To become successful in different market structures, a manager has to determine completely different strategies. As we learned in university about monopoly, oligopoly, perfect competition, monopolistic competition I will choose a company who is in monopolistic competition. This type of market is enjoyable than others because in many departments (financial, sales, human resources etc.) have to be aware of rivalry in the market and differentiate company’s products all the time. Being innovative is the basic success point in the monopolistic competition. I will specify my position with a famous company and I’ll try to explain concepts.
Unilever is the company where I really desire to work. Unilever is a British–Dutch multinational consumer goods company. Its products include foods, beverages, cleaning agents and personal care products. If I become Unilever’s manager, before making pricing decisions, I have to consider Nestle and P&G who are my strong rivals. Measuring the concentration of the industry we can look the following chart.
Industry C4 (%) HHI
Breweries 91 NA
Electronic computers 81 2662
Jewelry 22 195
Luggage 34 580
Motor vehicles 81 2324
Soap and detergent 63 2308
Soft drinks 52 896
Ready-mix concrete 11 63
Unilever basically sells soap, shampoo, detergent. As we can see from chart this industry’s market concentration is %63. It is close to 1 so it means that except Unilever there is a few huge firms producing soap & detergent. As a manager I have to consider rivalry and encourage the production of highly differentiated products.
Four-firm concentration index is based on market shares of four largest firms but HHI is based on all firms market index. As stated in the chart, HHI of soap and detergent industry is 2308. It’s the highly concentrated one among industries. Unilever is labor-intensive company so human resource department has importance at this point. But as a manager, I have to promote workers with a desirable wage level.
May be I can give high amount of money if every single worker work an additional hour (As I learned this strategy in chapter four called the theory of individual behavior). In concentrated industries firms coordinate between each other to raise prices, or to agree to not invest in new products, technology or quality improvements – hence they may behave like an oligopoly. Demand & market conditions for Unilever represent most important factors because it’s rivals are really powerful to differentiate products. As a manager I can determine market conditions, such as is there any substitute goods or not and I can understand if I increase prices what will happened demand, with Rothschild index.
Assume that own rpice elasticity of market demand for soap, shampoo and detergent industry is -1.0 and own price elasticity of demand for Unilever’s products is -3.8. With calculating Rothschild index it’s 0.25. What does it mean? I will understand when I see the value of 0.25 that, there are many close substitute products exist in the market and I have to differentiate them more than others swiftly. Unilever’s manager, me, who make pricing decisions have to aware of market conditions and substitute goods to do not decrease it revenues. If there are many close substitutes, this means that Rothschild index is close to zero, as a manager I do not have to increase prices because consumers may switch to other products instead of my company’s products. This will really hurt profits.
Potential for entry in an industry is the basic factor for determining power of rivals. There are barriers like capital requirements, patents, economies of scale and so on. These barriers stopped entry to the market and competition will become stronger with a few firms.
Products Foods, beverages, cleaning agents and personal care products
Revenue €46.467 billion (2011)
€6.901 billion (2011)
€4.623 billion (2011)
Employees 171,000 (2012)
Mark-up factor has huge effect (positively) on firms’ profits. A manager has to maximize company’s revenue with increasing mark-ups. For determining pricing behavior and considering the power of mark-up factor I will give an example. Assume that Unilever’s foods such as Ben & Jerry’s, Knorr, Becel/Flora, lerner index is 0.26 and it’s mark-up factor is 1.35.
These values represent Unilever collects low level of mark up (profit) from foods’. In my opinion Nestle has great power in food industry and that’s a problem for Unilever because Unilever is strong in cleaning tools. Unilever’s operating income was €6,901 billion, net income was €4,623 billion and it’s revenue was €46,467 billion. It earns much but there are many internal expenditures that minimize it’s income.
Unilever can increase types of products which it has least power like as I stated foods. In this way may net income increase. In five or ten years natural resources become weaklier because environmental pollution and Unilever has huge impact on it because of detergents, soaps and other cleaning stuff which include high level of chemicals and plastics. Consumers are aware of nature has important place in their life expectancy.
They will choose products which are nature friendly. Now Unilever has a sustainability policy’s which make consumers happy. Recycling and damage nature less than others are the powerful fields of Unilever. Researches states that consumers are choosing products which do not damage the nature, their health and future generations. As a manager I can merge with nature friendly organizations such as GREENPEACE, TEMA. In this way consumers will be aware of that Unilever is different than other because it protect nature and their prosperity.
• Managerial Economics and Business Strategy, Michael R.Baye, 6/e