Monopolistic Competition

in India

A Description with an example

of HUL’s Pepsodent

BY:

Tanay Sharma

MBA (2010-2012)

What is Monopolistic Competition?

Perfect competition and pure monopoly are very unlikely to be found in the real world.

The real modern world is characterized by the presence of rival monopolists competing

with one another, with their prices, product policy and selling efforts. It is a situation

falling between “Competition” and “Monopoly”.

Monopolistic Competition refers to a market structure where there are many firms

selling differentiated products which are close substitutes and there is existence of

free entry and exit of firms.

The firms under monopolistic competition produce commodities which are similar to one

another but not identical. Certain industries in the Indian market falling under the

category of monopolistic competition are fast foods, textile trade, garments, plastics,

retail trade, hosiery, pickles, steel utensils, household cleaning products such as dusters

and brooms and even greeting cards.

For a long period the traditional theory of value was dominated by the study of market

situations of perfect competition and monopoly. The belief of classical economists that

there prevails perfect competition was first challenged by a Cambridge Economists, Piero

Sraffa. He maintained that the actual conditions in the industry are neither those of

perfect competition nor those of complete monopoly, but somewhere between the two.

Characteristics of Monopolistic Competition

Exhibits features of both perfect competition and Monopoly

The elements of competition are there because the products are close substitutes.

In the fast food industry in India, there are elements of competition present between

Nirula’s, McDonalds, Domino’s, Pizza Hut and the various other fast food joints. The

elements of monopoly are present as each product (brands) of each firm is differentiated

from the others. The greater the degree of differentiation, the greater the degree of

monopoly power involved.

Product Differentiation

One of the distinguishing features of monopolistic competition is product

differentiation. Product differentiation exists when the firm’s product (offerings) differs

or is perceived to differ from those of competing firms on any attribute (quality, branding,

packaging, after sales services, advertising etc.) Firms usually compete trough product

differentiation by offering the consumer something different from and better than

competitor’s products.

Large Number of Sellers

There are a large number of firms producing goods under monopolistic

competition. It must not be assumed that there it requires existence of thousand of firms.

It requires the presence of fairly large number; say 25, 35, 60 or 70. Even though each of

the firm enjoys some monopoly privilege, it has to compete with other firms in the

market. Following are the important implications for the presence of a large number of

sellers:

An individual firm has a relatively small part of the total market, so

that each has a very limited (or no) control over the market price of the

product.

With a large number of firms in the industry, there is no feeling of

mutual interdependence, that is, each firm determines its price - output

policies without considering the possible reactions of rival firms. The

economic impact of one firm’s decision is spread sufficiently across

the entire group so that the effect on any single competitor is almost

negligible. This implies that deliberate rivalry is missing or that

competition is impersonal. Each firm behaves independently. Yet all

the firms are in competition because their products are close

substitutes.

The presence of a relatively large number of firms ensures that

collusion by the firms to restrict output to raise price is most unlikely.

Free entry and exit of the firms

There are no restrictions placed on the entry as well as the exit of the firms. A new

firm may enter into production and an old firm may come out of production. As there are

no barriers to entry or exit in the long run in a monopolistically competitive market, new

firms will enter the “product group”. If the existing firms are successfully differentiating

their products and earnings supernormal profits, new firms would replicate the existing

products and marketing strategy of the successful firms. New entry of firms will decrease

the demand for an existing firm’s product. The cross-price elasticity of demand may

increase, as there are more close substitutes available in the firm’s demand curve as the

relative prices change. With no barriers to entry under monopolistic competition, there

are no economic profits in the long run.

Higher Elasticity of Demand

The effect of product differentiation is that the firm has some discretion in the

determination of the price. The firm has therefore some degree of monopoly power,

which it can exploit. Product differentiation creates brand loyalty of the consumers and

gives rise to a negatively sloping demand curve. However the firm faces competition of

close substitutes offered by other firms. In such a case the firm can expand its sales by

decreasing its price.

The model of monopolistic competition puts our situation into a more familiar

form of demand and cost curves. The illustration below shows a seller with a downward-

sloping demand curve and a conventional marginal cost curve. Because the demand curve

slopes downward, the marginal revenue curve lies below it. The seller maximizes profit

by selecting that output at which marginal revenue equals marginal costs and charges as

much as he can, which is price P2. In the long run, there can be no economic profit

because there is free entry into the industry. If there are any profits, others will enter the

industry, positioning themselves to take away customers from the most profitable sellers.

The zero profit condition implies that at equilibrium, average revenue (which is demand)

must just equal average cost. When average revenue equals average cost, average profit is

zero, and so total profit must also be zero.

The model of monopolistic competition was considered important when it was

introduced for two reasons. First, the situation it described seemed the most common

form of industry. Both the single sellers of monopoly and the many sellers of price-taking

competition are uncommon in comparison. Furthermore, monopolistic competition

describes more than traveling costs in a geographical sense. The distance between sellers

can be in the minds of buyers. Product differentiation, which results in many products

that are similar but not identical, also creates a distance between products. It was this

distance that seemed especially important to the developers of monopolistic competition.1

Second, notice that because price exceeds marginal cost, the graph contains a gray

area of welfare loss, an unexploited value that neither firms nor customers obtain.

Because monopolistic competition was seen as both common and economically

inefficient, it was argued that market systems were inherently inefficient.

Selling Efforts

In addition to price and nature of the product, the selling effort (in terms of

advertising, personal selling, public relations (excluding publicity and sales promotion)

can influence the sales of the firm’s product.

Selling efforts are undertaken to inform, persuade and to remind customers to

purchase and to remind customers to purchase the firm’s products. Selling costs can

change the position and slope of the demand curve. They can cause the demand curve to

shift outwards and become more inelastic.

This concept of monopolistic competition can be clearly understood by throwing some

light on some popular product that falls into this category and satisfies the criteria of

monopolistic competition. One such product is Pepsodent toothpaste.

An overview of this product and study of its promotion policies, its market share

and methods adopted by it to differentiate itself and sustain in the market will

explain that why it follows monopolistic competition.

An Introduction to Pepsodent

I want to do!It is one of the oldest toothpastes on the market today and still touted as a

favorite by those who swear by the brand---Pepsodent. The well-known minty-flavored

toothpaste, now sold mostly in discount stores and chains, has stood the test of time and

still has many faithful users.

Pepsodent is a brand of toothpaste with a wintergreen flavor. It was formerly owned by

Unilever (but, since 2003, by Church and Dwight in USA,). Pepsodent was a very

popular brand before the mid '50s, but its makers were slow to add fluoride to its formula

to counter the rise of other highly promoted brands such as Crest and Gleem toothpaste

by Procter & Gamble, and Colgate's eponymous product; sales of Pepsodent plummeted.

Today Pepsodent is a “value brand” marketed primarily in discount stores and retails for

roughly half the price of similarly-sized tubes of Crest or of Colgate. Pepsodent is still

sold as a Unilever property in India, Indonesia, Chile, Finland, and several other

countries.

Pepsodent advertisements spotlighted the toothpaste's distinguishing features. It had a

minty flavor that was derived from sassafras, an ingredient found in some varieties of tea

and such soft drinks as root beer and sarsaparilla. Advertisements also pointed out the

presence of irium (otherwise known as sodium lauryl sulfate) as a mechanism for fighting

tooth decay, and to an ingredient known as IMP for preventing tooth decay.

The following are certain type of products that Pepsodent deals with:

Complete + Gum Care

Complete 12 Pepsodent

Herbal Pepsodent

Pepsodent - Milk, Teeth, Orange

Pepsodent - Milk, Teeth, Strawberry

Pepsodent Sensitive

Pepsodent Whitening

Pepsodent Cavity Prevention

Pepsodent India

Pepsodent is a 15 year old brand that offers various oral care solutions to specific need

based solutions.

Pepsodent was launched in 1993 in India and since then the brand has raised the

benchmark on Oral Care solutions in India.

Pepsodent has a range of toothpastes and toothbrushes that could take care of specific

oral care needs. Pepsodent toothpaste fights germs to protect teeth against cavities and

gives strong teeth, fresh breath and healthy gums.Pepsodent as an oral care expert offers

solution to specific problems like bleeding gums and sensitive teeth.

Key facts

Endorsed by FDI ( the largest dental association globally)

Among the most trusted brands in India (Brand Equity, Economic Times, India)

Now, let’s take a look at the product more precisely along with some description of its

global whereabouts.

Overview

History

Documentation of Pepsodent's roots goes back to at least the late 1920s, although

prior to that, records are sketchy. Claims that Pepsodent toothpaste was effective in

fighting tooth decay made it an impressive and sought-after toiletry item in the early

20th century. Further claims that Pepsodent whitened teeth with a special ingredient

known only as "IMP" gave the minty toothpaste a glamour appeal to the jet set.

Formerly owned by Unilever, the Pepsodent brand is now owned by Church &

Dwight Co., Inc.

Advertising Boosts Sales

Marketing efforts to sell Pepsodent toothpaste were very successful, and sales sky

rocketed thanks to a well-known slogan of, "You'll wonder where the yellow went

when you brush your teeth with Pepsodent." Entertainers also helped give the

toothpaste a boost. It was referred to in a popular 1949 musical called "South Pacific."

Singer Cole Porter also mentioned the tasty paste several times in his recordings, and

Pepsodent was the sponsor of the famous 1929 radio show "Amos and Andy."

Marketing Makes Lasting Impression

Another popular Pepsodent advertisement was an oversized neon sign projecting a

girl on a swing that hung in New York in Times Square in the 1930s. The larger-than-

life advertising sign was so successful, it was depicted again in the 2005 remake of

the movie "King Kong." Comedian Bob Hope also saw the opportunity in being

associated with the popular toothpaste and named his 1938 variety show the "Bob

Hope Pepsodent Show."

Pepsodent's Descent

In the 1950s, Pepsodent toothpaste sales began a steady decline due to the fierce

competition of several other companies that were marketing toothpastes with fluoride,

a new ingredient that Pepsodent manufacturers had yet to add to their popular paste.

The mistake proved to be a costly one for Pepsodent. In addition, in 1994 claims were

made that Irium, the ingredient that Pepsodent claimed for years that it fought

cavities, never existed in the toothpaste and was actually a radioactive material.

Pepsodent Holds On

Although Pepsodent never fully bounced back from the decline, reclaiming their

position as the number-one toothpaste in the U.S., the toothpaste dinosaur is still

being sold in 2010 as a lower-priced brand and costs about half of what leading

toothpastes today sell for. Marketed today as Pepsodent Complete Care toothpaste,

the Church and Dwight Company claims the product is a proven cavity fighter that

helps remove plaque and creates white smiles, all while protecting the tooth's enamel

and promoting good gum health.

Promotion policy

Pepsodent packs included a Germ Indicator in February-May 2002, which allowed

consumers to see the efficacy in fighting germs for themselves. As a follow-up, in

October 2002, Pepsodent offered Dental Insurance to all its consumers to demonstrate the

confidence the company has in the technical superiority of the product.

Pepsodent connects directly with kids and their parents. Pepsodent has always worked in

the direction of an overall awareness of dental health. The relaunch campaign in October

2003 widened the context to "sweet and sticky" food and leveraged the truth that children

do not rinse their mouths every time they eat, demonstrating that this makes their teeth

vulnerable to germ attack. Pepsodent's most recent campaign aimed at educating

consumers on the need for germ protection through the night. Pepsodent also includes a

range of toothbrushes.

Pepsodent, Unilever’s leading oral care brand, recently announced its collaboration with

the Indian Dental Association (IDA) in conjunction with World Dental Federation (FDI)

to help improve the oral health and hygiene standards in India.

This project is part of a wider global collaboration between Pepsodent’s parent company,

Unilever and FDI, the international organisation which represents nearly one million

dentists globally.

This unique partnership aims to increase oral health education and promotion in countries

in both the developed and developing world. The Pepsodent-FDI collaboration,

established in 2005, now operates 42 projects in 38 countries.

Hindustan Unilever has roped in Shah Rukh Khan to promote its flagship oral care brand

Pepsodent that has been losing market share to rival Colgate, and even smaller brands

like Babool and Anchor. This will be Khan’s second association with HUL — he

endorsed Lux soaps — and the first time that the company had to bring in a celebrity to

endorse flagship Pepsodent. The campaign will launch in a few days and, according to

HUL, what clinched the deal for Shahrukh is ‘his superstar and devoted dad’ image. This

will enhance their long run profits and this can be explained by the graph below:

The graph shows pepsodent firm in a monopolistically competitive industry in long run

equilibrium. Profits are zero owner(s) is (are) earning a return equal to their next best

opportunity.

    The industry is the single shop single toothpaste brand promoted by Shahrukh, (to

distinguish it from other brands). And as a result of the popularity of the TV sitcoms

"Friends" and "Frasier" there is an increase in patronage of this brand.

The new partnership in India will build on existing programmes that Pepsodent and the

IDA have been running in schools targeting behaviour change amongst children. Going

forward, the programme will focus on increasing awareness of good oral habits and

concentrate on the importance of twice daily brushing, and particularly night brushing

amongst children. The Oral Health initiative will feature many practical elements

including dental check-ups, live demonstrations with audio-visual aids and the

distribution of oral health educational materials. It will also involve schoolteachers and

rural health workers working to educate children about the benefits of better oral health

and hygiene.

Market Share

Pepsodent, Hindustan Lever Ltd s leading oral care brand, announced the launch of

Pepsodent Dental Insurance, a first of its kind initiative in the oral care category in India.

Undertaken through a partnership with the New India Assurance, India s largest General

Insurance Company, Pepsodent now offers its consumers free dental insurance of Rs.

1000/- on purchase of any pack of Pepsodent.

Under this initiative Pepsodent offers its consumers insurance cover against

expenses for the extraction of a permanent tooth or teeth due to severe Caries and

Periodontitis including cost of medication in relation there to. Caries and Periodontitis are

two of the most widespread dental ailments in India.

Announcing the launch of Pepsodent Dental Insurance Pradeep Banerjee, Category

Head - Oral Care, HLL, said, "Pepsodent Dental Insurance is a unique concept and first

of its kind in the Oral Care category in India. The initiative not only strengthens

Pepsodent s proposition of being a germ-protector but also displays our commitment

towards improving oral hygiene for our consumers."

Elaborating further on the concept of Dental Insurance, Pradeep said "Pepsodent

Dental Insurance is a unique concept in this category and will further strengthen the

equity of Pepsodent in the minds of the consumers."

Insurance cover under Pepsodent Dental Insurance will be provided for one year,

which comes into effect after a period of six months from the date of issue of the

Pepsodent Dental Insurance Certificate.

According to market researcher AC Nielsen, the toothpaste market is estimated at

Rs 3,000 crore. Colgate leads the category with a 52.5% share. HUL’s toothpaste brands

Pepsodent and Close Up together accounted for 22% share in 2009-10, down from 24.5%

the previous year. Dabur ranks third in the category with a 13.6% share with its

three toothpaste brands – Red, Meswak and Babool. While Colgate and Dabur’s market

shares inched upwards between 2008-09 and 2009-10, HUL’s shares in toothpaste have

slipped.

Packaging

Their approach:

Their approach towards responsible packaging seeks to take into account

environmental, social and economic considerations. In 2007 the company created a

Sustainable Packaging Steering Team to define a strategy. This team is building on the

work already carried out over the past few years by the Unilever Packaging Group.

Achieving truly sustainable packaging is a complex challenge. Some energy is

always required to make packaging and some waste is inevitable even with highly

effective reuse and recycling schemes.

The approach is based on three elements:

1. Consideration of the whole product, not just packaging in isolation

2. Assessment via our new vitality metric, which covers the waste generated– taking

into account all the different kinds of packaging a product requires. It also takes

into account an estimate of the recycling, reuse and recovery rates of the materials

as used in a particular region.

3. Use of leading-edge design techniques and choice of materials to minimise

impacts.

Guiding principles

Underlying this strategy are five guiding principles that they seek to apply: remove,

reduce, reuse, renew and recycle. Sustainable Packaging Steering Team implements this

approach across Unilever.

More on the five guiding principles: (4R)

Remove: to eliminate, where possible, unnecessary layers of packaging

such as outer cartons and shrink-wrap film.

Reduce: to reduce the material we use in our packages and ensure they

are the optimal size and weight for their contents.

Reuse: to reuse packaging from the materials we receive at our factories.

Renew: to maximise the proportion of packaging from recycled and

renewable resources and to investigate the technical feasibility of

biodegradable and compostable materials

Recycle: to increase the use of recyclable and single-material

components in packaging for easy sorting and recycling at the end of its

use.

Enhancing design

Innovative packaging design can minimise the environmental impact of

packaging itself. But it can also enhance a product's lifecycle impacts. For

example, effective packaging can reduce product leakage and consequent

waste during transportation.

Sustainable paper sourcing

A significant proportion of packaging relies on paper. They estimate

that most of the paper purchased for European business comes either from

recycled material or sustainably managed forests. While this is an encouraging

picture for Europe, the situation in other regions can be very different as

sustainable forestry practices differ greatly. The company is working with the

Rainforest Alliance to develop a sustainable sourcing policy for paper.

Litter in the developing world

A particular concern is the volume of sachets we use to package single- use

products, especially in developing and emerging markets. These may end up as litter

where there are no appropriate disposal facilities.

The approach is to:

implement design improvements to create sachets that use less material

or material with less environmental impact

support litter awareness programmes

work with others to explore economic models which create incentives

for collection and reuse of our packaging.

Working with others

Effective solutions require a partnership approach. Unilever is a

founding member of the Sustainable Packaging Coalition, which has over 160

members, including packaging producers, users and retailers. We are also

members of EUROPEN (the European Organisation for Packaging and the

Environment).

Thus Pepsodent is a perfect example of a monopolistic competition in India as it is

having all the characteristics of monopolistic competition in it and is adopting all the

strategies to sustain in the market.