falls. As a result, she is only able to buy less of other goods and services: known as the income effect (p.49). Besides price and income, there are other factors too that determine the demand for a given product. These factors include income (p.51), tastes and preferences, prices of related goods, changes in expectations about the future and so on (p.52). Consumers will demand Dyson Air Multiplier if the perceive some advantages in it and there are several advantages of this new bladeless fan in the minds of customers. The very first of these advantages is safety, especially for the children, as there are no blades to touch. Secondly, Dyson Air Multiplier is easier to clean as compared to the conventional ones. Thirdly, it is free from buffeting and does not cause disturbance; and thus is enjoyable and cozy especially at night. Fourthly, the air multiplier fan has got better air blowing ability than the conventional fans (Hickman, 2009). Moreover, it reduces the amount of money spent on air-conditioning. Consequently, not only is the Multiplier an innovative technology, but also a mind soothing invention (Hickman, 2009). In short, there are many reasons to believe that Dyson Air Multiplier has got good market value as well as prospective demand. Nonetheless, the there are certain other issues as well which negatively affect the market demand for Air Multiplier. To start with, the fan has been developed to substitute the existing fans and, in turn, it too has got many substitutes. Furthermore, experience reveals that the fan does have some sound coming through the backside (Miller, 2009). Moreover, though the multiplier is quieter than the conventional fans, it is annoying if set at higher speeds (Beschizza, 2009). Besides, the price of the fan is alarmingly high at £199- equal to the price of many fans (boingboing). We, thus, can conclude that the fan has got demand for it offers several advantageous features to the consumers but there are also concerns regarding certain other features of the fan. Ultimately, I suggest that the company should reduce the price of the fan for improvement in the demand of the product. Consumer Behaviour: Utility and Indifference Analysis The theoretical term ‘consumer behaviour’ refers the manner in which a consumer behaves to gain maximum return from her economic undertakings. The theory, however, has got certain underlying assumptions and the most important of them in the study of consumer behavior is that the consumer behaves rationally. Such a rational behaviour on part of consumer requires that the consumer knows her objectives and is aware of the available alternatives. Furthermore, these rational consumers must develop some criteria for the evaluation of feasible options or alternatives (Reynolds 1). There are two methods to explain the behaviour of a rational consumer: the utility theory and the indifference curves. Utility Utility refers to the benefits or the satisfaction that a consumer receives from the use of a good or service (Parkin, 1996:147). When a consumer consumes more and more of a good or service, its marginal or the additional utility falls- we know this phenomenon as the law of Diminishing Marginal utility. A rational consumer, thus, tries to receive highest possible utility from the use of a good or service which takes place when the marginal utility (MU) obtained from the good or service is equal to the price (p) that is paid. In other words, the utility received by the use of a product or service is maximum when the marginal utility (MU) of the last pound spent on the goods (MU ÷ p) equals 1. Dyson Air multiplier does have utility for the consumers. Consumers see several benefits offered to them by Dyson Air Multiplier. Hence, there is a good deal of satisfaction for consumers in the use of Dyson Air Multiplier. However, what matters is the price; consumers do investigate if the price of the fan is, in fact, worth it. Shocked by the price, a customer said, “For the price of 10-15 fans, here is one! Thank you, come again.” (qtd. in Boingboing). The current price of the fan is £199 and, undoubtedly, is extremely high as compared to the level of utility the fan offers. As a result the fan does not seem to be maximizing the utility for the customers as the price paid exceeds the marginal utility received of the last £ spent on this fan. In other words, MU gained by the use of Dyson Air Multiplier is lesser than the price paid for it: mathematically, MU < p. Indifference Curves Analysis An indifference curve show the combinations of at least two goods that a consumer buys in a way that she remains indifferent at all points on the curve. Figure (1) shows a typical indifference curve with three identifiable regions. The first region below the curve is inferior regarding consumer preference of a combination to all the point on the curve. The points lying on the curve are attainable and are equal in their level of preference or utility to consumer. The consumer is indifferent among her choices at each point on the indifference curve. The region above this indifference is unattainable on this cure but is preferred to all other points on the curve. A consumer may only attain this region if a higher indifference curve is available (FlatWorld Knowledge). The choice of availing the highest possible indifference curve, however, rests on the budget constraint of the consumer. The budget constraint is expressed by a budget line which tells what level of utility the consumer can finally have using all her income. Figure (2) shows a budget line that gives all the possible combination of two goods that Ms. Bain can buy within her budget. The regions below the budget line and on the line are attainable whereas the region above the line is unattainable with in the constraint of income. When the real income of a consumer increases, the budget line shifts upwards (FlatWorld Knowledge). The consumer, finally, Maximises her utility within the constraints of her budget at the point where the highest indifference curve meets the budget line, as shown by point T in figure 3. The point where the indifference curve makes a tangent with the budget line shows the maximum utility obtained from the use of a bundle of commodities, two in this case (Parkin, 1996: p.174). The indifference curves show a state of mind and there can be several possible variations in their shapes to reflect the consumer behavior in relation to different situations. Figure (4) gives one of such variations in the indifferent curves showing the mapping of consumer preferences for two substitutes. These lines provide good ground to discuss Dyson Air Multiplier in relation to other fans with blades. Dyson Air Multiplier faces fierce competition from the conventional fans, which act as close substitutes that people still admire instead of Dyson for their superior quality and trustworthiness; examples include Nexus and Scythe. Dyson claims that the design of the Multiplier is unique and innovative but some customers strongly disagree. They argue that the design of Dyson Multiplier is not a new one; one of the customers even compares it with compressed air systems used in coal mines and yet another compares it with a 50-year-old extremely stylish Westinghouse Art Dec Desk fans (boingboing). This tells that Dyson Air Multiplier has failed to establish a reputable brand and differentiated identity among customers and serves only as a substitute for the others though it has some unique attractions, the design and being bladeless for example. Therefore, Dyson Air Multiplier creates lesser difference among the minds of customers. Figure (4), thus, represents this situation: the consumer is grossly indifferent between the use of Dyson Air Multiplier and other fans. The Price Elasticity of Demand The price of a product is one of the most important determinants of it demand. Consumers worry about the prices mostly while making their buying decisions. Though some consumers may be less sensitive to high prices, most of the customers have a tendency to respond to changes in prices especially if the goods or services in question are not necessities or habit-forming. From this sensitivity of consumers to changes in prices, stems out the concept of elasticity of demand of a good to the changes in price (Parkin, 1996:99). Several factors are responsible in determining the price elasticity of demand (PED), some of them include the type of the consumer, availability of substitutes, prices of substitutes as well as complements and the time available to acquire a good or a service (103). Highly elastic demand is more responsive and changes sharply when the prices change. Mathematically, the price elasticity of demand (PED) can be calculated using the following formula: PED= % changes in demand ÷ % change in price The answer of elasticity is negative, ranging somewhere between 0 and α. This negative sign indicates an inverse relationship between the variables and is ignored while considering the degree of price elasticity of demand. If the answer, in absolute terms accordingly, is greater than 1, the demand is price elastic and if the answer is less than 1, the demand is price inelastic (100). Customer comments about Duson Air Multiplier reveal that they perceive several advantages in this new invention. However, the current price of Dyson Air Multiplier is £199 high enough to act as the biggest hurdles in consumers’ choice of Dyson air Multiplier (Boingboing). Briefly, we infer that there are many potential buyers for Dyson Air Multiplier but they are reluctant to purchase the fan due to excessively high price. We, for that reason, can claim that that the demand of Dyson Air Multiplier is relatively price elastic. If the company reduces the prices, it will experience a sharp rise in its demand resulting in increased total revenues for the business. The Income Elasticity of Demand Besides price, demand also depends upon the income of consumer. As the income of consumers rises, their demand for goods and services increases provided they are normal goods. In case of inferior goods, on the other hand, a negative relationship exists between income and the quantity demanded- income rises, demand falls. Demand of some of the goods responds more to the changes in income while others show lesser responsiveness of demand to changes in income. The income elasticity of demand, thus, determines how much the demand will respond to changes in income (Parkin, 1996:107). The following formula is used for calculating the income elasticity of demand: IED= % change in demand ÷ % change in income The answer, in this case, is normally a positive value between 0 and α. An answer lying below 0 means that the demand is not very responsive- or elastic, technically speaking - to changes in income whereas an answer above 1 is indicative of high elasticity. Furthermore, the income elasticity as well as price elasticity depends upon the slope of the demand curve (Maunder 93). We have already noticed in case of the price elasticity of demand that many potential consumers favour Dyson Air Multiplier, however, the hurdle in their demand is the prices of these fan. At the moment, many potential, low-income consumers find Dyson Air Multiplier as a-far-cry but if the income of those potential consumers increases, we expect the income effect to be strong and positive enough to bring about a sharp rise in the demand for the fans. Thus, we can infer that not only is the demand for Dyson Air Multiplier normal but also income elastic. Both the price elasticity of demand and the income elasticity of demand for Dyson seem to be elastic. The rise in the demand of the fan, consequently, can rise either by increasing the income of the people or by reducing the prices. The likelihood of establishing and maintaining a Monopoly A monopoly is market structure where there is only one seller in the market earning abnormal profits. Such an existence of one seller in the market becomes possible only when there are very strong barriers to entry in the market (Maunder 347). These barriers include technical knowhow, legal constraints, historical fame or goodwill of the existing sellers, natural endowments, finance requirements etc (348). Has Dyson Air Multiplier created enough barriers to entry in order to become a monopoly? No, firstly because consumers perceive the fan merely as a substitute of the existing fans and Dyson Air Multiplier, hence, already has got strong competition in the market. Secondly, the design it has offered as a newer technology has undergone strong criticism by the consumers (Boingboing). Thirdly, the fan is a very recent invention, or discovery as Sir James Dyson himself claims, and thus has no historical goodwill as the case is with existing strong brands like Nexus and Scythe. As far as the legal barriers are concerned, there is some possibility that Dyson will be able to get patent rights for this invention depending on the differing laws of land. However, some critics argue that the pace of innovation is very fast in this global business world and, that is why, this advantage to Duson once again is not a strong barrier to entry for other firms. Moreover, the financial barriers are also not of any relevance in the creation of a monopoly by Dyson. Furthermore, one of even bigger hurdles for Dyson Air Multiplier is the price being too high to dampen the goodwill of Dyson Air Multiplier. Besides price, durability and performance are two other more important determinants of staying in and capturing market in the long-run. These two qualities also reduce the appeal of the unique design even as the case is with Dyson Multiplier (Beschizza, 2009). Thus in the light of the above discussion, we can safely claim that the likeliness of Dyson becoming a monopoly is near to the ground. Conclusion Dyson Air Multiplier is a unique, bladeless invention meant to replace the existing fans. The product does contain many benefits, utility, for the consumers and has got good prospects to prosper in the marketplace. Air Multiplier is the second product that Dyson has invented yet it may seem very familiar with the existing technologies to some consumers. Even though it has strong likeliness for a high market demand as, noteably, both the price elasticity of demand and the income elasticity of demand are high for Dyson Air Multiplier, high pricing strategy has become a hurdle for Dyson Air Multiplier. There is, nonetheless, no probability that Dyson has come to a position to dictate it terms in the market. Dyson has just done well enough to create a chance to capture a large piece of market share for its Air Multiplier. References Beschizza, R. 2009, 19 Dec. Dyson Air Multiplier looks Great, Feels God, Hurts Wallet. www.boingboing.com. Retrieved 04 Dec, 2009 from Boingboing. 2009, Oct 19. Comments. www.boingboing.net. Retrieved 04 Dec, 2009 from http://boingboing.net/2009/10/19/dysons-air-multiplie.html Flatworld Knowledge, Indifferent curve Analysis: An Alternative Approach to Understanding Consumer Choice. Flatworldknowledge.com n.d. Retrieved 06 Dec, 2009 Hickman, M. 13 Oct, 2009 Dyson: Fans, the Conservatives and the Climate Change. Independent.co.uk Retrieved 03 Dec, 2009 from http://www.independent.co.uk/news/business/news/dyson-fans-the-conservatives-and-climate-change-1801663.html Liverpool Daily News. 06 Nov, 2009. Inventor James Dyson takes 96% Pay Cut. Liverpool Daily News: National Business News. Retrieved 03 Dec, 2009 from http://www.liverpooldailypost.co.uk/ldpbusiness/national-business-news/2009/11/06/inventor-sir-james-dyson-s-takes-96-pay-cut-92534-25109239/ Maunder, M. et al. 1990 Economics Explained. Collins Educational, Miller, P. 12 Oct. 2009 Dyson's Air Multiplier is the overpriced bladeless fan you never asked for. www.engadget.com, retrieved 03 Dec, 2009 from http://www.engadget.com/2009/10/12/dysons-air-multiplier-is-the-overpriced-bladeless-fan-you-never/ Parkin, M. 1996 Economics third Edition, Addison-Wesley Publishing Company, Sayid, R. 13 Oct, 2009. Man Behind the Dyson Vacuum Cleaner invents a Fan with no Blades. Mirror.co.uk. Retrieved 04 Dec, 2009 from http://www.mirror.co.uk/news/top-stories/2009/10/13/the-fan-that-has-no-fan-115875-21743182/ Read More