Price Differentiation


A common response during slow demand is to discount the price of the service. This strategy relies on basic economics of supply and demand. To be effective, however, a price differentiation strategy depends on solid understanding of customer price sensitivity and demand curves.

Heave use of price differentiation to smooth demand can be a risky strategy. Over –reliance on price can result in price wars in any industry where eventually all competitors suffer. Price wars are well known in the airline industry, where total industry profits suffered as a result of airlines simultaneously trying to attract customers through price discounting.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

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Economies of Scale


You get economies of scale when the unit cost falls as the number of units made increases. There are three reasons for the lower unit costs:

  • Fixed costs are spread over a larger number of units;
  • You can use more efficient processes, perhaps including more automation;
  • More experience with the product raises efficiency.

Economies of scale encourage you to concentrate operations and make as many units as possible in the same facilities. Another benefit from larger operations comes from the ‘learning curve.’ The more often you repeat something, the easier it becomes.

Obviously, you can’t expand facilities for ever, and there is no point in having more capacity than likely demand. More realistically, if you expand beyond a certain size the organization gets too complex – making communications, support functions and management more difficult. Beyond this point you get dis-economies of scale. You can see these in many large organizations, such as governments, which aim for the efficiencies that come from centralization, but actually get bogged down in bureaucracy and red tape.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Breaking through the Ceiling


‘Average thinking’ not only leads managers away from excellence and away from their top performers. There is one final, and perhaps most damaging, way in which it harms a manager’s best efforts. ‘Average thinking’ actively limits performance.

Great managers, with their unique talents and styles, will have devised their own routes to excellence. But despite their success, it is still a shame that they have had to waste so much creativity maneuvering around performance evaluation schemes that unwittingly place a ceiling on performance. It is still a shame that they have had to exert so much energy railing against ‘average thinking.’ This energy and creativity would be much more valuable in the unfettered pursuit of excellence.

However, if you face the same ‘average thinking,’ you should rail against it just as energetically. Define excellence vividly, quantitatively. Paint a picture for your most talented employees of what excellence looks like. Keep everyone pushing and pushing toward the right-hand edge of the bell curve. It’s fairer. It’s more productive. And, most of all, it’s much more fun.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Statistics of Supply and Demand


Equilibrium is determined by the interaction of given supply and demand curves. But what about changes in supply and demand? Such changes can be interpreted as shifts of the supply, curve, of the demand curve, or both at once.

Perhaps as a result of altered preferences, buyers suddenly want to continue more of some good at each possible price. This is called an increase of demand. The basic technique in analyzing some economic change will be to ask: Is the change reflected in a shift of supply, or a shift of demand (or possibly, of both)? It will be immediately evident that an increase in demand alone leads to an increase in both equilibrium price and equilibrium quantity. An increase in supply leads to an increase in equilibrium quantity, but to a decrease in equilibrium price.

It is sometimes useful to distinguish between those sources of change originating “outside” and those originating “inside” the economic system. The “outside” sources of variation include” 1) Changes in tastes, 2) changes in technology, changes in resources, and 3) changes in resources, and 4) changes in the political-legal system. All these changes can be regarded, in some degree at least, as originating autonomously rather than in response to economic factors.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Calculating Market Share


Market share is the ratio of the competitor’s annual sales to the total annual sales of competitive products in the market being served by the competitors. It is usually measured by dividing the  competitor’s sales in dollars by the total sales volume in dollars for the industry. Dollars are used in the calculation because monetary value is usually easy to obtain.

As may be seen from the dimensions describing the horizontal axis of the economic experience curve. It would make more sense to measure the market share in units sold during the year. Dollar volume does not double when volume in units shipped doubles if price decreases with experience.

The dimensions of the experience curve are fully allocated unit expense in constant dollars and cumulative number of units produced. The reference to doubling sales is measured in units shipped. Because this kind of measure could be counted off on the horizontal axis of the curve, it is possible to relate the growth in shipments to fully allocated expense in constant dollards, a reasonable profit margin, and the resulting dollar volume of sales.

The difficulty in obtaining the information needed to calculate market shares in terms of units shipped is often resolved by trade association data, which reports in both units and dollars. Still the associations may not include every possible competitor among their membership. In almost all cases, however, the non-members are not big enough to be significant. Even without the non-member data, the trade association information is a good approximation to the actual figures.

Given that sufficient data is available, it is not entirely necessary to know a competitor’s exact market share. The information most meaningful to a manager is market share compared to that of the nearest competitor. This gives rise to the concept of a market share ratio.

A proposed ratio that has special meaning when used in conjunction with the economic experience curve. The ratio may be best understood as:

Market Share Ratio =   Your Market Share __________

Market Share of Your Biggest Competitor

The interesting result of defining the ratio this way is that only one competitor has a ratio greater than one. All the others have functional ratios, less than one. For instance, if you the largest market share your biggest competitor will have a smaller share than you, and your ratio will be a number greater than one. If your biggest competitor has a market share larger than yours, your ratio will be less than one.

Because only one competitor has market share ratio greater than unity, the dominant competitor is identified by a number greater than one. Also, the degree of the biggest competitor’s dominance is indicated by the size of the number.

Typically, when a new business concept arises that can be represented by an economic experience curve, several competitors enter the marketplace within a very short span of time. There is an initial market penetratiuon in which market shares are established. Managers have learned how difficult it is to change the market share of the competitors once they have been established. Market shares among suppliers who are competing forcefully tend to remain reasonably constant. Cummulative experience relative to other competitors tends to be aligned with the market share ratios.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Lectures, Line of Sight

Peak Versus Off Peak Operation


An important practical problem in many industries is how to deal with sharp variations between peak and off-peak demands. Telephones are more heavily used during business hours than during evenings or weekends; local transit demands are greatest in the morning and afternoon commuting hours; in the arid areas water is more intensely demanded in summer than in winter months; restaurants are busiest at regular mealtimes, and so on. For a firm facing both peak and off-peak demands for its product, the optimization problem is how to divide its efforts between the two.

Assume for simplicity that the peak and off-peak periods are equal duration. Under pure competition the firm would be a price-taker in both the peak and off-peak markets. In the peak market it would face a higher price and in the off-peak market a lower price—but, in either market, the price will be independent of the firm’s own level of output. An example might be a city served by a number of competing taxicab suppliers, daytime hours being the peak demand period and evening hours the off-peak demand period. The quoted taxicab fares do not usually vary with time of day. However, the effective price of taxicab service does vary. In peak periods taxi earn a higher effective price, since there is less “dead time” waiting for a customer. And similarly, the customers have to pay a higher effective price in peak periods, since on average they have to wait longer for taxi to become available.

In analyzing the peak/off-peak situation, it is essential to distinguish between “common costs” and “saparable costs.” Common costs are those that apply to both peak and off-peak service. On the case of taxicabs they would include the costs of providing the casbs themselves, of running the central dispatching system,, and so on. Saparable costs are those incurred in serving each specific market. For taxicabs they might include gasoline and drivers’ wages. The distinction between common and saparable costs is quite apart from the distinction between fixed and variable costs. Common costs can be fixed or variable, and the same holds for saparable costs.

The following additional assumptions are employed: 1) There are no common fixed costs at all; the marginal common costs (MCC) is a constant magnitude. 2) The separable costs include both fixed and variable elements, but the cost function is the same in either market. However the firm may want to operate at different points along the cost curves in serving the two markets. A taxicab firm, for example, may chose to put a larger number of cabs on the road during peak period.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Monopsony in the Factor Market


Just as a monopolist is a sole seller in a market, a monopsonist is a sole buyer. If everyone in a small town works for a single coal mine, then the mine has monopsony power in the local labor market. A price-taking employer of a factor faces a horizontal supply curve, meaning that hire-price will be unaffected. But the monopsonist is the whole demand side of its market, so the factor supply curve it faces is upward slopping.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

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