Recall that price elasticity is a function of (i) the number

of available substitutes, (ii) the price level relative to customers

budgets, (iii) and the durability of the product. Describe these
factors for the firms primary product. Based on this analysis, does
the firm face elastic or inelastic demand with regard to its primary
product?
Question No 4:

Anwer: The price elasticity of demand (PED) is a measure of how much the quantity
demanded changes with a change in price. The PED for a given good is determined
by one or a combination of the following factors:
Availability of substitute goods: The more possible substitutes there are for a given
good or service, the greater the elasticity. When several close substitutes are
available, consumers can easily switch from one good to another even if there is
only a small change in price. Conversely, if no substitutes are available, demand for
a good is more likely to be inelastic.
Proportion of the purchaser's budget consumed by the item: Products that consume
a large portion of the purchaser's budget tend to have greater elasticity. The relative
high cost of such goods will cause consumers to pay attention to the purchase and
seek substitutes. In contrast, demand will tend to be inelastic when a good
represents only a negligible portion of the budget.
Degree of necessity: The greater the necessity for a good, the lower the elasticity.
Consumers will attempt to buy necessary products (e.g. critical medications like
insulin) regardless of the price. Luxury products, on the other hand, tend to have
greater elasticity. However, some goods that initially have a low degree of necessity
are habit-forming and can become "necessities" to consumers (e.g. coffee or
cigarettes).
Duration of price change: For non-durable goods, elasticity tends to be greater over
the long-run than the short-run. In the short-term it may be difficult for consumers
to find substitutes in response to a price change, but, over a longer time period,
consumers can adjust their behavior. For example, if there is a sudden increase in
gasoline prices, consumers may continue to fuel their cars with gas in the short-run,
but may lower their demand for gas by switching to public transportation,
carpooling, or buying more fuel-efficient vehicles over a longer period of time.
However, this tendency does not hold for consumer durables. The demand for
durables (cars, for example) tends to be less elastic, as it becomes necessary for
consumers to replace them with time.
Breadth of definition of a good: The broader the definition of a good, the lower the
elasticity. For example, potato chips have a relatively high elasticity of demand
because many substitutes are available. Food in general would have an extremely
low PED because no substitutes exist.

Brand loyalty: An attachment to a certain brand (either out of tradition or because

of proprietary barriers) can override sensitivity to price changes, resulting in more
inelastic demand.

Reckitt Benckiser generates 95% of total revenue from household and

toiletries products. Thus, this is the primary range of products that they
operate upon.
Sales comparison (In BDT Million) for the Reckitt Benckiser and its
competitors are:
Year
2011-12
2012-13
2013-14
2015

Reckitt
Benckiser
2412
2432
2670
3373

Unilever

Marico

7444
8520
8790
9010

6036
6120
6435
8542

With regards to its primary product, the firm faces inelastic demand as the
firm produces more than one product in a single category. This is based on
three reasons:

Brand Awareness: Reckitt Benckiser has a strong brand presence in the

market. Their customer segment stick their brands irrespective of price
changes in the market. Thus, their demand is inelastic to a good extent.

Category pricing: Reckitt Benckiser has multiple products in the same

category. Their household and toiletries products resemble a category with
multiple products. The price is inelastic when it transfers from a specific
product to a larger category.

Number of available substitutes: Reckitt competes in a market where there

are many national and international competitors. Yet, they have been posting
growth in sales even though their competitors are active in the market.
Reckitt even does less advertising on different medias in comparison to
Unilever. So, although there are high number of substitutes in the market,
their demand seems to be inelastic

Price Level relative to Customers Budget: The advantage of producing

consumer goods are, these goods mostly cater to the basic needs of people.
So unless there is a huge shift in product prices, the price is relatively
inelastic to the market situation

Durability of Product: Consumer goods have long expiry dates of almost 1 to

2 years. But that hardly pays a role because their utility generally is over
after 2 to 3 months due to constant usage.

5. How would you describe the market structure of the industry in which your
firm operates? To arrive at an answer you should discuss (a) the number of
competitors, (b) product similarity, (c) barriers to entry, and (d) the
importance of non-price competition. (Be sure to define the geographic
nature of the market. Is the market best described as local, national, or
international?) How much pricing power does the firm have? Are economies
of scale a barrier to entry in this industry?

Answer: The market structure of consumer goods markets can be derived

from the standard market classifications of economics. The market structures
all over the world include:
Economists assume that there are a number of different buyers and sellers in the
marketplace. This means that we have competition in the market, which allows price to
change in response to changes in supply and demand. Furthermore, for almost every
product there are substitutes, so if one product becomes too expensive, a buyer can choose
a cheaper substitute instead. In a market with many buyers and sellers, both the consumer
and the supplier have equal ability to influence price.
In some industries, there are no substitutes and there is no competition. In a market that
has only one or few suppliers of a good or service, the producer(s) can control price,
meaning that a consumer does not have choice, cannot maximize his or her total utility and
has have very little influence over the price of goods.
A monopoly is a market structure in which there is only one producer/seller for a product. In
other words, the single business is the industry. Entry into such a market is restricted due to
high costs or other impediments, which may be economic, social or political. For instance, a
government can create a monopoly over an industry that it wants to control, such as

electricity. Another reason for the barriers against entry into a monopolistic industry is that
oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi
Arabia the government has sole control over the oil industry. A monopoly may also form
when a company has a copyright or patent that prevents others from entering the market.
Pfizer, for instance, had a patent on Viagra.
In an oligopoly, there are only a few firms that make up an industry. This select group of
firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry.
The products that the oligopolistic firms produce are often nearly identical and, therefore,
the companies, which are competing for market share, are interdependent as a result of
market forces. Assume, for example, that an economy needs only 100 widgets. Company X
produces 50 widgets and its competitor, Company Y, produces the other 50. The prices of
the two brands will be interdependent and, therefore, similar. So, if Company X starts selling
the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to
lower its prices as well.
There are two extreme forms of market structure: monopoly and, its opposite, perfect
competition. Perfect competition is characterized by many buyers and sellers, many
products that are similar in nature and, as a result, many substitutes. Perfect competition
means there are few, if any, barriers to entry for new companies, and prices are determined
by supply and demand. Thus, producers in a perfectly competitive market are subject to the
prices determined by the market and do not have any leverage. For example, in a perfectly
competitive market, should a single firm decide to increase its selling price of a good, the
consumers can just turn to the nearest competitor for a better price, causing any firm that
increases its prices to lose market share and profits.

Traditionally, the most important features of market structure are:

1. The number of firms (including the scale and extent of foreign competition)
2. The market share of the largest firms (the extent to which the market is divided
between the largest firms)
3. The nature of costs ( Features the potential for firms to exploit economies of
scale and also the presence of sunk costs which affects market contestability in
the long term)

4. The degree to which the industry is vertically integrated - vertical integration

explains the process by which different stages in production and distribution of a
product are under the ownership and control of a single enterprise. A good
example of vertical integration is the oil industry, where the major oil companies
own the rights to extract from oilfields, they run a fleet of tankers, operate
refineries and have control of sales at their own filling stations.
5. The extent of product differentiation (which affects cross-price elasticity of
demand)
6. The structure of buyers in the industry (including the possibility of monopsony
power)
7. The turnover of customers (sometimes known as "market churn") i.e. how
many customers are prepared to switch their supplier over a given time period
when market conditions change. The rate of customer churn is affected by the
degree of consumer or brand loyalty and the influence of persuasive advertising
and marketing

Based on above discussion, we can summarize the characteristics of market

structure as:

Based on these characteristics, the industry that Reckitt participates in can

be classified as:

Number of Firms: Few dominant firms

Type of product: Homogenous
Barriers to entry: High
Supernormal Short Run Profit: Possible
Supernormal Long Run Profit: Not possible
Pricing Power: Price taker
Non price competition: Important

Economic: Low Allocative

As from the analysis above, the industry acts mostly as an oligopoly, with
some attributes of perfect competition. Thus, it can be concluded that the
fmcg goods industry in Bangladesh right now is oligopoly with some
attributes of perfect competition.

Question no. 6 Calculate the companys sales and profit growth

rates for (a) the past year and (b) the past three years. Do the same
for the firms rivals (firms with the same industry classification). Has
the firms growth rates matched its rivals? Summarize the
companys performance relative to the rivals?

Answer: Reckitt Benckiser faces competition mostly from Unilever

and Marico. Based on the data we collected from the previous few
years, the performance of RB with respect to its competitors can be
summarized as follows:

After collecting data on the sales of the three competitors, we find

the growth rates as:

Year
201112
201213
201314
2015

Reckit
t
Bencki
ser
Sales

RB
Growth

2412
2432
2670
3373

Unileve
r Sales

Unilever
Growth

7444
0.0082918
74
0.0978618
42
0.2632958
8

8520
8790
9010

Marico
Sales

Marico
Growth

6036
0.144545
943
0.031690
141
0.025028
441

6120
6435
8542

0.0139165
01
0.0514705
88
0.3274281
27

From this analysis we can see that last year Reckitt Benckiser had 0.26, or
26% growth in their respective industry. To understand if this growth is better
than their competitors, we need to plot it in a trend line.

Plotting this data on a trend line we find:

Chart Title

RB Growth

Unilever Growth

Marico Growth

Chart: Growth comparison of three firms in FMCG industry

From the trend line, its apparent that, growth wise RB stands second in
comparison to Unilever and Marico. Marico is recording the highest growth in
sales. Reckitt Benckiser is next to Marico and Unilever third.

The growth rates only give a partial picture of the firms as sales wise,
Unilevers sales figures are much higher than Marico and Reckitt Benckiser.
So although its having lower growth, it has higher revenues.