Competition in Consumer Goods is Tending towards Perfect Competition - Coursework Example

Competition Competition in Consumer Goods is tending towards Perfect Competition Introduction Characteristics of perfect competition, oligopolyand monopoly in economics theory help us to understand business dynamics and markets. Businesses have ‘markets’ at the core of their operations. All firms work out their survival strategies from time to time, and continue to fine-tune it with the changing market conditions. Survival, growth and profit maximisation are the watchwords for businesses even as new suppliers, new products, newer promotion methods, changing tastes of customers etc. characterise a market. This essay examines the competitive forces created by newer marketing strategies and communication technologies with specific reference to competition and prices. It concludes that the barriers to competition and efficiency maximisation are disappearing, especially for consumer goods, and the markets are approaching near perfect competitive situation, limited exceptions to this trend notwithstanding. Consumer goods Consumer goods are of two types viz., durable and non-durable. Generally durable items like cameras, cell phones, appliances, furniture etc. have a life span of more than three years while the non-durable items like food, fuel, cosmetics etc. are consumed immediately. Items like clothing, footwear, etc. are also non-durable items, consumed within about three years (Britannica concise encyclopedia, 2007). These are items of mass market sought after by almost all the households, subject to availability of purchasing power. It is this nature of consumer goods i.e., relatively faster consumption and high demand that provides opportunities for business and at the same time, induces intense competition among suppliers. This competition in Competition 2 turn gives rise to strategies in several areas of operations such as pricing, product differentiation, customer services, and marketing channels. Businesses are constantly faced with choices of how much to produce and what price to charge. Costs, prices and consumer goods markets Costs comprise of the two basic types viz., fixed costs of an enterprise and variable costs that happen with a change in the output volumes. Total cost equals to the sum of fixed and variable costs (for a given volume of output); average cost equals to the total cost divided by the corresponding numbers of units produced; and the marginal cost is the additional cost for producing an extra unit of the product. Total, average and marginal revenues can be described in a similar manner. These definitions help one to understand competitive pricing under different market situations (Sloman, 2003, Ch. 5, 6 & 7). Consumer goods markets operate in a dynamic manner all the time and this dynamism, of which the firm is a factor, limits its ability to set prices at will. A higher price will bring in higher profit, but will drive down demand and invite competition as well; a lower price will reduce profit per unit, but will fuel the demand thus expanding the market. Similarly, a higher output will reduce the cost per unit, if other factors of production can be maintained at constant value, and vice versa. Market dynamics determine the prices, sales volumes and revenues. This dynamism in turn enables one to define a market into one of the three classic types viz., perfect competition, oligopoly and monopoly. Perfectly competitive market and e-commerce Large number of buyers and sellers, free movement of people and goods (unrestricted entry and exit), and access to full information about the competing products, are conditions for Competition 3 perfect competition. In this situation, neither the buyer nor the seller is able to exert undue influence. Products and their substitutes are available in plenty. Businesses have to operate at the highest possible levels of efficiency to remain competitive in the market and to retain their market share. Profits are minimal and are nearly equal for all players. Consumer goods of common consumption like food grains, processed food, milk and beverages etc. are examples of products in a competitive market. In a competitive market, the marginal revenue equals the price of the goods, since the seller is in no position to sell at a differentiated price, irrespective of his production volumes. Hence, he looks to the costs angle. Fixed costs being what they are, it is the variable cost element that comes into play with the changing volume of sales. In order to maximize his profits, he has to find the point (in quantity of sales) at which the marginal cost equals or exceeds the marginal revenue. The key words in the above analysis of a perfectly competitive market are ‘large number of buyers and sellers, free movement of people and goods (unrestricted entry and exit), and access to information’. Internet based e-commerce has shown the potential to create such conditions, especially for consumer goods. When consumers are in a position to comprehensively compare the features, prices and service conditions of competing products, they are able to make the most efficient ‘buy’ decisions. Any number of examples can be seen with the online stores’ offering consumer goods like readymade clothes, jewelry, electronic appliances, books etc. For each one of these items, Internet give the consumers a glimpse of makes, models, features, and instant comparison of prices across different suppliers. This kind of ready-made comparative statement at the click of a button, is empowering the buyers on the one hand, and compelling the sellers to offer goods at the most competitive prices on the other. For Competition 4 all practical purposes e-commerce does not also recognise any geographical boundaries, and more so for commerce within any country. Thus, in this near perfect competitive condition, “Price changes act as the mechanism whereby demand and supply are balanced (Sloman et al., 2006, Ch.4)”, and a win-win situation is created for the seller and the buyer. It is not surprising then that volumes of business transacted over the Internet are surging at $1 trillion (Sloman et al., 2006, Ch.12, Case E2) Price dispersion even with e-commerce While it is generally held that e-commerce lowers search costs enabling consumers to make best buy decisions, a study by Ratchford et al. found ‘a substantial degree of price dispersion in electronic markets for consumer goods (Ratchford et al., 2000). Trade barriers like patents, brand names, trademarks etc., partly account for price differentials even in a highly competitive market (Stretton, et al., 2000, p.494). Further, competition among businesses makes them to innovate all the time, and be a different player in the market. This differentiation can be in many ways such as product features, packaging, promotion, distribution, retailing, and customer services. These variations cause variations in product ‘utility’ to the consumers, who look at the product offerings in totality, rather than just the product itself. This also explains the price dispersion in consumer goods market. In addition, another important factor is the oligopoly nature of the market discussed below. Oligopoly and e-commerce Oligopoly exists for items of mass consumption like cosmetics, ready-mades, electronic products etc. A few suppliers, offering competing and differentiated products within a narrow price band, characterize this market. No supplier dominates the market; product features, Competition 5 distribution efficiency and promotion dictate the prices. But since there are only a few suppliers, any decision by one supplier (to increase / decrease production or prices) affects the entire market, and impacts the other suppliers as well. The oligopoly price is less than the monopoly price but greater than the competitive price...(Mankiw, 2004, p.352).” Firms operating under oligopoly, reach market equilibrium for profit maximization when the production volumes and prices are jointly decided and acted upon in case they are able to collude with each other. In other cases where such collusion is not possible due to antitrust laws (Sherman Act) or any other reason, then profit maximization is difficult to achieve with each player constantly trying to improve his market share by product differentiation, pricing and promotion. Profits under these circumstances approach those that can be expected under competitive market conditions. Interestingly enough, for consumer goods it is not just the few manufacturers that constitute an oligopoly market, but the giant distributors and retailers as well. These latter groups wield enormous economic power vis-à-vis suppliers and consumers. In the past, shelf space being at a premium, they were able to dictate terms to a supplier. But with the advent of Internet and e-commerce, the household computer has emerged as an efficient alternative display mode, reducing the importance of shelf space. Not surprisingly, the supermarket chains like Tesco have their own online stores, in addition to physical retail outlets. With economic power for negotiations with suppliers, and massive presence in multiple locations as well as on the Internet, these giant marketing companies are able to sell consumers products – in a differentiated price scale, for many reasons inherent in their operations. However, Internet allows anyone and everyone to be a market player; one-man shows and smaller business firms have significant cost Competition 6 advantages, which they are able to pass on to consumers. This phenomenon can be readily seen on e-commerce sites like the e-Bay, which are facilitating consumer goods exchange through innovations like auctioning and reverse auctioning etc. Thus, price dispersion and price competitiveness are moving side-by-side, which was also noted by Ratchford who stated that, “… price dispersion decreased substantially between 2000 and 2001” (Ratchford et al., 2000). Conclusion Consumers are in an ever more informed situation today. Internet is enabling them not only the convenience of online shopping with attendant reduction in search costs, but also facilitating instantaneous comparison of choices available in terms of products, features, finance options etc. In addition, they have the choice of purchasing practically from any source that offers them the best bargain, all facts considered. Internet and e-commerce is fostering a new generation of smaller entrepreneurs with minimum overhead expenses. Giant supermarkets and distributors have quickly got on to the band wagon of the Internet, in spite of having substantial physical retailing outlets in multi-locations. All this is resulting in turning the consumer goods market to a near perfect competition situation, even for products and suppliers which once constituted an oligopolistic market. References Beharrell A, Sloman J (2006), Supermarket competition – deal or no deal?, Pearson Education Companion Website, Available: http://www.booksites.net/sloman/download_files/TEI/Current/index.htm [20 March 2007]. Britannica concise encyclopedia (2007), Consumer goods. Available: http://www.answers.com/topic/consumer-goods [20 Mar 2007]. Mankiw NG (2004), Principles of economics, South-Western Educational Publishing. Ratchford BT, Xing P, Shankar V (2000), "On the Efficiency of Internet Markets for Consumer Goods" University of Maryland Department of Marketing. Available: SSRN: http://ssrn.com/abstract=328800 or DOI: 10.2139/ssrn.328800 [20 Mar 2007]. Sloman J (2003), Economics, Prentice Hall, New York. Sloman. J, Sutcliffe M (2006), Economics for Business (3rd Ed.) Stretton, H Economics: A New Introduction Read More