Monopolistic Competition

In Detergent Powders
Indian Detergent Market
(5,700 crore market)
NIRMA ARIEL
“dudh si safedi” “stain removal”

SURF EXCEL TIDE

“daag achhe “chauk gaye”
hai”

WHEEL FENA
“safedi ki “fena hi lena”
chamkaar”

GHADI
RIN
“pehle istemaal
“bijli giri” kare…”
 What is a Market?
• A market is a phenomena in which goods
and services are exchanged for a price.
• The exchange may take place through a
monetary mechanism or by barter.
• Markets therefore exist wherever
exchange takes place.
• Market structure is determined by two
important elements
– Number of firms producing a given product.
– Nature of products produced by the firms.
The Four Types of Market
Structure
Number of Firms?

Many
firms
Type of Products?

One Few Differentiated Identical

firm firms products products

Monopolistic Perfect
Monopoly Oligopoly
Competition Competition

• Electricity • Airlines • FMCG • Wheat

• Cable TV • Crude oil • Movies • Milk
The Four Types of Market
Structure…
Models of Monopoly Oligopolistic Monopolistic Perfect
competition Competition Competition Competition
No. of Buyers very large very large very large very large

No. of Sellers one very few large very large

Nature of large large large identical

Products differences differences differences
Barriers to very large large none none
Entry & Exit
Monopolistic Competition

A market structure in which

several or many sellers each
produce similar, but slightly
differentiated products. Each
producer can set its price and
quantity without affecting the
marketplace as a whole.
 Characteristics

• Many Firms
• Product Differentiation
• Free Entry Or Exit
• Firms Act Independent Of
Competitors
• No Long-run Economic Profits
• Group Equilibrium
 Explanation of
Characteristics
• Many Firms
– There are many firms competing for the
same group of customers
• Product examples include books, CDs, movies,
restaurants, furniture, FMCG, etc
• Product Differentiation
– Each firm produces a product that is at
least slightly different from those of other
firms
 Explanation of
Characteristics…
• Free Entry or Exit
– Firms can enter or exit the market
without restriction
– The number of firms in the market
adjusts until economic profits are zero
• Firms act independent of
competitors
– Each has small enough market share so
it believes its actions will bring no
significant reactions from competitors
Explanation of
Characteristics…
• No long run economic
profits
– According to law of demand
the price of the commodity
rises the demand falls.
– In the long run there is no
guarantee of profits because
of many complementary
products available in the
market
Explanation of
Characteristics…
• Group Equilibrium
– Prof E H Chamberlin introduced
the concept of group in
monopolistic competition
– Every firm is an industry by
virtue of product & price
differentiation
– A group is a cluster of firms
producing very closely related
but differentiated products
 Contribution to the theory of
Monopolistic Competition
• Theory of imperfect competition was
developed by economists like Joan
Robinson of Great Britain and EH
Chamberlin of US.
• Mrs. Joan Violet Robinson introduced the
theory of imperfect competition in 1933.
• Prof. E.H. Chamberlin introduced the
concept of group into the theory of
monopolistic competition.
Benefits of Monopolistic
Competition
• Is very competitive – firms watch
competitors very closely.
• Competition drives firms along -
competition is strong for quality,
design, price.
• Free entry and exit keeps
competition up.
• Variety is great - more choice -
greater consumer satisfaction.
 Problems with Monopolistic
Competition
• Wastes of time and effort - worry about
competitors actions.
• Waste of resources
• May be too much differentiation -
pretend product is “better” but merely
different
• Advertising wastes
• Free gifts, 2-for-1, competitions to get
trips etc. instead of better or cheaper
products.
Monopolistic Competition and
the Welfare of Society
• Monopolistic competition may be
socially inefficient is that the
number of firms in the market may
not be the “ideal” one. There may
be too much or too little entry.
• Externalities of entry include:
– product-variety externalities.
– business-stealing externalities.
Monopolistic Competition and
the Welfare of Society
• The product-variety externality:
– Because consumers get some consumer
surplus from the introduction of a new
product, entry of a new firm conveys a
positive externality on consumers.
• The business-stealing externality:
– Because other firms lose customers and
profits from the entry of a new
competitor, entry of a new firm imposes
a negative externality on existing firms.
Many Sellers in the Indian
Detergent Market
• Ariel • Rin
• Fena • Surf Excel
• Henko • Tide
• • Wheel
Ghadi
• Nirma
There are two multinational companies present in
detergent market :-

•Hindustan Lever Limited(HLL)

•Procter & Gamble(P&G)
Price tags
Detergent Price per Segments
500 gm
(Rs.)
Nirma 11
ECONOMY
Wheel 11
Rin 26
Tide 26 MID-PRICED
Henko 35
Surf Excel 57
PREMIUM
Ariel 57
 Free entry & exit in detergent
market of India
• The first companies in detergent markets were
Hindustan Lever Limited (HLL) & Swastik
• Hindustn Lever Limited (HLL) launched ‘SURF’
• Swastik launched ‘DET’
• TATA Oils Mills Company (TOMCO) launched
‘MAGIC’, ‘TATA’s Tej’, ‘OK’ at different time
intervals
• Godrej launched ‘KEY’
• Detergent’s India Ltd ‘SIXER’
• HLL was challenged by ‘NIRMA’
Except Nirma & Surf, none of the above exist
today in the market
 Free entry & exit in detergent
market of India…
• In the present scenario Hindustan
Lever Limited (HLL) has brands of ‘RIN’
& ‘WHEEL’
• Procter & Gamble (P&G) came into
existence later with ‘ARIEL’ & ‘TIDE’
• Other smaller companies are also
trying to compete in the market.
Brand Names
• Brand names cause consumers to
perceive differences that do not
really exist.
• Economists have argued that brand
names may be a useful way for
consumers to ensure that the goods
they are buying are of high quality.
– providing information about quality.
– giving firms incentive to maintain high
quality.
 Product Differentiation
• All detergent companies manufacture
similar but not identical products with the
same purpose i.e. washing clothes
• But all the brands add some chemicals or
technical difference to their product to
make it superior
• Companies try to make their brands
slightly different from others, by
concentrating on the different aspects of
washing clothes
 Advertising Strategies

• The advertising strategies in detergent

market change very often
• The commonly used advertising strategies
by the companies are:-
– Lightning whiteness
– Blue power boosters
– Lemon/spring fragrances
– Hard on stains
– Maintains original colour
• These strategies help in differentiating the
products from others
Advertising
• Aggressive advertising involved
• When firms sell differentiated
products and charge prices above
marginal cost, each firm has an
incentive to advertise in order to
attract more buyers to its particular
product.
• Firms that sell highly differentiated
consumer goods typically spend
between 10 and 20 percent of
revenue on advertising.
Critics towards Advertising
• Critics of advertising
argue that firms advertise
in order to manipulate
people’s tastes.
• They also argue that it
impedes competition by
implying that products
are more different than
they truly are.
Firms towards Advertising
• Firms argue that advertising provides
information to consumers
• They also argue that advertising
increases competition by offering a
greater variety of products and prices.
• The willingness of a firm to spend
advertising dollars can be a signal to
consumers about the quality of the
product being offered.
Advertising Media for Detergents

• Television • Magazines
• Radio • Newspapers
• Hoardings • Internet

Sales Promotion

• Free trials • Price Pack Deals

• Sponsor Events • Stalls at malls,
• Free coupons in the theatres & local
magazines markets
 P&G’s step to lower
the prices

HLL had to react by

doing the same
 Summary
• A monopolistically competitive market is
characterized by three attributes:
– many firms
– differentiated products
– free entry
• The number of firms can be too large or
too small.
 Summary...
• The product differentiation inherent in
monopolistic competition leads to the use
of advertising and brand names.
– Critics argue that firms use advertising and
brand names to take advantage of
consumer irrationality and to reduce
competition.
– Firms argue that firms use advertising and
brand names to inform consumers and to
compete more vigorously on price and
product quality.
THE END