Page 203 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes But how did the paints industry acquire such a mesoeconomic structure? The existence of
economies of scale usually leads to its establishment. Where economies of scale exist,
profitable expansion to larger plant sizes will necessarily come at the expense of rival
companies. Realisation of economies of scale by some companies means the number of
rival firms are simultaneously reduced through failure or merger. However, no such
economies of scale exist in the paints industry. Paint manufacture essentially being a batch
process, economies of scale do not automatically flow from larger plant sizes. On the
other hand, there are other factors which contributed to the emergence of the industry
structure. The basic infrastructure in terms of distribution network, the consumer hold
through strong brand awareness, power of innovation and the introduction of a large
variety of products are some of the aspects responsible for the creation of strong entry
barriers and, consequently, dominant firms.

Regardless of how such structures have started emerging, one important phenomenon
which may develop in the future is the mutual interdependence of companies. What it
means in reality is that no company in the mesoeconomic industry may dare to alter its
price policies without attempting to calculate the most likely reaction of its rivals. It is like
playing a chess or a poker game. There is no way to know beforehand the best way to play
your cards in a poker or a chess game because it depends on the way the other players play
theirs. Players should pattern their actions according to the expected reactions of their
rivals.
What emerges out of the difficulty in assessing rival reaction is the rigidity in prices.
Prices are expected to change less frequently in mesoeconomic structures than under pure
or monopolistic competition. On the other extreme, a price change by one producer may
spark off a price war as other producers come out with more drastic price changes. As an
intermediate position, producers may collide with each other to bring about organised
price changes. However, non-collusive mesoeconomies may seek to lead a quiet life and
may adopt a live-and-let live policy.
At the same time, collusive behaviour, though difficult, cannot be ruled out. To reduce the
uncertainties of price wars, producers may collide with each other and charge the maximum
profit making price. For society, it would be more like a monopolist kind of market under
the garb of competition. Yet another way to deal with uncertainties with respect to rival
reactions would be collusion. Adopting a "follow the leader" policy may result in tacit
collusion. This has often been witnessed in the paints industry — when one company
comes out with a price change, it is followed by the other players. What all this indicates
is that mesoeconomic companies shun price competition.

But often such collusive behaviour is accompanied by non-price competition. This
phenomenon has also been witnessed in the paints industry. The emphasis on non-price
competition has its roots in two facts. One, price cuts can be quickly and easily met by a
firm's rivals who may promptly react to cancel out any potential gains in sales through
matching price cuts. There is also the risk of price war. On the other hand, non-price
competition is harmless and can be safely carried out without any side effects through
product innovation, improvement in productive techniques and advertising gimmicks
which may be difficult to replicate.
This is exactly what the paints industry has been following for the last three years with the
introduction of consumer-interactive marketing methods for advertising paints – 'Insta
Colour' by Jenson & Nicholson, "Colour Solutions" by ICI India, "Colour Bank' by Berger
Paints and "Colour World' by Asian Paints. ICI India's generous offer to paint the Ananthpur
Sahib could also be fitted into the category of non-price competition. And, second,
mesoeconomic firms generally have the financial strength to support such advertising.

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