Question

The Indian FMCG Market is a highly competitive market with a large number of national and global players competing on margins. The stock turnover is high as FMCG products are frequently consumed and have a short shelf life. The presence of large number of sellers is highlighted by the fact that the Indian Soap and Detergent market has 700 companies competing to sell their products. The major players across the country are ITC Limited, Procter & Gamble and Hindustan Unilever Limited (HUL) HUL has a large share of market in soaps and detergent segment but it still faces a growing number of competitions from various Competitors in the market. In the detergent sector it faces competition from Procter and Gamble (P&G), Henkel, Rohit Surfactants Pvt Ltd (RSPL) and Nirma (now out of the market). In the soap sector it faces competition from Godrej P&G, Wipro, ITC and in health care sector from Reckitt Increase in disposable income in hands of both rural and urban consumers gave an opportunity to the rural consumers to shift from unbranded unorganized products to branded FMCG products. The increasing demands led to new firms entering the market When the competition increased the existing firms were forced to reduce their price in order to meet the competition For instance, Nirma was launched in the detergent industry at a low price targeted to cater to the needs of middle-priced and popular segment. The success of Nirma forced HUL to launch an even lower priced product. Thus, Wheel and Rin were introduced by HUL to maintain its market share. Nirma failed to innovate its brand and soon died out To maintain brand loyalty, each brand in this market tred to innovate Their products were deliberately made different in terms of colour packaging, teatures, packing, size and shape For Instance, Ariel, the detergent laundry line for P&G, is available in a variety of forms. Ariel Colour Is a detergent used mainly to protect colour of clothes Anel Stain remover is a stain pre treatment product, Ariel Quick wash is used to wash clothes in the quick wash cycle and so on To create brand awareness.firms are required to Incur some additional costs such as advertising sales promotion, salaries of marketing stat etc to promote the product The main aim is to inform persuade and remind the buyers of the availability of the product The strategy of aggressive advertising is adopted HUL and Procter & Gamble are two renowned companies for portrayal of advertisement for. Aggressive television commercials were shown targeting each other's brand New Brands like Ghari entered the market after the fall f Nirma in 2000 Tide launched by P&G is now at the third position in the market after Ghori and Wheel with a shore of 13.5%.

Read the above and answer the questions below .

a. Identify the market structure in the above paragraph and justify your answer.
b. With the entry and exit of firms, how is long run equilibrium reached in this market structure ?
C. How far can high selling costs in this market be justified ?

Answer 1

a. The market structure in the above paragraph is highly competitive thus signifying perfect competition as the products are homogenous, only the size, packaging and brand name is different in order to differentiate the products. There are limited barrriers to entry and exit and short run profits. The market players have to adjust their prices according to competition such as HUL launching a lower priced product soon after Nirma's products were turning out to be a success.

b. There are limited barriers to entry and exit and thus long run equilibrium is where there is no economic profit as there is severe competition. The firms earn profits only in the short run and the long equilibrium is reached in this market structure when economic profit is zero where the long run marginal cost curve cuts the lowest point on the long run average cost curve.

c. HIgh selling costs can be justified until the firm is able to earn a decent margin on its products, otherwise as the products are homogenous and when a lower priced product enters the market, the high selling costs are not justifiable and not incurred by the firms as the prices are almost similar, economic profits decline and they are able to sell at the lower existing price as they have a horizontal demand curve at that price.