Page 184 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 12: Monopolistic Competition

Assumptions in Analysing Firm Behaviour Notes

We analyse the conditions and process of long run equilibrium under monopolistic competition

with the assumption that competing firms keep their selling costs and product quality constant
and compete only through price variation. We then assume that

1. The demand curve of each individual firm has the same shape (elasticity) and position
(distance from the y-axis). That is, we assume the demand curves of all firms to be

symmetrical. This assumption implies that market share of every firm is the same and
equal to a constant proportion of total market demand. That is, if total market demand is

Q and an individual firm’s demand is q then q=KQ, where K is a constant fraction for all
fi rms.
2. The cost curves, both average and marginal, are symmetrical for each fi rm.
These two assumptions are ‘heroic’ or unrealistic but we need to make them for logical
convenience in order to analyse the long run equilibrium of a typical fi rm under monopolistic
competition.

Caselet Market Entry and the Vanilla Syndrome

n most categories of consumer products, there is one dominant segment; glucose in
biscuits, cola in soft drinks, vanilla in ice creams. These are good categories, but the
Isame thing can be extended to other product categories.
Now the tendency is that when a new player wants to enter an established product

category, he automatically looks at the dominant segment first. The MD and CEO, Ashok
Jain, Cadbury Schweppes Beverages India Private Limited, calls it a “Vanilla trap”. He
explains this as follows:
“A trap because you, as the new entrant, can never come close to challenging the dominance
of the biggest player in that vanilla segment. So what you get into is a syndrome: “Can I
get two-to-three per cent market share in that segment?” The segment spells sheer volume,
so this share would be larger than 15 per cent of some other segment in the category.
That’s where the trap is. The segment’s Goliath is so big, you’ll get routed, like it or not.
So what do you do instead? I suggest the “blackcurrant route”. A route where you take
something else and make yourself dominant there, while getting a foot into the dominant
segment as well (you can’t afford not to).
And what’ll happen? While people will come for your blackcurrant, they will buy your
vanilla. Your volumes will still come from your vanilla. But for top-of-mind consumer, the
trademark blackcurrant is what will identify you. This is theory. It’s happened. I’ll give
you three examples.
When Cadbury India decided to extend to biscuits, it started off by challenging Parle in
glucose, a segment where Parle’s strength is unmatched. Cadbury didn’t succeed. By the
time it launched chocolate biscuits, it was too late.
There was a lesson here, which was extended to ice creams, the next category Cadbury
entered. The brand, Dollops, harped on its blackcurrant ice cream, didn’t talk vanilla at all,
but the volumes came from vanilla anyway.
Then take Britannia. For years, it tried to break Parle’s dominance in glucose biscuits, with
little success. It then went in for a number of branded products that gave it an aura and
Contd...

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