Individual Report
(This assignment comprises 50% of the final mark for this module)
You should answer the question in report form with 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
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. Maximising 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
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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; rationalisation by the industry; 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 realise 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
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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.
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
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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 an 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 unfavourable 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 the 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
the new consumers. In fact, while the established markets – such as Europe and North America –
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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
emerging markets order, although the established markets still offer the highest profit margins
(Emerging Markets the ‘engine’ of smartphone growth, 2014). This implies that while 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 share 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 favour 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
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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 recognise 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 that 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
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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 the emerging markets to buy mobile phones, despite facing
challenging economic conditions.
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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.
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.
