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Competition in the detergent market in India is of interest for several reasons on both a macro- and micro-economic levels. On a macroeconomic level, one-sixth of the world’s population is in India. Furthermore, GDP per capita measurements indicate a steady rise in income levels in this newly industrializing nation. From a microeconomic perspective, this paper addresses a strategic game involving price wars between two market leaders in the detergent market, Unilever and Procter & Gamble (P&G). Lastly, ethical considerations will be discussed as it relates to the importance of considering exogenous ‘losers’ as a result of engaged players in this strategic games; namely, mom and pop Indian shops that sell detergent products.
Unilever has had a strong, unmatched foothold in India since 1888, when it sold its first bar of soap in the country. As an Anglo-Dutch company, Unilever has worked hard over a period of nearly 150 years to build its dominant position in emerging markets, such as India. The organizational success in executing this objective successfully is evident through the nearly 70-80% market share enjoyed by Unilever in the Indian detergent market.
P&G is a direct competitor with Unilever and has been using price wars, as well as aggressive advertising campaigns, to whittle away at Unilever’s market share. The cost of this strategy in the short run has been pressures endured by both company’s operating margins and bottom-line financial results; however, P&G has traditionally viewed this as a viable long-term strategy. In order for the company to be successful, P&G must be diligent and willing to accept losses today in order to profit from potential future gains.
The uphill battle faced by P&G is clear, as Unilever is an early adopter in this market, while P&G just entered the Indian market in 1993. To date, P&G have yet to establish the full value of their brand equity realized in other overseas markets. Strategically, the Indian market was essentially flooded by P&G with their products as an attempt to drive prices below Unilever’s marginal costs. P&G has been modestly successful in obtaining control of some additional market share in India over time, as Unilever has given up their once 90% market share held since 2004.
The game in which Unilever and P&G are playing will now be explored in greater detail. Neither player has knowledge of the other’s actions, as both moves simultaneously. Furthermore, each company has a strategy of either pricing competitively (i.e., high prices) or engaging in a price war (i.e., low prices). This game is similar, in some respects, to the “Battle of the Sexes” strategic game, in which the Pareto optimal move is for one player to set high prices while the other is priced low, but both players actually want to set low prices. The Nash equilibrium in this game is one in which is the Pareto optimal move involves asymmetric payoffs: P&G continues to price their products at the low price while Unilever prices competitively. Unilever would prefer to collude with P&G – in that manner, both players would charge the high price.
Nonetheless, the cost to Unilever of this market payoff is cushioned by the fact that it has a strong market leadership position in the Indian market – especially in the areas of brand recognition and customer loyalty. In the short run, anyway, P&G’s strategies are minimally effective in scaling additional market share at Unilever’s loss. Both companies lose in this game by waging a price war because it would adversely affect both companies’ bottom lines, at least in the short run.
In reality, both companies act in a somewhat surprising manner by following the strategy of rigorous price cutting. M.S. Banga, CEO of Hindustan Lever Ltd., a subsidiary of Unilever responsible for the Indian business, justifies such a scenario with a claim that reiterates Unilever’s already very strong position that was built up over years, as well as the company’s determination to not just defend it, but to strengthen its market share. A.G. Lafley, CEO of P&G, highlights the fact that Unilever has been in India for many decades, and that India is a region worth aggressively pursuing market entry in the long-term.
Two important factors have been omitted from this game: (1) smaller competing firms; and (2) India’s competition policy. Obvious losers in this game would be the small mom and pop companies in India. These small players in this market have no viable alternative means of competing for any length of time in a scenario where the major players are engaged in a price war due to their limited capital to draw on.
This begs the question of whether it is ethical (or even legal) for Unilever and P&G, as oligopolies in the Indian market, to engage in price wars. Unfortunately, there is a less clear or direct answer to this question. One way to consider a possible response is to observe India’s competition policies, in which Unilever and P&G appear to be in violation of, which gives rise to the idea that both companies’ may be behaving in an unethical manner. According to India’s New Competition Policy, public enterprises are charged with preventing monopolistic, restrictive, and unfair practices. Included, are practices that are exclusionary to other players by creating a barrier to new entrants or forcing existing competitors out of the market.
Advocates of price wars, in the short run, would be Indian consumers because they are receiving the same quality products at a highly discounted price. Another ethical consideration may highlight the fact that many consumers in the Indian marketplace would otherwise have no access to quality detergent products, which are a required good in the pursuit of an acceptable standard of living. One fact remains: this story is unfolding in real time and many answers to these and related questions will require continued observation of the market dynamics between Unilever, P&G, and other players in India’s detergent market.
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Source by David J Stone