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Monopolistic in India

Competition

A Description with an example of HUL s Pepsodent

BY: Tanay Sharma MBA (2010-2012)

What is Monopolistic Competition?


Perfect competition and pure monopoly are very unlikely to be found in the real world. The real modern world is characterized by the presence of rival monopolists competing with one another, with their prices, product policy and selling efforts. It is a situation falling between Competition and Monopoly. Monopolistic Competition refers to a market structure where there are many firms selling differentiated products which are close substitutes and there is existence of free entry and exit of firms. The firms under monopolistic competition produce commodities which are similar to one another but not identical. Certain industries in the Indian market falling under the category of monopolistic competition are fast foods, textile trade, garments, plastics, retail trade, hosiery, pickles, steel utensils, household cleaning products such as dusters and brooms and even greeting cards. For a long period the traditional theory of value was dominated by the study of market situations of perfect competition and monopoly. The belief of classical economists that there prevails perfect competition was first challenged by a Cambridge Economists, Piero Sraffa. He maintained that the actual conditions in the industry are neither those of perfect competition nor those of complete monopoly, but somewhere between the two.

Characteristics of Monopolistic Competition Exhibits features of both perfect competition and Monopoly The elements of competition are there because the products are close substitutes. In the fast food industry in India, there are elements of competition present between Nirulas, McDonalds, Dominos, Pizza Hut and the various other fast food joints. The elements of monopoly are present as each product (brands) of each firm is differentiated

from the others. The greater the degree of differentiation, the greater the degree of monopoly power involved. Product Differentiation One of the distinguishing features of monopolistic competition is product differentiation. Product differentiation exists when the firms product (offerings) differs or is perceived to differ from those of competing firms on any attribute (quality, branding, packaging, after sales services, advertising etc.) Firms usually compete trough product differentiation by offering the consumer something different from and better than competitors products. Large Number of Sellers There are a large number of firms producing goods under monopolistic competition. It must not be assumed that there it requires existence of thousand of firms. It requires the presence of fairly large number; say 25, 35, 60 or 70. Even though each of the firm enjoys some monopoly privilege, it has to compete with other firms in the market. Following are the important implications for the presence of a large number of sellers: y An individual firm has a relatively small part of the total market, so that each has a very limited (or no) control over the market price of the product. y With a large number of firms in the industry, there is no feeling of mutual interdependence, that is, each firm determines its price - output policies without considering the possible reactions of rival firms. The economic impact of one firms decision is spread sufficiently across the entire group so that the effect on any single competitor is almost negligible. This implies that deliberate rivalry is missing or that competition is impersonal. Each firm behaves independently. Yet all

the firms are in competition because their products are close substitutes. y The presence of a relatively large number of firms ensures that collusion by the firms to restrict output to raise price is most unlikely. Free entry and exit of the firms There are no restrictions placed on the entry as well as the exit of the firms. A new firm may enter into production and an old firm may come out of production. As there are no barriers to entry or exit in the long run in a monopolistically competitive market, new firms will enter the product group. If the existing firms are successfully differentiating their products and earnings supernormal profits, new firms would replicate the existing products and marketing strategy of the successful firms. New entry of firms will decrease the demand for an existing firms product. The cross-price elasticity of demand may increase, as there are more close substitutes available in the firms demand curve as the relative prices change. With no barriers to entry under monopolistic competition, there are no economic profits in the long run. Higher Elasticity of Demand The effect of product differentiation is that the firm has some discretion in the determination of the price. The firm has therefore some degree of monopoly power, which it can exploit. Product differentiation creates brand loyalty of the consumers and gives rise to a negatively sloping demand curve. However the firm faces competition of close substitutes offered by other firms. In such a case the firm can expand its sales by decreasing its price. The model of monopolistic competition puts our situation into a more familiar form of demand and cost curves. The illustration below shows a seller with a downwardsloping demand curve and a conventional marginal cost curve. Because the demand curve slopes downward, the marginal revenue curve lies below it. The seller maximizes profit

by selecting that output at which marginal revenue equals marginal costs and charges as much as he can, which is price P2. In the long run, there can be no economic profit because there is free entry into the industry. If there are any profits, others will enter the industry, positioning themselves to take away customers from the most profitable sellers. The zero profit condition implies that at equilibrium, average revenue (which is demand) must just equal average cost. When average revenue equals average cost, average profit is zero, and so total profit must also be zero.

The model of monopolistic competition was considered important when it was introduced for two reasons. First, the situation it described seemed the most common form of industry. Both the single sellers of monopoly and the many sellers of price-taking competition are uncommon in comparison. Furthermore, monopolistic competition describes more than traveling costs in a geographical sense. The distance between sellers can be in the minds of buyers. Product differentiation, which results in many products that are similar but not identical, also creates a distance between products. It was this distance that seemed especially important to the developers of monopolistic competition.1 Second, notice that because price exceeds marginal cost, the graph contains a gray area of welfare loss, an unexploited value that neither firms nor customers obtain. Because monopolistic competition was seen as both common and economically inefficient, it was argued that market systems were inherently inefficient.

Selling Efforts In addition to price and nature of the product, the selling effort (in terms of advertising, personal selling, public relations (excluding publicity and sales promotion) can influence the sales of the firms product. Selling efforts are undertaken to inform, persuade and to remind customers to purchase and to remind customers to purchase the firms products. Selling costs can change the position and slope of the demand curve. They can cause the demand curve to shift outwards and become more inelastic. This concept of monopolistic competition can be clearly understood by throwing some light on some popular product that falls into this category and satisfies the criteria of monopolistic competition. One such product is Pepsodent toothpaste. An overview of this product and study of its promotion policies, its market share and methods adopted by it to differentiate itself and sustain in the market will explain that why it follows monopolistic competition.

An Introduction to Pepsodent I want to do!It is one of the oldest toothpastes on the market today and still touted as a favorite by those who swear by the brand---Pepsodent. The well-known minty-flavored toothpaste, now sold mostly in discount stores and chains, has stood the test of time and still has many faithful users. Pepsodent is a brand of toothpaste with a wintergreen flavor. It was formerly owned by Unilever (but, since 2003, by Church and Dwight in USA,). Pepsodent was a very popular brand before the mid '50s, but its makers were slow to add fluoride to its formula

to counter the rise of other highly promoted brands such as Crest and Gleem toothpaste by Procter & Gamble, and Colgate's eponymous product; sales of Pepsodent plummeted. Today Pepsodent is a value brand marketed primarily in discount stores and retails for roughly half the price of similarly-sized tubes of Crest or of Colgate. Pepsodent is still sold as a Unilever property in India, Indonesia, Chile, Finland, and several other countries. Pepsodent advertisements spotlighted the toothpaste's distinguishing features. It had a minty flavor that was derived from sassafras, an ingredient found in some varieties of tea and such soft drinks as root beer and sarsaparilla. Advertisements also pointed out the presence of irium (otherwise known as sodium lauryl sulfate) as a mechanism for fighting tooth decay, and to an ingredient known as IMP for preventing tooth decay.

The following are certain type of products that Pepsodent deals with: y Complete + Gum Care y Complete 12 Pepsodent y Herbal Pepsodent y Pepsodent - Milk, Teeth, Orange y Pepsodent - Milk, Teeth, Strawberry y Pepsodent Sensitive y Pepsodent Whitening y Pepsodent Cavity Prevention

Pepsodent India Pepsodent is a 15 year old brand that offers various oral care solutions to specific need based solutions. Pepsodent was launched in 1993 in India and since then the brand has raised the benchmark on Oral Care solutions in India. Pepsodent has a range of toothpastes and toothbrushes that could take care of specific oral care needs. Pepsodent toothpaste fights germs to protect teeth against cavities and gives strong teeth, fresh breath and healthy gums.Pepsodent as an oral care expert offers solution to specific problems like bleeding gums and sensitive teeth. Key facts
y y

Endorsed by FDI ( the largest dental association globally) Among the most trusted brands in India (Brand Equity, Economic Times, India)

Now, lets take a look at the product more precisely along with some description of its global whereabouts.

Overview
History Documentation of Pepsodent's roots goes back to at least the late 1920s, although prior to that, records are sketchy. Claims that Pepsodent toothpaste was effective in fighting tooth decay made it an impressive and sought-after toiletry item in the early 20th century. Further claims that Pepsodent whitened teeth with a special ingredient known only as "IMP" gave the minty toothpaste a glamour appeal to the jet set. Formerly owned by Unilever, the Pepsodent brand is now owned by Church & Dwight Co., Inc.

Advertising Boosts Sales Marketing efforts to sell Pepsodent toothpaste were very successful, and sales sky rocketed thanks to a well-known slogan of, "You'll wonder where the yellow went when you brush your teeth with Pepsodent." Entertainers also helped give the toothpaste a boost. It was referred to in a popular 1949 musical called "South Pacific." Singer Cole Porter also mentioned the tasty paste several times in his recordings, and Pepsodent was the sponsor of the famous 1929 radio show "Amos and Andy." Marketing Makes Lasting Impression Another popular Pepsodent advertisement was an oversized neon sign projecting a girl on a swing that hung in New York in Times Square in the 1930s. The larger-thanlife advertising sign was so successful, it was depicted again in the 2005 remake of the movie "King Kong." Comedian Bob Hope also saw the opportunity in being associated with the popular toothpaste and named his 1938 variety show the "Bob Hope Pepsodent Show." Pepsodent's Descent In the 1950s, Pepsodent toothpaste sales began a steady decline due to the fierce competition of several other companies that were marketing toothpastes with fluoride, a new ingredient that Pepsodent manufacturers had yet to add to their popular paste. The mistake proved to be a costly one for Pepsodent. In addition, in 1994 claims were made that Irium, the ingredient that Pepsodent claimed for years that it fought cavities, never existed in the toothpaste and was actually a radioactive material. Pepsodent Holds On Although Pepsodent never fully bounced back from the decline, reclaiming their position as the number-one toothpaste in the U.S., the toothpaste dinosaur is still

being sold in 2010 as a lower-priced brand and costs about half of what leading toothpastes today sell for. Marketed today as Pepsodent Complete Care toothpaste, the Church and Dwight Company claims the product is a proven cavity fighter that helps remove plaque and creates white smiles, all while protecting the tooth's enamel and promoting good gum health.

Promotion policy
Pepsodent packs included a Germ Indicator in February-May 2002, which allowed consumers to see the efficacy in fighting germs for themselves. As a follow-up, in October 2002, Pepsodent offered Dental Insurance to all its consumers to demonstrate the confidence the company has in the technical superiority of the product. Pepsodent connects directly with kids and their parents. Pepsodent has always worked in the direction of an overall awareness of dental health. The relaunch campaign in October 2003 widened the context to "sweet and sticky" food and leveraged the truth that children do not rinse their mouths every time they eat, demonstrating that this makes their teeth vulnerable to germ attack. Pepsodent's most recent campaign aimed at educating consumers on the need for germ protection through the night. Pepsodent also includes a range of toothbrushes. Pepsodent, Unilevers leading oral care brand, recently announced its collaboration with the Indian Dental Association (IDA) in conjunction with World Dental Federation (FDI) to help improve the oral health and hygiene standards in India. This project is part of a wider global collaboration between Pepsodents parent company, Unilever and FDI, the international organisation which represents nearly one million dentists globally. This unique partnership aims to increase oral health education and promotion in countries in both the developed and developing world. The Pepsodent-FDI collaboration, established in 2005, now operates 42 projects in 38 countries.

Hindustan Unilever has roped in Shah Rukh Khan to promote its flagship oral care brand Pepsodent that has been losing market share to rival Colgate, and even smaller brands like Babool and Anchor. This will be Khans second association with HUL he

endorsed Lux soaps and the first time that the company had to bring in a celebrity to endorse flagship Pepsodent. The campaign will launch in a few days and, according to HUL, what clinched the deal for Shahrukh is his superstar and devoted dad image. This will enhance their long run profits and this can be explained by the graph below:

The graph shows pepsodent firm in a monopolistically competitive industry in long run equilibrium. Profits are zero owner(s) is (are) earning a return equal to their next best opportunity. The industry is the single shop single toothpaste brand promoted by Shahrukh, (to distinguish it from other brands). And as a result of the popularity of the TV sitcoms "Friends" and "Frasier" there is an increase in patronage of this brand.

The new partnership in India will build on existing programmes that Pepsodent and the IDA have been running in schools targeting behaviour change amongst children. Going forward, the programme will focus on increasing awareness of good oral habits and concentrate on the importance of twice daily brushing, and particularly night brushing amongst children. The Oral Health initiative will feature many practical elements including dental check-ups, live demonstrations with audio-visual aids and the distribution of oral health educational materials. It will also involve schoolteachers and

rural health workers working to educate children about the benefits of better oral health and hygiene.

Market Share
Pepsodent, Hindustan Lever Ltd s leading oral care brand, announced the launch of Pepsodent Dental Insurance, a first of its kind initiative in the oral care category in India. Undertaken through a partnership with the New India Assurance, India s largest General Insurance Company, Pepsodent now offers its consumers free dental insurance of Rs. 1000/- on purchase of any pack of Pepsodent. Under this initiative Pepsodent offers its consumers insurance cover against expenses for the extraction of a permanent tooth or teeth due to severe Caries and Periodontitis including cost of medication in relation there to. Caries and Periodontitis are two of the most widespread dental ailments in India. Announcing the launch of Pepsodent Dental Insurance Pradeep Banerjee, Category Head - Oral Care, HLL, said, "Pepsodent Dental Insurance is a unique concept and first of its kind in the Oral Care category in India. The initiative not only strengthens Pepsodent s proposition of being a germ-protector but also displays our commitment towards improving oral hygiene for our consumers." Elaborating further on the concept of Dental Insurance, Pradeep said "Pepsodent Dental Insurance is a unique concept in this category and will further strengthen the equity of Pepsodent in the minds of the consumers." Insurance cover under Pepsodent Dental Insurance will be provided for one year, which comes into effect after a period of six months from the date of issue of the Pepsodent Dental Insurance Certificate. According to market researcher AC Nielsen, the toothpaste market is estimated at Rs 3,000 crore. Colgate leads the category with a 52.5% share. HULs toothpaste brands Pepsodent and Close Up together accounted for 22% share in 2009-10, down from 24.5%

the

previous

year. Dabur ranks third in the category with a 13.6% share with its

three toothpaste brands Red, Meswak and Babool. While Colgate and Daburs market shares inched upwards between 2008-09 and 2009-10, HULs shares in toothpaste have slipped.

Packaging
Their approach: Their approach towards responsible packaging seeks to take into account environmental, social and economic considerations. In 2007 the company created a Sustainable Packaging Steering Team to define a strategy. This team is building on the work already carried out over the past few years by the Unilever Packaging Group. Achieving truly sustainable packaging is a complex challenge. Some energy is always required to make packaging and some waste is inevitable even with highly effective reuse and recycling schemes.

The approach is based on three elements:

1. Consideration of the whole product, not just packaging in isolation 2. Assessment via our new vitality metric, which covers the waste generated taking into account all the different kinds of packaging a product requires. It also takes into account an estimate of the recycling, reuse and recovery rates of the materials as used in a particular region. 3. Use of leading-edge design techniques and choice of materials to minimise impacts.

Guiding principles

Underlying this strategy are five guiding principles that they seek to apply: remove, reduce, reuse, renew and recycle. Sustainable Packaging Steering Team implements this approach across Unilever.

More on the five guiding principles: (4R)

Remove: such

to as

eliminate, outer

where

possible, cartons

unnecessary and

layers

of

packaging film.

shrink-wrap

Reduce: to reduce the material we use in our packages and ensure they are the optimal size and weight for their contents. Reuse: to reuse packaging from the materials we receive at our factories. Renew: renewable to maximise resources the and proportion to of packaging the from recycled feasibility and of

investigate

technical

biodegradable and compostable materials Recycle: to increase the use of recyclable and single-material

components in packaging for easy sorting and recycling at the end of its use.

Enhancing design Innovative packaging design can minimise the environmental impact of packaging itself. But it can also enhance a product's lifecycle impacts. For example, effective packaging can reduce product leakage and consequent

waste during transportation.

Sustainable paper sourcing A significant proportion of packaging relies on paper. They estimate that most of the paper purchased for European business comes either from recycled material or sustainably managed forests. While this is an encouraging picture for Europe, the situation in other regions can be very different as sustainable forestry practices differ greatly. The company is working with the Rainforest Alliance to develop a sustainable sourcing policy for paper. Litter in the developing world A particular concern is the volume of sachets we use to package single- use products, especially in developing and emerging markets. These may end up as litter where there are no appropriate disposal facilities. The approach is to: implement or support work with others design material improvements with litter to explore to create less sachets that use less material impact programmes which create incentives

environmental awareness

economic

models

for collection and reuse of our packaging. Working with others Effective solutions require a partnership approach. Unilever is a

founding member of the Sustainable Packaging Coalition, which has over 160

members,

including packaging producers,

users and

retailers. We

are

also

members of EUROPEN (the European Organisation for Packaging and the Environment). Thus Pepsodent is a perfect example of a monopolistic competition in India as it is having all the characteristics of monopolistic competition in it and is adopting all the strategies to sustain in the market.