Business Report on Economic Analysis of Two Industries
This business report is mainly aimed to analyse both microeconomic analysis and macroeconomic analysis of two industries in a critical manner. The two industries selected for such purpose are supermarket industry, and mobile phone industry. The recent price wars in the business market have affected both these industries in varying ways which have huge impact on these industries as well as on the consumers (Miles and Scott, 2008). In relation to both of these companies, the report is mainly aimed to examine whether the price was have been beneficial for both consumers and their respective industries or not.
To examine this scenario, some microeconomics models are implied in the report to reach some significant results. Further in the same report, macroeconomic model is also applied to evaluate a significant position of mobile phone industry. As per this situation, the prices of the mobile phone devices have been fallen rapidly and as a result it is seen that if the trend continued the larger segment of the emerging population will also be able to afford the mobile phones. In addition to this, some theoretical macroeconomic models are also applied to reach some critical results of the economic analysis of both the industries.
Micro economic analysis of price war within the supermarket and mobile phone industry
Price War is a market strategy in which regular cutting of prices takes place between the competitors in the market. In this strategy if one competitor lowers the price, the others sellers will also cut down the price in order to survive the price competition (Smith, 2011). Supermarket industry and the mobile industry are the one, where high degree of price war takes place as the market structure is of oligopoly market where there are few sellers who are interdependent on each other.
The benefit of price war is enjoyed by both consumers and the sellers of the supermarket and mobile phone industries. Main benefit is enjoyed by the consumers as price cutting due to price war is a good deal for the consumers. When one supermarket lowers the price of groceries, the other supermarkets will have to cut their grocery price as well in order to survive in the market and maintain its customers and also because all the supermarket firms are interdependent. According to the kinked demand curve, the related firms in the oligopoly market have to cut their prices as well in order to survive on the market (Tucker, 2012). Consequently, the average prices of groceries will fall and thus consumers will now be able to purchase more units of low price groceries.
However it has also been seen that with the effect of price war the customers become price sensitive and tend to focus less on quality of the products. It may sometimes result in dissatisfaction among the consumers at later stage when they realise the quality of the product being purchased is not up to the mark. This is one of the major drawbacks of the price war strategy for the customers. Another drawback seen is that with the help of aggressive price cutting powerful firms can drive its competitors away from the industry and thus customers are left with lesser choice. Later on these firms can set higher price and customers are at loss.
Looking from the seller’s perspective, the concept of price war has its own importance. This economic strategy of price war is to a certain extent beneficial to the sellers of the industries as it helps to attract more and more customers which directly help to raise the demand of its products in the market. Thus, the demand for its products increases as the prices are cut. This happened in mobile phone industry when the prices of the mobile phones were decreased by all the companies which lead to rapid increase in demand of the mobile phones.
Another great advantage offered by it to the firms is that the when the price war is dominant within the supermarket and mobile phone industry then the industry does not seem very attractive in terms of profit to the new comers as the profit margins are reduced and may sometimes lead to. Thus it might not appear pleasing to the potential new entrants to enter the industry and thus competition is reduced for the existing firms.
Looking at the other side of the situation it has been seen that price war should be practiced in a controlled manner as if practiced aggressively it can worsen the situations of the sellers of the industry. Major negative impact of the price war is that the profit margins of the firms are reduced as the prices are regularly cut in order to match up with the decreased prices of the competitors in the oligopoly supermarket industry and may sometimes lead to profit haemorrhage (Lamb, 2011). Also it is seen at times due to the price cut the quality of the raw materials used or products have to be reduced in order to cover fixed cost out of reduced profits. This may affect the goodwill of the companies. Thus the strategy of price war has its both negative and positive impacts and should be practiced very carefully.
Macro economic analysis related to fall in the cost of mobile phones in the markets
A fair and efficient competitive market place brings positive changes in the macro economics aspects of the economy in the form of higher productivity and reduction in the cost (Fatoki and Musara, 2010). Mobile phones companies are decreasing the prices of the phones these days. The main reason responsible for the reduction in the price is that the with the passage of time the technology charges are reduced which cuts down the cost of the inputs used and also due to the increase in the efficiency level of industries which results in economies of sales and the prices automatically comes down. If this trend of falling cost continues, the selling and buying activities will increase as it would lead to increase in demand by the consumers.
The cost cutting will help to grab a larger section of the customers as it will be within the purchasing power capacity of the people due to fall in the price of mobile phones. Thus, it will become more affordable to the wide section of the customers. Besides this, it can be seen that with the decrease in the cost of mobile phones, the prices will reduce which will help to raise the demand of mobile phones in the market. The increased demand calls for increased supply or it can be said that there will not be a situation of over production because when the cost is cut it will automatically be sold off whatever is produced by the manufacturers. This is supported by Say’s law of market which states that the supply creates its own demand (Johnson, 2001).
Another benefit to the economy will be in terms of increase in the investment projects by the potential investors. In order to meet the increased demand in the economy more investment projects need to come up in the economy and thus new entrants may enter the mobile phone industry market because of the reduced cost and increased demand in the market. As more and more investment projects come up, the employment level tends to increase as employment is directly related to the level of investment (Temple and Driver, 2005). Thus it indirectly help via the increment in demand and investment concept to increase the employment opportunities as for producing more mobile phones more labour will be required which will thus generate employment.
Reduction in the cost thus helps the wide section of consumers in a number of ways but it should be kept in mind that the cost should be reduced only up to a certain limit which is bearable for the suppliers and firms. Reducing cost beyond limit will be unprofitable for the firms and will therefore hamper the economy as the suppliers and firms will not be able to cover their average cost of production.
The presented discussion made in the paper has reflected the implication of different Microeconomic as well as Macroeconomic theories in the real life scenario. On the basis of the review of the situation regarding Price War in the Super market and Mobile phone industry, it can be reflected that although the high degree of price war is making it tough for the company to sustain in stiff competition, yet still from the perspective of industry development and consumer’s interest, stiff price war leads to provide some crucial and positive impression.
In relation to this, cost reduction and its impact of consumer’s interests can also be considered as one of the major point of discussion in the paper. On the basis of the Say’s law of demand and supply relation, it can be stated that high supply of the product creates its own demand in the market. In this regard, cost reduction will lead mobile phone companies to produce more products and enhance the supply of product, which will be able to accomplish the demand of customers.
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