Managerial economics

SUBJECT: Managerial Economics Marks: 100
CASE – 1 Indian Stock Market: Does it Explain Perfect Competition?
The stock market is one of the most important sources for corporates to raise capital. A stock
exchange provides a market place, whether real or virtual, to facilitate the exchange of securities
between buyers and sellers. It provides a real time trading information on the listed securities,
facilitating price discovery.
Participants in the stock market range from small individual investors to large traders, who can be
based anywhere in the world. Their orders usually end up with a professional at a stock exchange, who
executes the order. Some exchanges are physical locations where transactions are carried out on a
trading floor. The other type of exchange is of a virtual kind, composed of a network of computers and
trades are made electronically via traders.
By design a stock exchange resembles perfect competition. Large number of rational profit
maximisers actively competing with each other, trying to predict future market value of individual
securities comprises the main feature of any stock market. Important current information is almost
freely available to all participants. Price of individual security is determined by market forces and
reflects the effect of events that have already occurred and are expected to occur. In the short run it is
not easy for a market player to either exit or enter; one cannot exit and enter for few days in those
stocks which are under no delivery. For example Tata Steel was in no delivery from 29/10/07 to
02/11/07. Similarly one cannot enter or exit on those stocks which are in upper or lower circuit for few
regular trading sessions. Therefore a player has to depend wholly on market price for its profit
maximizing output (in this case stock of securities). In the long run players may exit the market if they
are not able to earn profit, but at the same time new investors are attracted by rise in market price.
As on 01/11/07 total market capital at Bombay Stock Exchange (BSE) is $1589.43 billion (source:
Business Standard, 1/11/2007); out of this individual investors account for only $100bn. In spite of the
fact that individual investors exist in a very large number, their capital base is less than 7% of total
market capital; rest of capital is owned by foreign institutional investor and domestic institutional
investors (FIIs and DIIs), which are very small in number. Average capital owned by a single large
player is huge in comparison to small investor. This situation seems to have prompted Dr Dash of BSE
to comment ‘The stock market activity is increasingly becoming more centralized, concentrated and
non competitive, serving interest of big players only.” Table 2 shows the impact of change in FII on
National Stock Exchange movement during three different time periods.
Table 2: Impact of FIIs’ Investment on NSE
Wave Date Nifty
close
Change in
Nifty Index
FLLS Net
Investment
(Rs.Cr.)
Change in Market
Capitalization
(Rs.Cr.)
Wave 1
From
To
17/05/04
26/10/05
1388.75
2408.50 1019.75 59520 5,40,391
Wave 2
From
To
27/10/05
11/05/06
2352.90
3701.05 1348.15 38258 6,20,248
Wave 3
From
To
12/05/06
13/06/06
3650.05
2663.30 -986.75 -9709 -4,60,149
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By design, an Indian Stock Market resembles perfect competition, not as a complete description
(for no markets may satisfy all requirements of the model) but as an approximation.
Questions
1. Is stock market a good example of perfect competition? Discuss.
2. Identify the characteristics of perfect competition in the stock market setting.
3. Can you find some basic aspect of perfect competition which is essentially absent in stock
market?
CASE – 2 The Indian Audio Market
The Indian audio market pyramid is featured by the traditional radios forming its lower bulk.
Besides this, there are four other distinct segments: mono recorders (ranking second in the pyramid),
stereo recorders, midi systems (which offer the sound amplification of a big system, but at a far lower
price and expected to grow at 25% per year) and hi-fis (minis and micros, slotted at the top end of the
market).
Today the Indian audio market is abound with energy and action as both national and international
majors are trying to excel themselves and elbow the others, ushering in new concepts, like CD sound,
digital tuners, full logic tape deck, etc. The main players in the Indian audio market are Philips, BPL
and Videocon. Of these, Philips is one of the oldest and is considered at the leading national brands. In
fact it was the first company to introduce a range of international products such as CD radio cassette
recorder, stand alone CD players and CD mini hi-fi systems. With the easing of the entry barriers, a
number of new international players like Panasonic, Akai, Sansui, Sony, Sharp, Goldstar, Samsung and
Aiwa have also entered the arena. This has led to a sea of changes in the industry and resulted in an
expanded market and a happier customer, who has access to the latest international products at
competitive prices. The rise in the disposable income of the average Indian, especially the upper-
income section, has opened up new vistas for premium products and has provided a boost to
companies to launch audio systems priced as high as Rs. 50,000 and beyond.
Pricing across Segments
Super Premium Segment: This segment of the market is largely price-insensitive, as consumers are
willing to pay a premium in order to obtain products of high quality. Sonodyne has positioned itself in
this segment by concentrating on products that are too small for large players to operate in profitably.
It has launched a range of systems priced between Rs. 30,000 to Rs. 60,000. National Panasonic has
launched its super premium range of systems by the name of Techniques.
Premium Segment: Much of the price game is taking place in this segment, in which systems are
priced around Rs. 25,000. Even the foreign players ensure that the pricing is competitive. Entry
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barriers of yester years compelled the demand by this segment to be partially met by the grey market.
With the opening up of the market, the premium segment is witnessing a rapid growth and is currently
estimated to be worth Rs. 30 crores. Growth of this segment is also being driven by consumers who
want to upgrade their old music systems. Another major stimulating factor is the plethora of financing
options available, bringing more and more consumers to the market.
Philips has understood the Indian listener well enough to dictate the basic principles of segmentation. It
projects its products as high quality at medium price. In fact, Philips had successfully spotted an
opportunity in the wide price gap between portable cassette players and hi-fi systems and pioneered the
concept of a midi system (a three-in-one containing radio, tape deck and amplifier in one unit). Philips
has also realized that there is a section of the rich consumer which values not just power but also
clarity and is willing to pay for it. The pricing strategy of Philips was to make the most of its image as
a technology leader. To this end, it used non-price variables by launching of a range of state of art
machines like the FW series, and CD players. Moreover, it came up with the punch line in its
advertisements as, “We Invent For You”.
BPL stands second only to Philips in the audio market and focuses on technology as its USP. Its
kingpin in the marketing mix is its high technology superior quality product. It is thus at being the
product-quality leader. BPL’s proposition of fidelity is translated in its punchline for its audio systems
as, ‘e-fi your imagination’ (d-fi stands for digital fidelity). The company follows a market skimming
strategy. When a new product was launched, it was placed in the top end of the market, and priced
accordingly. The company offers a range of products in all price segments in the market without
discounting the brand.
Another major player, Videocon, has managed to price its products lower even in the premium
segment. The success of the Powerhouse (a 160 watt midi launched by Philips in 1990) had prompted
Videocon to launch the Select Sound range of midi stereo systems at a slightly lower price. At the
premium end, Videocon is making efforts to upgrade its image to being “quality-driven” by associating
itself with the internationally reputed brand name of Sansui from Japan, and following a perceived
value pricing method.
Sony is another brand which is positioning itself as a premium product and charges a higher price
for the superior quality of sound it offers. Unlike indulging into price wars, Sony’s ad-campaigns
project the message that nothing can beat Sony in the quality and intensity of sound. National
Panasonic is another player that has three products in the top end of the market, priced in the Rs.
21,000 to Rs. 32,000 range.
Monos and Stereos: Videocon has 21% share I the overall audio market, but has been a major player
only in personal stereos and two-in-ones. Its history is written with instances where it has offered
products of similar quality, but at much lower prices than its competitors. In fact, Videocon launched
the Sansui brand of products with a view to transform its image from that of being a manufacturer of
cheap products to that of being a company that primes quality, and also to obtain a share of the hi-fi
segment. Sansui is being positioned as a premium brand, targeting the higher middle, upper income
groups and also the sensitive middle class Indian consumer.
The objective of Philips in this segment is to achieve higher sales volumes and hence its strategy is
to expand its range and have a product in every segment of the market. The pricing method used by
Philips in this segment is providing value for money.
National Panasonic offers products in the lower end of the market, apart from the top of the range.
In fact, it reduced the price of one of its small two-in-ones from Rs. 3,500 to Rs. 2,400, with the logic
that a forte in the lower end of the market would help in building brand reliability across a wider
customer base. The company is also guided by the logic that operating in the price sensitive region of
3

the market will help it reach optimum levels of efficiency. Panasonic has also entered the market for
midis.
These apart, there also exists a sector in the Indian audio industry, with powerful regional brands in
mono and stereo segments, having a market share of 59% in mono recorders and 36% in stereo
recorders. This sector has a strong influence on price performance.
Questions
1. What major pricing strategies have been discussed in the case? How effective these strategies
have been in ensuring success of the company?
2. Is perceived value pricing the dominant strategy of major players?
3. Which products have reached maturity stage in audio industry? Do you think that product
bundling can be effectively used for promoting sale of these products?
CASE – 3 Automobile Industry in India: New Production Paradigm
The Industry
The automotive sector is one of the core industries of the Indian economy, whose prospect is
reflective of the economic resilience of the country. The automobile industry witnessed a growth of
19.35 percent in April-July 2006 when compared to April-July 2005. As per Davos Report 2006, India
is largest three wheeler market in the world; 2nd largest two wheeler market; 4th largest tractor market;
5th largest commercial vehicle market and 11th largest passenger car market in the world and expected
to be the seventh largest by 2016. India is among few countries that are showing a growth rate of 30
per cent in demand for passenger cars. The industry currently accounts for nearly 4% of the GNP and
17% of the indirect tax revenue.
The well developed Indian automotive industry produces a wide variety of vehicles including
passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles, scooters,
motorcycles, mopeds, three wheelers, tractors etc. Economic liberalization over the years has made
India as one of the prime business destination for many global automotive players, including
international giants like Ford, Toyota, GM and Hyundai have also made their presence with a mark.
As per another report, every commercial vehicle manufactured, creates 13.31 jobs, while every
passenger car creates 5.31 jobs and every two-wheeler creates 0.49 jobs in the country. Besides, the
automobile industry has an output multiplier of 2.24, i.e., for every additional rupee of output in the
auto industry, the overall output of the Indian economy increases by Rs. 2.24.
The India automotive sector has a presence across all vehicle segment and key components. In
terms of volume, two wheelers dominate the sector, with nearly 80 per cent share, followed by
passenger vehicles with 13 per cent. At present, there are 12 manufacturers of passenger cars, 5
manufacturers of multi utility vehicles (MUVs), 9 manufacturers of commercial vehicles (CVs), 12 of
two wheelers and 4 of three wheelers, besides 5 manufacturers of engines.
Table: Vehicle Segment-wise Market Share (2005-06)
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Item Percent Share
Commercial vehicles 3.94
Passenger vehicles 12.83
Two Wheelers 79.19
Three Wheelers 4.04
Total 100.00
Source: Report of Society of Indian Automobile Manufacturers (SIAM), 2006.
Although the automotive industry in India is nearly six decades old, until 1982, there were only three
manufacturers – M/s Hindustan Motors, M/s Premier Automobiles and M/s Standard Motors in the
motorcar sector. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in
collaboration with Suzuki of Japan to establish volume production of contemporary models.
The Company
Maruti Udyog Ltd. (MUL) has become Suzuki Motor Corporation’s R&D hub for Asia outside Japan.
Maruti introduced upgraded versions of the Esteem, Maruti 800 and Omni, completely designed and
styled inhouse. This followed the up gradation of WagonR and Zen models, done inhouse only a year
before. Maruti engineers also worked with their counterparts in Suzuki Motor Corporation in the
design and development of its new model, Swift.
The company launched superior Bharat Stage III versions of most of its models, well before the
Government deadline. Maruti also set up a Centre for Excellence with a corpus or Rs. 100 million.
This was done in collaboration with suppliers, who contributed an additional Rs. 50 million. The
Centre provides consultancy and training support to Maruti’s Suppliers and Sales Network to enable
them to achieve standards in Quality, Cost, Service and Technology Orientation.
Maruti has embarked upon this new project in collaboration with SMC for the manufacture of diesel
engines, petrol engines and transmission assemblies for four wheeled vehicles. The project is being
implemented in the existing Joint Venture Company viz. Suzuki Metal India Limited (renamed Suzuki
Powertrain India Limited).
Questions
1. Identify the most important factors of production in case of automobile industry. Also attempt
to explain the relative significance of each of these factors.
2. What more information would you like to obtain in order to draw a production function for
Maruti Udyog? Explain with logic.
3. Automobile industry is a good example of capital augmenting technical progress. Discuss.
5

CASE – 4 From Wages to Packages: the Journey of Software
Organizations across all industries are undergoing a shift in emphasis from tangible resources to
valuable, rare and inimitable human resource in order to attain competitive advantage. Many leading
organizations have started adopting an investment perspective towards their employees by moving
from a traditional wage and salary system to compensation “packages”. The underlying reasons behind
such a change include ensuring a motivational climate, encouraging efficiency and productivity for
attainment of strategic goals, and gaining control over labour costs.
Wage and salary system bears a strong relationship with the performance, satisfaction and
attainment of goals of the employees of a firm. This has prompted companies to start offering full
packages of monetary and non monetary rewards as compensation or wage/salary to their employees.
Dimensions of Compensation
Compensation affects a person economically, sociologically and psychologically. It also compensates
for the opportunity cost and real cost occurring to the specific type of human resource in being in the
present context. Proper management of compensation helps a firm procure, maintain and retain a
productive workforce.
A sound compensation package should encompass factors like adequacy of wages, social balance,
supply and demand, fair comparison, equal pay for equal work and work measurement. The concept of
adequacy can be disintegrated into two components: internal and external. The internal component can
be linked with the concept of fair wages; it is the money wage adequate for an employee to maintain a
decent standard of living. External adequacy, on the contrary, is in relation to comparable jobs in the
same industry(s) with the same skill-set required.
Besides the element of adequacy, compensation is instrumental in motivation. An equitable
compensation package may increase employee motivation. Inequity, on the contrary, may motivate
employees to take corrective actions, which may be harmful to the firm. Firms thus link compensation
to performance appraisal to enhance motivation, and hence productivity. Compensation may also be
looked upon as a controlling device to ensure that employees behave in particular manner. An
organisation may choose to offer a higher package to a particular employee in order to allure another
employee to perform better.
Compensation in Software
Let us now take you to the software industry, known in corporate history for adding new facets to
realms of wage and salary administration. It is software that has introduced compensation as a multi-
dimensional tool. Differentials in compensation packages among various levels of software
6

professionals, focus on skill-based compensation, rewards essentially linked to performance and
negotiability have all added new facades to compensation.
In a recently conducted countrywide comprehensive survey of salary, Businessworld covered
aspects like costs, compensation and benefits across 12 sectors of the Indian economy. The survey had
revealed an arbitrage between high employee salaries overseas, with the low cost workforce in India. It
has also found human resource contributing the largest component, namely 44 percent of the industry’s
total cost. The annual entry-level salary has been revealed to range from Rs. 3.21 lakhs in the western
part of the country to Rs. 5.23 lakhs in the north.
The Businessworld survey has found that the weakening dollar has hit the margins of the Indian
software industry, thus compelling software firms to rationalize on employee costs. As competition is
intensifying, software organizations must focus on ‘added value’ of their employees, by encouraging
them to increase their efforts and performance on a continuous basis. This can be achieved by an
overhauling of the entire compensation packages, including basic salary, along with incentive systems
(including increase in salary, performance bonuses, stock options and retirement packages). Apart
from such core components, emphasis must also be given to redesigning non-monetary incentives like
words of praise, special recognition, job security and autonomy in decision making. On the whole, all
such parameters of compensation strategies should be directed towards providing the ability to
reinforce desired behaviors, and also serve the traditional functions of attracting and maintaining a
qualified workforce.
Questions
1. Which factors, according to you, are prompting organizations to adopt a package instead of
traditional salary?
2. Do you think package compensation is more suitable in modern globalised business? Can you
draw some lessons from marginal productivity theory?
3. Do you think that the case supports the efficiency wage theory or bargaining theory? Give
arguments in support of your logic.
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Managerial economics

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