3

Monopolistic and
Perfect competition:
Markets vis-a-vis
Cement Industry
 3
Monopolistic & Perfect competition :
Markets Vis-a-vis Cement Industry

(A) General

Cement like many other commodities is governed by Monopolies and

Restricted Trade Practices Act of GOI where the manufacturers are prohibited in

formation of cartels or a group of sub-groups to dictate the market prices

although it may be noted that with the supply overlapping the demand for many

years, there is hardly any need for this act. It is known to everybody that the

Indian Cement Scenario is too much fragmented and the installed capacity of

140 million tones as on 31/03/2003 comes from 54 companies owning 125

cement plants located at different places in the country.'

Thus the obvious conclusion is there cannot be a worthwhile or long

continuing understanding in so many manufacturers. The cement prices in fact

have been constantly under pressure due to the fact that against an installed

capacity of 140 million tonnes as on 31/03/2003, the cement consumption was

only 107 million tones.

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 As far as prices are concerned, a study has been made where it has been .

conclusively proved that in comparison to other building materials, there is

negligible increase in the cement wholesale price index over 1996-97 in 2002-03,

which is only 9%. In case of building bricks it is 51% Timber 43% Iron and Steel

16%.

Another study was made of cement prices by CRISIL Advisory Services.

All the normative retail prices of cement are based on inputs costs. It is quite

revealing that during last 7 years, the cement industry never got a fair ex-works

naked cement price or retail price as is very clear from the table.

Wholesale Price Index ( Base : 1993-94-100)

1996-97 2002-03 % Var. 2002-03 over

1996-97
All Commodities 127.2 166.8 31

Cement 133.5 145.3 09

Building Bricks 141.0 212.3 51

Ceramic Tiles 124.3 144.1 16

Iron & Steel 124.1 143.5 16

Logs & Timber 114.6 163.9 43

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 Materials increased by a range 16 - 51% and all Commodities by 31%

cement index registered a marginal increase of only 9% only.

At the current level of cement prices with no sign of improving even little

further up, compelled with increases in production cost, the scope for investment

in the cement looks far from a possibility. This would adversely affect the growth

of the core sector industry in the long run.

Thus the profitability of the cement industry is under severe pressure. It is

also noted that since there are many companies, i.e. more than 54 companies

owning 125 cement plants, they are competing in our market go grab their

market share and induce cutthroat competition.

Inspite of the huge infrastructure development work taken up by the GOI, in

the present Financial Year 2002-2003 and earlier budgets for making Roads,

Sea Ports, Airports and Housing, the cement supply is very very comfortable in

comparison to demand. This scenario is likely to continue for next 5 years or so.

Therefore, there is hardly any chance of any MRTP control over cement prices.

The Government of India has also enacted a competition act which is received

the President's approval recently and is likely to be enforced very soon, which

specifically prevent practices having adverse effect on competition and the act in

fact promote and sustain competition in the markets to protect the interest of

consumers and to ensure freedom of trade carried on by other participants in

markets and for matters connected therewith. The cement competition act also

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seeks to establish a new regulatory body to replace MRTP to see that the

provisions of the act are followed in all respects. The bill notifying the act is likely

to be passed by the Parliament within a year. It is to be noted that some of the

provisions of the competition act are very harsh but the onus of proving

dominance is, prima facie, on complainant.

While on the subject of Monopolies and Competition Act, it is to be noted

that since last 3-4 years, a tendency has started in the Indian Cement Industry

for merger and acquisition. This primarily started in a way to reduce the unfair

competition from the small players with very less localized will spoil the market

rates for big manufacturers who have to carry cement for long distances.

The merger and acquisition was started in South by India Cement, which

acquired Rassi Cement and its unit like Vishnu Cement, Coromandal Cement,

etc.

Subsequently Lafarge India, which is a subsidiary of French major cement

producers acquired cement units of Tata in Jharkhand and Chattisgarh and

Raymond Cement in Chattisgarh State. Recently as stated before, in ACC,

Ambuja Cement Group as acquired of 15% equity share in ACC Limited, while

the Grasim Ltd., owned by Birlas have acquired the controlling interest in the

largest cement producers of L&T. Thus it can be seen, between these four

players, they now control about 50-55% of Indian Cement Production.

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 However, due to still many big cement producers of one million tonne and

two million tonne capacity per year, these four groups are not able to dictate their

prices. Therefore, there should be no fear of any less competition in future also.

With the acquisition of controlling interest of cement in L&T by Grasim Limited

and ACC by Ambuja, the foreign multinational are not likely to try to acquire other

small cement units of million tonne capacity or so.

Even if they acquire one or two such cement companies, they will not be

able to pause any threat to Indian Cement giants like ACC, Ambuja combined

and L&T Grasim combined.

From the projections of 9th and 10th five-year plans, it is expected that the

supply and demand will be fairly comparable and there is no fear of any shortage

or monopoly tendencies in controlling the prices even though any competition act

or MRTP acts.

Pricing

From the view point of price analysis, it is very important for a Executives

to gain a proper understanding of the nature and process of competition in the

industry. It is necessary for him to have an understanding of the competitive

process and how the variables in the process, particularly price, may be

manipulated in enlarging the firm’s market share. He should have full knowledge

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of the markets and market situations in which his firm has to operate and of

policies appropriate to those market situations.

Market Structures

Market situations vary in their structure. Different market structures affect

the behaviour of buyers and sellers. Price, volume and other variables are

influenced by different market structures. Hence, it becomes necessary to

discuss different market structures in brief and the structure in which cement

industry operates in detail.

Economists usually classify market structures on the basis of two criteria :

1. The number of firms in the market and

2. The characteristics of products such as whether the products are

homogeneous or heterogeneous.

Accordingly, four basic patters of market structure commonly distinguished

are:

• Pure or perfect competition

• Monopoly

• Monopolistic competition and

• Oligopoly

Monopoly

It is a market situation where there is a single seller controlling the entire market.

Thus, the firm itself becomes the industry. There is absence of any competition,

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since the entry of rivals is effectively prevented. Being the sole supplier, the

monopolist has a strong control over price determination. Pure monopoly is

common in many public utility enterprises under the complete control of the state.

The characteristic features of a monopoly market for a product are :

The monopolist is the only producers in the industry.

There are no closely competitive substitutes for the product of

the monopolist. So, the buyers have no alternative. They have

to either buy the product from the monopolist or go without it.

Monopoly is a complete negation of competition

The monopoly firm faces a downward sloping demand curve for

its product. That means it cannot sell more output unless the

price is lowered.

A pure monopolist has no immediate rivals due to certain

barriers to entry into the field. There are legal, technological,

economic or natural obstacles, which may block the entry of

new firms.

The price is solely determined at the discretion of the

monopolist, since he has unchecked control over the supply.

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( B ) Monopolistic Competition

It is a market situation comprising a large number of firms, but their

products are differentiated from each other. The entry of new firms into this type

of market is relatively open and easy. Thus, there is tremendous scope for

competition in a such a market. On account of lack of product differentiation,

firms also enter into non-price competition. The individual firms has only a slight

control over price determination.

The following are the important features of monopolistic competition:

1. It is a blending of monopoly and competition.

2. There are a large number of sellers.

3. Product differentiation is its basic phenomenon. Each seller enjoys a

degree of monopoly power through product differentiation.

4. Advertising and sales promotion efforts and expensive selling costs

are a prominent feature of monopolistic competition.

5. Monopolistic competition has two variations : (i). price competition and

(ii) non-price competition ; product competition and selling cost

competition.

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Obligopoly

It is a market situation comprising only a few firms in a given line of

production. Their products may be standardized or differentiated. The price and

output policy of oligopolistic firms are interdependent.

The following are the distinguishing features of an oligopolistic market:

1. There are just a few sellers supplying either a homogenous or

differentiated product.

2. The firms have a high degree of interdependence in their business

policies, - about fixing of price and determination of output.

3. Each seller known his competitors individually in each market.

4. Any of them is of such a size that an increase or decrease in his output

will appreciably affect the market price.

( C ) Perfect Competition

It is a market situation comprising a large number of firms selling a

homogeneous product. There is free entry into the market and, so

competition between sellers is always still. An individual firm has no« control

over the price in such a market. In this market situation, a single market

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price, which is determined by the forces of total demand and total supply in

the market rules for the commodity. The following are the distinct factors of a

perfectly competitive market:

1. There are a large number of actual and potential firms or sellers and, as

each firm is acting independently of the others, the individual firm’s supply

is just a fraction of the total market supply; hence, any variation in

individual supply has a negligible effect on the total supply. Thus, an

individual firm cannot exert any influence on the ruling market price. A

firm, therefore, assumes the role of price taker in a perfectly competitive

market.

2. There is a sufficiently larger number of actual and potential buyers, so that

each individual buyer’s demand constitutes just a fraction of the total

market demand. Hence, no individual buyer is in a position to exert his

influence on the prevailing price of the product.

3. There is fee entry for new firms into the market. There is no legal,

technical, financial or any other barrier to their entry. Similarly, existing

firms ensure that whenever there is no scope in the business, they are

free to quite the market. Thus, the mobility of firms' new entry will take

place and competition will remain always stiff. Inefficient firms will have to
-«

quite the industry.

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4. Perfect competition requires that all the buyers and sellers must possess

perfect knowledge about the existing market conditions, especially,

regarding the market price and the quality of the product.

Nature of Cement Market

A majority of Indian states get cement from 30-35 companies, but every

market, segmented on the basis of city, district, state or region, is dominated

by 6-8 companies. They control nearly 80 percent of the market. Any

increase or decrease in the output of these companies affects the market.

Each company known its competitors individually in each market. They

realize that any change in their price or advertising policy will lead competitors

to change their policies. Thus, an individual company must consider the

possible reactions of the other companies to its own policies. As in any

market, the number of dominant firms is small and their policies are more

interdependent. The reactions of competitions are generally immediate and

strong and there are tendencies of close collaboration in policy determination,

mainly with respect to the pricing of their brands.

There are various barriers faced by a new entrant into a market:

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Reasons

1. Established brands enjoy consumer loyalty and product differentiation.

2. They enjoy absolute cost advantages because of their closeness to their

markets, thus ensuring lesser transportation costs and having a

favourable cost structure.

3. They enjoy strong local dealer networks difficult to penetrate for a new

entrant.

4. Until recently, restrictions were imposed by the state on the entry of new

firms. Before installation, companies were required to obtain a license

from the government. In addition to the above barriers, it requires capital

running into hundreds of crores of rupees and a large source of limestone

to establish a large size cement unit.

Cement Pricing Decisions

If a product is in a competitive market or in a monopolistically competitive

market, as mentioned earlier, the manufacturer responds more or less

simultaneously to the general market conditions, by lowering prices when sales

are falling and vice-versa. In the case of cement, manufacturers generally do not

do so. They consider the effect of their price policy on the actions of their

competitors. If a manufacturer cuts his price, rivals are likely to follow suit. So,

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he cannot count on attracting many of their customers away from them. In the

cement industry, companies hesitate to reduce price except to meet a price cut

by one of the group. The initiation of price cuts is, therefore, infrequent except

under serious market pressure at existing prices. The decision to change a price

- normally to increase it - is taken jointly by the members of CMA ( Cement

Manufacturers Association ), who meet regularly every month. All the companies

follow the decisions almost simultaneously. This leaves little chance for a

company to gain or lose market share because of price change. Price change

initiators may a lose a small part of their sales but, as others follow suit, dealers

normally do not change loyalty because of it.

While making pricing decisions, a knowledge of the rivals’ pricing policies,

their market positions and the personal traits of the people who make these

decisions is very helpful. When a competitor makes a change in his price, the

reasons for the change must be analysed and the objectives sought to be

achieved must be studied. This will help a lot in determining the counter action to

be taken. As the CMA possesses substantial monopoly power, the price it sets

in normally higher than the price that would result from active competition. All the

members agree to keep the price high and are able to maintain it because the

demand for cement is inelastic. Even in the rainy season, when the consumption

and demand of cement decreases substantially, because of poor weather

conditions, the price remains high, not following the normal demand - supply

curve. Various cement companies refrain from price cutting because they have

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seen bad times in the past. Till a few years ago, because of the government

policy of partial decontrol, cement companies were unable to earn even 12

percent ROI. During those days, they had to maintain some relationship

between the controlled price and free market price of cement. Whenever the

difference between the two increased, government quota/control priced cement

was diverted from various government projects to the open market, thus making

it impossible for the companies to maintain the price informally announced by

CMA. Thus, in the cement industry, price competition among various companies

is non-existent and price is usually higher than otherwise. To maintain higher

prices at some point of time, especially the rainy reason, companies decide even

to restrict their production. And, by agreeing to eliminate price competition, the

producers gain. All members under banner of CMA pursue a ‘live and let live’

policy. Normally, every unit maintains hold on 3-4 markets (states) and refgrains

from entering other markets.

Till now and in. the immediate future, because of a gap between demand

and supply, units have not faced and do not face a conflict with regard to the

division of sales among different companies. Once this conflict starts, it may be

difficult for the members to maintain high prices. This may lead to a breakdown

of the agreements.

Once the equation changes and the companies are aksed to reduce

output, the total costs will increase and profits get reduced. The, the low cost

firms will be tempted to start a price war.

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 Briefly, we can say that each producer is aware of the disastrous effects an

announced reduction in his own price would have on the competitor’s prices. As

a result, companies are averse to gaining an additional market share by open

and announced price cutting. The main factors causing this aversion are given

below:

1. The producers know that the price will be met with promptly either

precisely or with the differentials that are likely to preserve the

compeititors’ market share. Hence, open price cuts, as a means of

extending the firm’s market share, will be futile.

2. Price reductions, once made, are not easily reversible until the cost

and demand situations again warrant higher prices.

3. Open price competition often degenerates into an uncontrolled price

war, especially where there is huge difference between the market

price and the price that would result from active competition.

4. In view of the above factors, considerable uniformity of published

prices is expected and the market share is largely determined by

secret price concessions and non - price competition.

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( D) Cement and Non-Price Competition

Cement producers rely on non-price competition, as they believe that

retaliation is much more difficult against advertising, personal selling or product

improvements than against price cutting. The sales effects of a particular

promotional strategy are far less clear than the effect of price cutting. The

various forms of non-price competition used by the producers are :

better quality,

better packaging and appearance,

easier credit terms,

quick delivery,

after - sales service,

technical advice,

dealer loyalty and

promotional effectiveness.

As a result of non-price competition, the consumers of cement have

benefited most, because do not compete on the price front and, in order to boost

their sales, rely on other elements of the marketing mix. Almost all companies

have modified or changed their packaging materials to cater to the needs of

weight - and - quality - conscious consumers. Cement packaging has gained

'4

tremendous importance. Cement is available in various packing materials and

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the consumer can now make a choice. Manufacturers try to make their

particular brands readily available at every consumption point to satisfy the

consumer, as they have become aware that the users would not wait for a

particular brand or search for it in the market. Intensive distribution brand or

search for it in the market. Intensive distribution through many outlets has

become a necessity. Various programmes and schemes are run by the

companies to boost the morale of their dealers so that they constantly push their

brands. Advertising and new promotional forms are used to attract consumers

directly or through engineers / masons. The three remaining elements of

marketing mix, viz. product, place and promotion have been discussed in great

detail elsewhere.

It is true that formulating price policies and setting the price are the most

important aspects of managerial decision making. Price is the source of revenue

which the firms seeks to maximize and an important marketing tool which a firm

can use to expand its market.

As is now evident, a cement company, because it operates in market

conditions quite comparable to an oligopolistic market, can do little with respect

to price. For cement companies, it is the Cement Manufacturers Association

(CMA) that takes the major price related decisions and revises them every

month. Very little is left for an individual unit. If a company wants to use pricing

as a marketing tool, it can offer secret concessions and schemes to its favoured

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dealers. An open announcement will meet with quick retaliation by the

competitors.

Discounts and Allowances

Most companies allow one or more types of deductions and allowances

to its dealers.

Trade Discounts

They are offered by the companies to the trade-channel members if they

perform certain functions. In the cement industry, distributors’ discount is

common. They regularly get a certain percentage on their sales in the name of

encouraging sales. Normally, they are given by big companies to some favoured

parties. As per Table (d) below, only 9 companies offer discounts to distributors.

Discounts Offered by Cement Companies Table (d)

Types of Discount No.

Trade 09

Quantity 29

Cash 36

Off - Seasons 05

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Quantity Discounts

Quantity discounts are price reductions related to the quantities purchased.

In case of cement, quantity discount is related to the order in terms of weight of

cement (normally tonnes) or the number of truck loads ordered by the dealer in a

given period of time. In the cement industry, quantity discounts offered by the

companies in very common. Various alternatives are prevalent. Not all

companies follow the same method to calculate the quantum of discounts.

Various methods are employed by the manufacturer, to determine the price

concessions to their dealers. Some of the commonly used methods are follow :

1. Dealers are entitled to discounts only when they order a certain

quantity. This is to attract large orders.

2. Quantity discounts, at a given time, are based on the cumulative

purchases made during a particular period, month season or year.

3. Different discount rates are made applicable to different slabs of

quantity ordered.

Companies offer these discounts to ensure dealer loyalty and to

discourage the dealer from purchasing from competitors simultaneously.

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 The quantity discounts, especially of the third type discussed above,

normally result in big dealers passing cement to small retailer at a price even

lesser than the ruling company price. This is because they pass some of their

discounts to the retailers. This is the major disadvantage of the slab type

discount sales scheme. IN case any company becomes dependent upon these

big dealers, they start dictating terms and exploit it. As table (a) shows, out of 47

companies, 29 use quantity discount schemes to attract and motivate their

dealers.

Cash Discounts

Cash discounts are price reductions based on promptness. Gone are the

days when cement companies used to get advance drafts / payments for the

quantity ordered. Nowadays, every dealer, irrespective of the company with

which he is dealing, asks for credit. In some markets, the situation of payments

is so bad that the companies are unable to collect payments for even the

dispatches made 2-3 months earlier. Credit of 30 days has become a normal

practice. If any company wants to have prompt payment, it has to offer cash

discounts to the dealers. A cash discount of Re 1 per bag which used to attract

dealers a few days ago, now fails to motivate them to make quick payments.

Over three fourths of the companies now want to have prompt payments and

hence offer varying cash discounts to their dealers. In order to arrive at the ratp

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of cash discount, a company can compare the costs of offering and or not

offering a particular rate.

Off - Season Discounts

Only a few companies (5, nearly 11 percent) offer off-season discounts to

their dealers during the rainy season when construction activities nearly come to

halt. Off season discount is charging a lesser price during a particular time of the

year.

( E ) Personal Price Discrimination

Cement prices are determined, as mentioned earlier, at the regular

meetings of the Cement Manufacturers Association. The major price - related

decisions are taken at the CMA level. An individual firm can do little. At the

Company level, a Executive can decide what concessions/discounts he should

offer, normally secretly, to its dealers to keep them loyal and motivated in order

to maintain or increase its share in the market and, the same time, avoid a price

war with its competitors. Few companies allow their selling centers/depots the

authority to negotiate with the customers. 23 companies (nearly 49 percent) to

not allow any negotiation at the depot level with any of its customers. Only 6

(about 13 percent) give that authority, with certain guidelines, to bargain with big

consumers. 16 companies (34 percent) given limited, authority. Times are

changing fast in favour of the branch Executives as companies are assigning

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greater responsibilities to them everyday in relation to price and non-price related

decisions. A few companies allow their branch Executives even to extend credit

terms to a selected few. With the passage of time, many new secret

concessions will be adopted by companies to gain a competitive edge over their

competitors.

Pricing in a New Market

At what level of price should a company sell its brand of cement in a new

market? This problem is a part of a company’s pricing policy and should be

decided not in isolation with the policy decisions regarding the other Ps of the

marketing mix.

Pricing Cement in a New Market Table (e)

Pricing Cement as against the Leader No. of Companies

Above 01

Below 26

Same Level 20

The analysis of Table (e) reveals that only 1 company, nearly 2.1 percent,

prices its cement above the ruling market price or the price charged by the

market leader. If a company wants to introduce its product above the market

price, it has to spend heavily on the other elements of the marketing mix.

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Without developing and implementing an effective marketing programme, a

company cannot ask for a higher price for a product like cement. It should make

its brand and the company name well known among the consumers so that they

pull the brand from the market. This will call for heavy expenditure on advertising

the product through various carefully planned media. A strong dealer network

will be required to make the product readily available - promotional programmes

and incentives to motivate them - backed with quality image. Larsen & Toubro is

one such company which introduced its product above the market leader in many

markets. It continued to enjoy a premium for long.

A company can price its product is a new market and can continue to ask

for a premium only when its spends heavily on the other elements of the

marketing mix, which normally does not seem possible. 20 companies, nearly 43

percent, introduced their cement at the ruling market price with the belief that,

with some market effort, they would be above to attract consumers of other

brands and, more importantly, make a place for their brand in the market

because of the gap which exists between demand and supply. If a market

situation is competitive, they will have to design a complete marketing

programme.

A majority, nearly 55 percent (26 companies), entered a market below the

market leader ( ruling market price ) under the belief that to gain a share or to

gep established in a new market, price competition is the most effective tool.

Once their*product gains ground, normally, they start selling at the ruling market

price, avoiding decrease in revenue.

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 Thus, in the case of cement, skimming price ( high initial price ) together

with heavy promotional expenditure is not normally used by a company while

entering a market. A majority of the companies follow market penetration price

policy which helps in successfully expanding their market rapidly and obtaining

larger sales volume, thereby, reducing overheads. This policy is particularly

appropriate because strong brand loyalty, by both the consumers and the dealers

is not consumers. Some other companies ( a good number of them ) introduced

their brands at the going rate with some emphasis on other elements of the

marketing mix.

(F) Suggestions

Cement is currently under oligopolistic market structure. As they are only

a few manufacturers in the market, their marketing decisions are highly

interdependent. Selling price of all manufacturers is almost the same. A

company cannot justify a higher price unless it is able to differentiate its product

from that of its competitors. This calls for heavy expenditure and concentration

on the remaining three P’s of the marketing mix. A company can directly offer a

few discounts and allowances to its dealers in order to motivate them. There are

only limited options available before the marketing manager as far as pricing

decisions are concerned. The manager should frame innovative pricing

strategies to gain competitive advantage.

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