Understanding the economic concept of Perfect Competition in India


There are so many simple concepts in economics. These concepts help us to understand the business world around us, even if we are not economists. One such concept is the concept of Perfect Competition, a situation where there are too many buyers and sellers in a single market. Some dimensions of this concept are sought to be explained in this article.

Introduction

Perfect competition is a very simple concept of economics. It means a situation where there are a huge number of players in a market and the price of the final product cannot be decided by any single player. The Government intervention is not there. The market is characterized by a huge number of buyers and sellers and the players earn normal profits, but not huge profits. The large number of firms present in the market, produce more or less homogeneous products. The customer gets to benefit at every step, as the prices cannot be very steep, anyway. In this article, the focus is on examples to understand this concept. The examples are a) the cell phone industry b) the organized retail industry c) the vegetarian hotel industry d) the biscuit industry and e) the soaps and detergents industry.

The cell phone industry

This is a superb example of perfect competition. That there are a good number of players is one thing. But the pricing strategy of the biggest player, the great Reliance group with its jio brand, has been a game changer. Just twelve months ago, for Rs.399 we had unlimited calls and some 1GB data per day as a combo pack from many players. When Jio reduced the prices, the competitors have to follow suit and today, for as less as Rs.199/-, we even get unlimited local and STD calls and upwards of 1GB free per day, for 28 days. Typical perfect competition at work. Vodafone and Idea have merged together, but Jio is keen on virtually killing the competition. The Tata group, for example, is no where in the game. Even the mighty Aditya Birla group is wondering what to do with Idea. The group might exit the business altogether and concentrate on its core competencies of commodities. The customers are happy that the prices are coming down drastically. However, the voice offering of Jio is still not okay, more so, in the semi urban and rural areas.

Reliance is now addressing this problem too. In the near future, we will have just three players, that is, Jio, the Vadofone/Idea combine and Airtel. It is well known that Airtel is feeling the heat now. The offerings are all the same. If we watch youtube with Jio or Airtel, the result is the same.

The organized retail industry

The biggest player is Big Bazaar. This group, led by Mr Kirshore Biyani, is a discount model group and is totally unfazed by the competition even from Amazon.com, which has entered the grocery space too. Since customers get a huge variety of goods in one place, at cheap prices, this is the biggest player.

However, the kirana shops that offer convenience and the personal touch, in some many residential localities are playing catching up. Their personalized equations help a great deal in customizing products for individual customers. For example, if a customer demands the best quality red chilies from Guntur, the kirana guy can get it fast and ensure the best quality too. Vegetables at 5AM, for example, are fresh and very good too. The prices are more or less same as what is there in the Reliance Fresh, More and Big Bazaar outlets. Big Bazaar has already eaten up smaller retail chains like Nilgiris of South India. However, the individual customer is always spoiled for choice in this perfect competition market, where the differentiation between products is very less indeed. For example, even the smaller super markets, with lower overheads in terms of wages, have also stocking branded plastic items, at prices that match the Big Bazaar and the other players. So, the perfect competition helps too.

The vegetarian hotel industry

Since my knowledge about this industry is rather limited to Chennai and other big cities of Tamil Nadu, let me restrict this explanation to Chennai alone. There is perfect competition between the branded players like the Saravana Bhavan, the Sangeethas, the Vasantha Bhavan, A2B, the GSS group and the Murugan Iddli Shop group. The food items are very similar, and a few more varieties are sometimes available. The prices cannot be increased just like that. Saravana Bhavan tried to increase prices at will, but when the customer resistance was noted, it reduced its prices for the vegetarian thali, at many places. Similarly, Sangeethas does not charge higher prices and is almost the same as the market leader Saravana Bhavan. Other variables like RO water, good ambiance and so on, are literally the same. Even the biggest single shop competitor, called Highway Inn, at Poonamalee, tries to match the prices and does not charge extra. When the GST rates were down to 5%, the customers started coming back. In the interim period, there was a big slump, as the customers went to unorganized outlets or cheaper non-GST hotels. The homogeneous nature of products makes it difficult to differentiate, and the customer make informed choices. However, distances do matter, and when the customer is near any of these branded outlets, he or she would enter one of these and be done with breakfast, or lunch or dinner.

The biscuit industry

Since this industry is also so huge with so many unorganized players, it is very difficult to increase prices. The perfect competition has meant that even the great Brittannia is now present in smaller packs. The new competitor, the ITC, with its sunfeast brand, is a huge success, as its products are as good as Britannia and the customer perception of ITC as a huge company helps. ( many think it is a multinational company. This is untrue). The perfect competition leads to "extra" packages being given almost every month. The profit margins may be less, but the market is huge and is growing. For example, children below the age of three are often given more biscuits than children who are more than ten years old. This is a huge plus in terms of volume sales. Of course, the unorganized sector is very active too. Go to any small shop and ask for the "butter biscuit". Priced at Rs.4 or Rs.5 apiece, these are tasty too and do not need to be stocked for a long time. The smokers will always have one or two, after their smoke. The huge number of Indian players, with the likes of Parle being a huge competitor, Brittannia does feel the heat. It has indeed entered niche markets, but these are not mass markets.

Still, the beauty of this industry is that the organized players like Britannia and Parle are trying their best to dent the competition from the unorganized sector, by coming up with smaller packs that will appeal to rural markets and customers. For example, the largest selling brand across categories, Tiger of Brittannia, is present in the small pack and retails at just Rs.3/ per pack and is sold in thousands of small shops everywhere. The rural customer will be tempted to buy this pack for children and this is exactly what is happening.

The soaps and detergents industry

The bath soap industry is hugely branded. Yet, there are so many players. The new craze of herbal soaps is eating into the brand equity of the biggest brands, including Hamam and Lux. The customer loyalty for brands, it has now been researched and revealed, is not huge. Customers keep on changing brands and there are a huge number of customers who seem to be sold on the "health" platform. Even here, there is perfect competition. Since customers have choices, the prices of bath soaps cannot shoot through the roof at any point in time.

Similarly, the detergents industry is also a perfect competition one. There are so many players and the unorganized sector is formidable too. The prices cannot be increased at will and in the villages the unorganized sector still rules. The "bar soap" is so famous. It is manufactured locally, but the product sells because of its utility in terms of price.

In Tamil Nadu, there are many small brands that are also very active and are holding out on their own. They also advertise on television and are fairly strong in some rural markets. For example, the brand "Arasan" brand of detergent soap is a formidable brand.


Conclusion

The aforesaid discussion is incomplete in terms of scope. There are many other examples of perfect competition in India. However, the most common and easily observable examples have been discussed to offer easy reference points. Understanding the concept will enable every single person to also explore more choices available in so many local environments. The individual customer has never had it so good. The emergence of perfect competition everywhere, in India, is very good for the individual customer.


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