CASE – 4 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 maximizes 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 Change in FLLS Net Change in
close Nifty Index Investment Market
(Rs.Cr.) Capitalisation
(Rs.Cr.)

Wave 1 17/05/04 1388.75 1019.75 59520 5,40,391

From To 26/10/05 2408.50

Wave 2 27/10/05 2352.90 1348.15 38258

From To 11/05/06 3701.05 6,20,248

Wave 3 12/05/06 3650.05 -986.75 -9709 -4,60,149

From To 13/06/06 2663.30

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 – 5 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 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, Gold star,
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 Technics.
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 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
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?