Page 185 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes market we have many sellers, as under perfect competition). However, they don't sell identical
products. Instead, they sell differentiated products-products that differ somewhat, or are
perceived to differ, even though they serve a similar purpose. Products can be differentiated.
Sometimes, it's simply geographical; you probably buy gasoline at the station closest to your
home regardless of the brand. At other times, perceived differences between products are
promoted by advertising designed to convince consumers that one product is different from
another, and better than it. Regardless of customer loyalty to a product, however, if its price
goes too high, the seller will lose business to a competitor. Under monopolistic competition,
therefore, companies have only limited control over price.
If we take a closer look we find that in some industries they have it many differentiated brands
and create an illusion of competition and providing a barrier to entry. For example so many
brands of soaps are there, but the most of these brands are owned by 2 companies, Unilever and
Proctor and Gamble. Such type of brand proliferation put barriers for new entry in the market.
There is less chance of getting a good market share with so many brands. Therefore, the new
firm would have an incentive to keep different brands in order to deter competitors. Another
aspect of this is, merging many different brands there may be economies of scale.
Government policies often act as entry barriers in several industries. Besides, the growth of
entrepreneurship is also a council element in the Indian context. Until a decade or so ago, even
products like soaps and toothpastes were characterised by oligopolies. For some reason, new
firms just did not enter into several product lines despite favourable government policy. It is
only since the 80s that one finds competition hotting up in the country's markets. Product
variations, aggressive promotional campaigns and easy entry of new firms are now commonly
encountered in several consumer goods industries.

Case Study Maruti Facing Tough Competition

he key issue for Maruti today is to sell at least the number of cars it sold last year
(1998-99). Insiders in the company admit that it can't. The reason: Hyundai, Daewoo
Tand Telco all plan to hawk 60,000 cars by end of next April. And all of them are
targeting the Zen or the Maruti 800, the two monopolists, and not the crowded luxury
segment. And with the market expected to stagnate, by simple logic the newcomers will
be grabbing a share only from Maruti.
The threat from the new car makers is not an empty one. For instance, Hyundai plans to
follow the policy of "enrichment" of the Zen. It intends to price its air conditioned model
slightly lower than the Zen VX and top it by pricing the higher end model with power
steering and windows just 10,000-15,000 more than the Zen VX.
Similarly, Daewoo plans to woo buyers of the Maruti 800 air conditioned and the Zen by
pricing its car under 3 lakh. And Telco is all set to take on the 800 by offering a model at
a slightly higher price.
The scenario might worsen in 1999-2000 when Maruti would have added to capacity. By
next year the three other car rivals will have the capacity to put 3.6 lakh cars a year on the
road. Of course, they might not reach full capacity but even at a conservative estimate they
would be selling over 1 lakh cars in 1999-2000. Assuming the market grows by 10 per cent,
as some optimists predict, there will be more capacity chasing the 40,000 extra car consumers.

Contd...

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