PRICE WARS IN THE SUPERMARKET AND MOBILE PHONE INDUSTRIES

Price Wars in the Supermarket and Mobile Phone Industries 6 PRICEWARS IN THE SUPERMARKET AND MOBILE PHONE INDUSTRIES

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Tableof Content

Introduction 3

PriceWar among British Supermarkets 4

Analysisof price War Effects on the Market 5

Findings 8

MobileTelephony in Emerging Markets 9

MacroeconomicConsequences of Mobile Phone Adoption 10

OverallMarket Impact 11

Conclusion 13

Recommendations 14

References 16

Appendices………………………………………………………………………………………………………………….18

Introduction

Intherecentyearspricewarshavebeenveryprevalentin almosteveryindustry,from fastfoodrestaurantto airlines,from computersoftware to groceryretailing, from mobilephonesto personalcomputers.In theencounterto gettheinterestof thecustomerin themarket,companiesapplya broadrangeof tactics to facecompetitors(Mankiw,2012). In a competitivemarket,firm tryto maketheir productas distinctas possiblesoas to commanda portionof themarket.Supermarkets andmobilephoneindustriesfallinto oligopolistic marketandin thismarketthere are fewfirms andas suchcompetitionis extremelystiff.Increasinglypriceis theweaponof choiceandmoreoftenthan not theskirmishing degeneratesinto a pricewar(Bermingham,2014).Thegoalofpricewaris to capturemaintainandacquirenewmarketshareevenifthiswould translates into drivingsomefirms out of themarket.In an oligopolistic market,there is alwaysa leadingfirm that setsthepaceforothercompaniesin theindustry,in economicthisbusinessis referredto as a leader.Whenitcutspricesto tryto increaseits marketshare,otherfirms retaliateby slashingtheir pricesto thelevel setby theleaderorevenat a lowerlevel. Thisinevitablyleadsto a precipitousdeclinein thedegreeof profitgeneratedby firms in theindustry(Mceachern,2014).

Pricewarscan generateeconomically debilitating andpsychologically devastatingstateof affairsthattakean extraordinarytollon afirm,companiesandtheprofitability of theindustry(Arnold,2010). In thesebrutalbattlesitdoesnot matterwhich firmwinsthewar,thecombatantsfrequentlycompaniesendup worseoffthan before theonsetof thepricewar.Andyet pricewarsare becomingincreasinglywidespreadanduncommonlyfierce,especiallyin United Kingdom (Steiner, 2014).

Price War among BritishSupermarkets

Inthe21st century,marketingstartsandconcludeswith thecustomerneeds.Thecorepurposeof marketing isensuringcustomersatisfaction.In thisrespectmarketingmanagement,adinfinitum strivesto augmentthewelfarecustomerbaseby offeringbetterproductsandservicesandat a pricethat is affordable. Marketingis not a torpidprocess,buta dynamicprocessthatentailsa setof interacting forcesbetween manufacturersandconsumersandfulfillingtheneedsandexpectation of thecustomersin a fairmanner(Steiner., 2014). Besides thequalityof theproduct,priceis a vitalelementin themarketingof anycommodityorservice.Pricing has a crucialbearingon thecompetitivepositionof a productandconsumerssupportrelies on thepricethat isset.Pricing isuseda weaponin an oligopolistic marketforattainingthetargeted salesvolumeandprojectedmarketshares(Mceachern,2014). Competingcompaniesandfirms providingsimilarproductsorservicesin themarketoftenresort to competitivepricing in a bidto capturea largermarketshareoroutsmart their competitorsin themarket.Thisis thescenariosthat leadto pricewarsin an oligopolistic market.Pricewaris an economictermthat is usedto indicatea situationof severecompetitiverivalryamong suppliers of commoditiesandservices,which goalong with multi-lateral sequenceof pricecutback (Mankiw,2012).

Inthisseriesof pricereductions,one competitorlowersits price,andthentheotherfirms respondby loweringtheir pricesto matchthatof theprimarycompany.Ifone firm reducesthepriceagain,a newrebound of reductionsbegins.In theinterim,pricewarsare beneficialto theshoppers,whocan benefitfrom thereducedprices.Thisis not an idyllicconditionforthefirms involvedin therivalry.Reducingpricesnot onlyreducestheprofitmarginbutalsois a hugethreatto their survivalin themarket(Mceachern,2014). In thelongterm,thisscenariodepending on thereactionof theotherfirms may be beneficialto thedominantcompany.Normally,itis anticipatedthatthesmallerfirms willbe forcedoutof themarketorwill makean informalagreementwith theprimarycompanyto usenon-price competition(Mankiw,2012). Nonetheless,in an examplewherethecompaniescontrola significantpartof themarketandare allof thesamesize,thedamageresultingfrom pricewarcan trickledown to suppliers andotherfirms whoproviderawmaterialforthemanufactureof commodities.

Diagram1: DemandRelationship

Analysis of price War Effectson the Market

Asaforementioned an oligopolistic markethas fewcompetitors,whocontrola significantpartof themarketandwhocontinuously monitortheactionof eachother’spriceandare allsetto respondto anypricecut.Thediagrambelow depicts an oligopolistic market.

Diagram2: OligopolisticMarket

Thekinked demandcurvemodelispeggedon theassumptionthata firm might facea dualdemandcurveforthecommoditiesitis offeringin themarket.Itisbasedon theprobablereactionof theotherfirmsin theindustry,which might changethepriceoranothervariable.Theassumptionis thatfirmsin an oligopoly will continuously protectandtryto maintaintheir marketshareandthattheothercompeting firms are loathto matchanother’spriceincreasebutmay matcha pricefall.Itis importantto notethatallfirmsin an oligopolistic marketrespondasymmetrically to a changein thepriceof anotherfirm(Mceachern,2014).

Diagram3: OligopolisticPricing

P1signifytheprevailingpricein an oligopolistic market.Ifa firm increasespriceits pricealong (D1), otherfirmsin theindustrywill not matchtheincreasein price,thefirmwill risklosingmarketshareto theotherfirms.Normally,pricewarsentail pricecutsuchthatthefirmwill reducethepricealong(D2), thecomponentof thedemandcurvethat is elastic(Arnold,2010). Otherfirmswill respondby decreasingtheir pricesto matchthatof theprimaryfirm,andto avoidlosingtheir marketshare.Ascan be observedfirmsin an oligopolistic markethas a kinked demandcurve,suchthatthere is a breakbetweenthemarginalrevenuecurves(MR1 – MR2).In anormalmarketenvironment,firms maximise profitby producingthequantityof commoditiesthat is equalto marginalcost,wherebymarginalcost= marginalrevenue.Inthegapbetween themarginalcostsMC1 andMC2, there is a phenomenonreferredto as pricerigidity, wherefirms will not changetheir prices.Butthisis onlythecasewhenfirmsare not usingpricecompetitionto increasetheir marketshare(Arnold,2010).

Findings

Inthecurrentpricewarsin thesupermarket andmobilephoneindustries,firm havebeenreducingtheir processsoas to avoidlosingtheir marketsharein themarket.Largesupermarkets suchTesco, Morrisons andGold Sachs havealllosta significantpartof their marketin spiteof thefactthattheyhavecontinuously reducedtheir pricesto matchthatof their counterpartsAldi andLidl (Steiner, 2014). Theelementsthat determinewhetherthefirms will gainorlosedepend on theinelasticity of its demandcurve.Aldi andLidl havebeenableto offsettheeffectsof thelowpricesby scale.In reality,thequantitiessuppliedhave not increasedbutfirms haveonlyadjustedtheir priceto matchthoseof otherfirms.Themaingainers are consumerswhocan acquirecommoditiesandservicesat a lowerpricethan theyusedto before theonsetof theprices.Thesamescenariohas prevailedin thephoneindustry.

Lowpricemeanthatconsumerscan savemoremoneyin their pockets,andhavetheopportunitytochoosegoodsof thehighestquality.Asmentionedabove thisis a temporarysituation,since firms haveto operateata lossorbreakevento avoidlosingtheir marketshare.In theend,thebrutalwarshall squeezeout marginalfirms andtotallyalterthecompositionof themarket(Steiner,2014). Veryfewfirms shall be willingto entera marketthat is operatingat lowpricesforsuccess,andmarginalcompetitorswill be forcedto exit ormergeas a consequenceof an inabilityto makea profit.Thishas allbeentooconspicuousin theUnited Kingdom. Forexample,in October, one of thelargestsupermarkets Britain, Tesco revealedthatithadsustaineda £263million reductionin profit(Steiner,2014).

Thepricewarin among supermarket alsohas ahugetollonthefoodp[producerwhoareusedas fodderto shield against thefiercebattle.Assupermarkets continueto adjusttheir positiontheyare reducingcosts,andthishas ledto morethan 28 percent insolvenciesin thefoodproductionwithin a spanof 12 months.Thefirms that are mai9nly affectedincludereadymealproducers,bakeriesandpasta makers.Forexample,one of thelargestpasta producersin Britain, Pasta Reale has beencoercedto enterinto insolvenciesafter losingtwo majorcontractswith supermarkets within a spanof one year.Thishas resultedin thelossof morethan 170 jobs(Bermingham,2014).Under suchcompetitiveenvironmentcapacity,exithas emergedas theonlyfeasibleoptionforthereturnof to cost-effective growth.On average,a basketof commoditiescost0.4 percent lessthan whatitdidthepreviousyear.

Mobile Telephony in EmergingMarkets

Theuse of cell phones in the globe has grown unprecedentedly over thelast two decade, more specifically in the emerging economies anddeveloping nations (Waverman,Meschi &amp Fuss, 2005). Areductionin thepriceof mobilephonestotheextentthatitis affordable tomostindividualsin emergingmarketshas manyimplicationsontheeconomicfacetsof thenations.From a situationof anormaldemandcurve,a fallin thecostof a mobilephonehas theeffectof increasingthequantitiesof mobilephonesdemanded(Waverman,Meschi &amp Fuss, 2005). Nonetheless,thisdoesnot haveanyeffecton thedemandformobilephones.Whenallfactorsare constant,andonlythepriceof themobilephoneundergoes changes,themarketwill witnessa movementalong thedemandcurve.

Diagram4: Movementalong theDemandCurve

Macroeconomic Consequences ofMobile Phone Adoption

Availabilityof low-cost phonesin emergingmarketsmeansthatamajorityof theciviliansin thesenationsare in a positionto acquirea cellphone.Thishas tremendousimpactson themacroeconomic facetof thesecountries(Allen,2011).Firstinformationtechnology andcommunicationhas a positiveeffecton thegrossdomesticproductandemployment.Abilityto communicateandexecutetransitionswith speedmakes marketsin emergingcountriesmoreefficient.In additional,thesearchcostis significantly reducedwhich translateto per capita incomegrowth(Allen,2011).Increasedcoordination among businessenterprises is alsoanotheravenuethat can boostgrossdomesticgrowth(Zhen-Wei,2008). Formicro andsmallscaleenterprises, cellphonesare associatedwith timesavingandimprovedcommunicationwith suppliers, andconsumersan aspectthat translatesinto improvedprofits.Nonetheless,mobilephonesimpacton themarketthrough reducedsearchcosts. Itis worthto notethatefficiencyandimprovementin thewaymannerthatthemarketoperateshas thepotential of increasingemployment.Forexample,in a researchfindingconductedin South Africa itwasfoundthatwhena communityreceivedtotalnetworkcoverage employmentincreasedby morethan 15 percent (Allen,2011).Thisis,asa result,improvedspatial integrationof thewagelabormarketandpartiallydueto theimpactsof a moreefficientmarket.Whenmajorityof theciviliancan afforda cellphone,themarketis muchmoreefficientdueto a reductionof transactionandsearchcosts(Mceachern, 2014). Ascan be observedin thediagrambelow,pricesof commoditiesreducewhenmarketis muchmoreefficientandwhengrossdomesticproductis growing.

Diagram5: Changesin the Price of Commodities

Overall Market Impact

Theeffectsof themobileboomin emergingmarketson themacroeconomic facethavebeenfarreaching.In amajorityof thesemarkets,thetelecommunication sectorhas emerged as one of thechiefsourcesof foreigndirectinvestment(Waverman,Meschi &amp Fuss, 2005). In addition,therevenuegeneratedby thissectorcontributesconsiderably to theexpansionof grossdomesticproductin emergingcountries(Columbus,2010).Ontheotherhand,themobilephonesectorhas hadmomentouseffectson theemploymentfacetof theeconomy,directlyorindirectlyvia creationof extensivenetworksof dealers,sub-dealers andsubcontractors. In emergingcountriessuchas Nigeria, there are morethan 10,000 distributiondealersforone of themajortelecommunication firm in thecountry.In addition,there are 3,000 sub-dealers andmorethan 50,000 retailopeningsandstreet vendors(Waverman,Meschi &amp Fuss, 2005).

Diagram6: PriceChanges Vs Real Output

Diagram6: PriceChanges Vs Real GDP

Increaseddemandstimulatedby lowpricesshiftsdemandcurveas shownabove.Thisattractsforeigninvestmentthatsignificantly bringsthecallanddata chargedown andthatincreasesnationaloutput(Mankiw,2012).

Conclusion

Inthe21st century,marketingstartsandconcludeswith thecustomerneeds.One of thecentraltargetsof marketingis ensuringcustomersatisfaction.Competingcompaniesandfirms providingsimilarproductsorservicesin themarketoftenresort to competitivepricing in a bidto capturea largermarketshareoroutsmart their competitorsin themarket.Thisis thescenariosthat leadto pricewarsin an oligopolistic market.Gainers of thisconditionare consumers,becauselowpricemeanthatconsumerscan savemorecashin their pockets,andhavetheopportunitytochoosegoodsof thehighestquality.Competingfirms haveto sacrificea hugepartof their earningsin orderto preservetheir marketshareandthisin thelongruncan be verydebilitating to theindustry,with ripple effectstootherindustrieslinkedto them. Whenmobilephonesaresoldat a pricethat is affordable to mostof theconsumersin themarket,there will be highdemandthat has thepotential of transformingtheeconomy.Firsttherevenuegeneratedinforms of taxesfrom thetelephony sectorprovidesanimportantcontributionto thecountry’sgrossdomesticproduct.Secondmobilephonesmakemarketsmoreefficientby reducingthecostof transactionandsearchcost.Finally,mobiletelephony sectoris a lucrativeventureforforeigndirectinvestmentthat createsemploymentopportunities,improvesthelivingstandardsandincreasescompetitionforthebenefitof theconsumers.

Recommendations

Ascan be observedfrom thefindingsabove,thoughconsumermay benefitfrom thepricewarsin themarket,thesebenefitsof reducedpriceswill onlybe enjoyedin theshortrun.In thelongruntheyare goingto payprices,sometimeshigherthan thepricethat wasprevailingin themarketbefore theonsetof thepricewars.In thisrespect,supermarkets andotheroligopolistic marketsshould be encouragedto usenon-price competitionto fightformarketshare.Non-price strategiesinclude,advertising,productpromotion,after saleservices,providinghigh-quality commoditiesandservices,longer openinghours,discounton commoditiesupgradesandcontractual relationshipwith thesuppliers. Suppliers havebeenone of themajorlosersin thepricewarengulfingthesupermarket industryin Britain, andthiscould bealleviatedthrough soundcontractual arrangementthat shields bothpartiesfrom lossesandneglect. Low-costcellphoneshavepotentialof transformingtheeconomyof emergingnations,butmeasuresmust be putinplaceto preventinflationary effects.Mobileoperatorstaketheopportunityof thedemandofmobilephonesto increasethecallanddata charges.Andsince mostare operatingin an oligopolistic markettheconsumershould be shielded from negativeeffectsof collisions.

Reference List

Allen,T2011.MacroeconomicImpact of Mobile Phones in the Developing World.Department of Economics, Case Western Reserve University, Cleveland,Ohio. Retrieved from:http://tutor2u.net/economics/revision-notes/a2-micro-oligopoly-overview.html

Arnold,R. A 2010. Macroeconomics.Mason, OH, Cengage Learning, South Western.

Bermingham,F 2014. SupermarketPrice War Killing British Food Producers. InternationalBusiness Times. Retrieved from:http://www.ibtimes.co.uk/supermarket-price-war-killing-british-food-producers-1476283

Columbus,S 2010, “MobilesMake the Markets Now”: How Mobile Phone Technology Makes Markets inDeveloping Countries More Efficient.

Mankiw,N. G 2012, Briefprinciples of macroeconomics.Mason, OH, South-Western Cengage Learning.

Mceachern,W. A 2014, Macroeconomics:a contemporary introduction.

&quotPriceWars: TheCost of A Competitive Behaviour.&quot123HelpMe.com. 07 Dec 2014 &nbsp &nbsphttp://www.123HelpMe.com/view.asp?id=166925

Steiner.R 2014, Britain`sbiggest supermarkets `must shut stores to survive`, as price wartakes its toll. DailyMail. Retrievedfrom:http://www.thisismoney.co.uk/money/news/article-2838364/Britain-s-biggest-supermarkets-shut-stores-survive-price-war-takes-toll.html#ixzz3LIDkeCRU

Waverman,L., Meschi, M., &amp Fuss, M 2005, The Impact of Telecoms onEconomic Growth in Developing Countries. VodafonePolicy Paper Series, 2,10-23

Zhen-WeiQ. C 2008, MobileTelephony: A Transformational Tool for Growth and Development.WorldBank. Retrieved from:http://www.proparco.fr/webdav/site/proparco/shared/ELEMENTS_COMMUNS/PROPARCO/Revue%20SPD%20vraie/PDF/SPD4/RevueSPD4_Mobile_Phone_UK.pdf

Appendices

Diagram1: DemandRelationship

Diagram2: OligopolisticMarket

Diagram3: OligopolisticPricing

amovementalong thedemandcurve.

Diagram4: Movementalong theDemandCurve

Diagram5: Changesin the Price of Commodities

Diagram6: PriceChanges Vs Real Output

Diagram6: PriceChanges Vs Real GDP