Individual Report on Price Wars Order Instructions: Assignment Task:
Individual Report
(This assignment comprises 50% of the final mark for this module)
You should answer the question in report form with an introduction, main body, conclusion.
“The recent price wars in the supermarket and mobile phone industries have been beneficial to both consumers and their respective industries. ”Discuss critically, using all the recent theoretical models. Make references to important microeconomic models.
Some examples are Supply, Demand, Market equilibrium, Price discrimination, Opportunity cost).750 words limit
“The cost of mobile phones has fallen to such a level which, if this trend continues, would make mobile telephony more affordable to much larger segments of the emerging markets population”. Discuss critically, using all the recent theoretical models. Make references to important macroeconomic objectives:
Some examples are Growth, Inflation, Unemployment, GDP, Exchange rates)
750 words limit
The price in the report must be in Pound not in Dollar. What I mean is that in the report analysis, the price should be in Pound
1500 words.but 750 words for each question
it is one assignment but have 2 parts
Individual Report on Price Wars Sample Answer
Individual Report
Price wars
A price war is defined as a cost leadership in a particular market using a price policy. It involves cutting down prices of either goods or services being offered with the aim of gaining a larger market share. In fact, the companies involved in a price war often offer the lowest possible prices that barely allow them to turn a profit. Maximizing profits and penetrating the market are the two tools most used in determining the success of a business entity. In a bid to gain more customers, the company will use a range of strategies; however, pricing is the most common strategy since it is reversible and speedily applied. A price war would entail the company understanding consumers’ price sensitivities then using the knowledge to set prices that meet the sensitivities. Ultimately, the company benefits by increasing its market share while the consumer gains by paying less (Kew & Stredwick, 2005, pp. 17-18). Therefore, price wars are part of standard management practices where competition exists.
Price wars are driven by a number of oligopolistic market factors. These factors include fluctuating demand; initiators financial position; industry consolidation; improving the price image; rationalization by the industry; the existence of excess capacity; and the product being essential to the consumers. In addition, substantial exit barriers encourage price wars since the business entity will find it difficult to eliminate its excess capacity and supply thereby resorting to price cuts to generate demand that covers the fixed costs and uses their full capacity and supply. In a competitive industry, price cuts by one company will provoke a similar reaction from its competitors, creating a price plunge. It is the decreasing demand that yielded excess production capacity and began the price war in the first place (Raju & Zhang, 2010, p. 74).
In the short-term, price wars may seem profitable to the industry since it increases competition and helps the companies gain a larger market share through market penetration, but that is not the case in the long-term. The consumers also realize short term benefits from the price war by competing companies since the price plunge allows them to acquire the commodities at lower prices per unit (Baker, Marn & Zawada, 2010, p. 144-145). For instance, the price war between Apple and Samsung has allowed consumers to purchase better mobile phones and tablets at cheaper prices. The same is comprehended in the case of Costco and Walmart supermarket chains. In the long-term, price wars negatively affect the competing companies, industry, and consumers in the long-term. Firstly, the smaller companies and new market entrants are forced to close down since they find it difficult to operate at the smaller profit margins, unlike their more established competitors. This will ultimately reduce the number of companies operating in the industry that in turn causes prices to rise to a level beyond where it was at before the price war began. The consumers then have to pay higher prices. Thus, irrespective of the immediate benefits, price wars are ultimately destructive for the companies, industry, and consumers (Baker, Marn & Zawada, 2010, p. 144-145). For instance, Nokia was a former global giant that was subjected to price wars and had to sell to Microsoft due to decreased profitability following the price wars. Even with this knowledge, price wars still persist.
A price war is a real threat for most companies and industries, especially in oligopolistic markets where competition is typical. Most companies are aware of this and adequately prepare with the understanding that engaging in a price war would ultimately affect their profit margins and survival. Ultimately, the companies that survive a price will have broken free from cost justification and will focus on reframing and reinventing themselves by providing innovative products and services (Rajagopal, 2013, p. 127). Because price wars are economically destructive – since there are no real winners in such competitive strategies and both the companies that win and loss suffer along with the customers –, all sensible companies should prepare for their eventuality. Even as they prepare for such as eventuality, there are steps that they should take to ensure that a price war does not occur. Firstly, they must continuously evaluate their pricing strategies to ensure that their competitors do not erroneously translate them as the beginning of a price war in the industry. Secondly, they can create price leadership that allows them to avoid price cuts and retain a majority of their profit margins even as the price reductions occur in the price war. Finally, they can adopt diplomacy and financial punishment to ensure that no company adopts predatory pricing policies that eventually cause price wars (Rajagopal, 2013, pp. 127-128).
One must accept that a price war is the price policy adopted with the aim of gaining market cost leadership. In the short-term, price wars improve companies’ market share and profits and even allow consumers a small period in which they can take advantage of the industry price cuts. Though, in the long-term, their adverse outcomes far outweigh their benefits. Price wars seem unavoidable as nearly every competitive industry will apply pricing strategies for the purposes of competition. In the supermarket industry, Costco and Walmart are engaged in a price war. Samsung and Apple are similarly engaged in a price war in the mobile phones industry. In this respect, price wars are part of how companies compete in the industry. Therefore, price wars are part of standard management practices where competition exists.
Mobile phone price drops
Emerging markets, which were previously under-tapped, now offer the best markets for mobile phone companies. They are brimming with opportunities for mobile phone manufacturers and marketers. This is because they have the largest population proportion that does not own mobile phones, despite having access to mobile phone infrastructure such as service providers. Essentially, the majority of the emerging market are yet to buy their first mobile phone (Tibken, 2014). Additionally, they face the highest inflation, unemployment and unfavorable exchange rate conditions – that discourage the purchase of mobile phones –, which has made the price drop more significant in increasing their purchasing power (Emerging Markets the ‘engine’ of smartphone growth 2014). Therefore, the mobile phone price drops have allowed more consumers from emerging markets to buy mobile phones, despite facing challenging economic conditions.
Global mobile phones sales have risen by as much as 25% in 2014. Analysts have attributed this rise to the companies increased intrusion into the emerging markets and drop in handset prices. These conditions allow them to offer more affordable prices that have attracted new consumers. In fact, while the established markets – such as Europe and North America – have experienced single-digit growth in sales, the emerging markets growth rate has been at more than 30% on average. Emerging markets now order for more mobile phone units than the order of the emerging market, although the established markets still offer the highest profit margins (Emerging Markets the ‘engine’ of smartphone growth, 2014). This implies that while the growth rate in the established markets is dropping, the growth rate in the emerging markets is rising.
Even as the mobile phone manufacturers report increasing sales in emerging markets, they are complaining that the price drops have caused their profits margins to dip correspondingly. In fact, except for the market leaders such as Apple and Samsung, manufacturers are struggling to balance production costs with selling prices and profitability. Contrastingly, the market leaders have also lost some of their market shares due to the high prices of their products. For instance, Samsung and Apple who are the market leaders – at positions one and two respectively – and have some of the most expensive handsets have lost at least 5% of their market share to the cheaper brands such as Xiomi and Huawei (Emerging Markets the ‘engine’ of smartphone growth, 2014). Essentially, if Samsung and Apple want to increase their mobile phone market share then they must lower the prices of their product to attract the emerging markets who have the largest percentage of new consumers.
With their flagship products, iPhone and Galaxy S, the two manufacturers – Apple and Samsung – dominate mobile phone sales, controlling as much as half of the market and profits. However, even with this dominance, they seem to have reached their peak in terms of market growth. This is because the established markets are saturated while the emerging markets can ill afford their products. Additionally, consumers are spurning the high priced handsets in favor of the low-priced handsets. Mostly, if the two manufacturers expect to increase their market share then they must develop more affordable mobile phones for the emerging markets. While the emerging markets present a substantial opportunity, most of them cannot afford the high price tags. At an average GDP (income per capita) of €4,000 and more than half of the population living on less than €1, populations in the emerging markets can ill afford an iPhone that would cost approximately €500. They will quickly find the cheaper handsets more appealing and affordable than the expensive handsets (Tibken, 2014). Therefore, the less than ideal economic conditions in emerging markets ensures that they are inclined to buy cheaper mobile phone models thereby helping the segment to grow.
Mobile phone manufacturers are increasingly aware that they must tap into the emerging markets if they wish to increase their market share and remain competitive. They recognize that they must provide cheaper products for the populations that cannot afford their high-end products. For instance, Apple has discounted its iPhone prices by approximately 5% in both the developed and emerging markets. This strategy has made the iPhone more affordable without sacrificing product quality, although the company profit margins will dip. However, even when discounted, the iPhones are still more expensive than the average price of cheaper models. This implies that the cheaper iPhone is still more expensive than the consumer from an emerging market can afford. Unlike Apple, Samsung will find it easier to shift to the emerging markets and offer low priced products. This is because the company already provides cheap phone models. Additionally, the company provides its components thereby lowering their production costs.
One must accept that the saturation of developed markets has forced mobile phone companies to focus on emerging markets. In fact, the emerging markets now account for a significant proportion of market growth. Given that the emerging markets are faced by financial constraints – such as inflation, unemployment, exchange rates, and GDP –, the mobile phone manufacturers and marketers have had to offer cheaper models. In this respect, cheaper mobile phones have allowed a larger segment of the emerging market population to buy phones while the companies have increased their market share. Therefore, the mobile phone price drops have allowed more consumers from emerging markets to buy mobile phones, despite facing challenging economic conditions.
Individual Report on Price Wars Reference
Baker, W. L., Marn, M. V. & Zawada, C. C. (2010). The Price Advantage. Hoboken, New Jersey: John Wiley & Sons.
Emerging Markets the ‘engine’ of smartphone growth 2014. Retrieved November 21, 2014, from http://www.fin24.com/Tech/Mobile/Emerging-markets-the-engine-of-smartphone-growth-20141031
Kew, J. & Stredwick, J. (2005). Business Environment: Managing in a strategic context. London: CIPD Publishing.
Rajagopal, S. (2013). Marketing Decision Making and the Management of Pricing. Hershey, Pennsylvania: Idea Group Inc.
Raju, J. & Zhang, J. (2010). Smart Pricing: How Google, Priceline, and leading businesses use pricing. Upper Saddle River, New Jersey: Pearson Prentice Hall.
Tibken, S 2013, Apple, Samsung’s next critical play: Affordable smartphones. Retrieved November 21, 2014, from http://www.cnet.com/news/apple-samsungs-next-critical-play-affordable-smartphones/
