Transient Market Power of Firms 1527571491, 9781527571495

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Transient Market Power of Firms

Transient Market Power of Firms By

T.V.S. Ramamohan Rao and Surajit Bhattacharyya

Transient Market Power of Firms By T.V.S. Ramamohan Rao and Surajit Bhattacharyya This book first published 2021 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2021 by T.V.S. Ramamohan Rao and Surajit Bhattacharyya All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-5275-7149-1 ISBN (13): 978-1-5275-7149-5

“Make it Stochastic” —Gerhard Tintner

CONTENTS

List of Figures............................................................................................ ix List of Tables ............................................................................................. xi Acknowledgements .................................................................................. xii Preface ..................................................................................................... xiii Chapter 1 .................................................................................................... 1 Introduction Chapter 2 .................................................................................................. 17 Earlier Attempts Chapter 3 .................................................................................................. 25 Theoretical Considerations Chapter 4 .................................................................................................. 40 Hall’s Measure Chapter 5 .................................................................................................. 88 Market Shares Chapter 6 ................................................................................................ 107 Non-Price Choices Chapter 7 ................................................................................................ 141 Transient Market Power Chapter 8 ................................................................................................ 164 Conclusion Appendix I .............................................................................................. 174 The Data and Variables

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Contents

Appendix II............................................................................................. 176 Notations Used References .............................................................................................. 177

LIST OF FIGURES

Figure 1.1. Intrinsic Value Figure 4.1. Textiles (v,s) Figure 4.2. Textiles: Alok Industries (v,s, C/S) Figure 4.3. Textiles: Alok Industries (Sales, Borrowings, NFA) Figure 4.4. Textiles: Welspun (v,s, C/S) Figure 4.5. Textiles: Welspun (Sales, Borrowings, NFA) Figure 4.6. Textiles: Set 1 (v,s,C/S) Figure 4.7. Textiles: Set 1 (Sales, Borrowings, NFA) Figure 4.8. Textiles: Set 1: HP Cotton and Shri Dinesh (v,s,C/S) Figure 4.9. Textiles: Set1: HP Cotton and Shri Dinesh (Sales, Borrowings, NFA) Figure 4.10. Machinery (v,s, C/S) Figure 4.11. Machinery: Bosch (v,s, C/S) Figure 4.12. Machinery: Bosch (Sales, Borrowings, NFA) Figure 4.13. Machinery: Shilp Grauvers (v,s, C/S) Figure 4.14. Machinery: Shilp Grauvers (Sales, Borrowings, NFA) Figure 4.15. Machinery: Escorts and BEML (s,v) Figure 4.16. Metals (v,s, C/S) Figure 4.17. Metals (Sales, Borrowings, NFA) Figure 4.18. Metals: JSW Steel (v,s, C/S) Figure 4.19. Metals: Jindal Steel (v,s, C/S) Figure 4.20. Metal: Steel (v,s, C/S) Figure 4.21. Metals: Steel: Tata Steel, JSW Steel (v,s) Figure 4.22. Metals: Steel: Tata Steel (Sales, Borrowings, NFA) Figure 4.23. Metals: Steel: JSW Steel (Sales, Borrowings, NFA) Figure 4.24. Metals: Steel: Jindal Steel (Sales, Borrowings, NFA) Figure 4.25. Metals: Steel: Kalyani Steel (Sales, Borrowings, NFA) Figure 4.26. Paper (v,s, C/S) Figure 4.27. Paper: Ballarpur (v,s, C/S) Figure 4.28. Paper: Ballarpur (Sales, Borrowings, NFA) Figure 4.29. Paper: Tamilnadu Newsprint (v,s, C/S) Figure 4.30. Paper: Tamilnadu Newsprint (Sales, Borrowings, NFA) Figure 4.31. Motor Vehicles: Jay Ushin, Sundaram (v,s) Figure 4.32. Motor Vehicles: Maruti, Amtek (v,s) Figure 5.1. Machinery: Bosch and Siemens

x

List of Figures

Figure 5.2. Metals: JSW Steel and Tata Steel Figure 5.3. Metals: Steel: SAIL Figure 5.4. Metals: Steel: JSW Steel Figure 5.5. Metals: Steel: Tata Steel Figure 5.6. Paper: JK Paper and West Coast Figure 5.7. Motor Vehicles: Gabriel and Motherson Figure 6.1. Textiles: Set 1 Figure 6.2. Textiles: Set 1: Season Textiles Figure 6.3. Textiles: Set 1: APM Industries Figure 6.4. Machinery (I, IS, and J) Figure 6.5. Machinery – Bosch, and Siemens (I, IS, and J) Figure 6.6. Machinery – Mazda and Shakti Pumps (I, IS, and J) Figure 6.7. Metals: Steel Figure 6.8. Steel – Tata Steel (I, IS, and J) Figure 6.9. Steel – JSW Steel (I, IS, and J) Figure 6.10. Steel – Kalyani Steel (I, IS, and J) Figure 6.11. Steel – Panchmahal (I, IS, and J) Figure 6.5. Metals: Steel: Kalyani Steels Figure 6.6. Metals: Steel: Panchmahal Figure 6.12. Paper Figure 6.13. Paper: Tamilnadu Newsprint Figure 6.14. Paper: Ballarpur Figure 6.15. Motor Vehicles – Force Motors (I, IS, and J) Figure 6.16. Motor Vehicles – Gabriel (I, IS, and J) Figure 6.17. Motor Vehicles – Sundaram (I, IS, and J) Figure 6.18. Motor Vehicles – Jay Bharat and Jay Ushin (I, IS, and J) Figure 7.1. Textiles: Set 1: Loyal and Shri Dinesh Figure 7.2. Textiles: Seasons and APM Industries Figure 7.3. Machinery: Mazda, Shakti Pumps Figure 7.4. Machinery: Escorts, BEML Figure 7.5. Metals: Steel: Kalyani, Panchmahal Figure 7.6. Metals: Steel: Tata Steel, JSW Steel Figure 7.7. Paper: T1, T2 Figure 7.8. Paper: Tamilnadu Newsprint and Ballarpur: T1 and T2 Figure 7.9. Motor Vehicles: Jay Bharat, Sundaram Figure 7.10. Motor Vehicles: Gabriel, Bharat Forge Figure 7.11. Motor Vehicles: Maruti, Amtek Figure 7.12. Motor Vehicles: Jay Ushin, Sundaram

LIST OF TABLES

7DEOH7H[WLOHVȞ&6YV Table 4.2. Textiles: Correlations 7DEOH7H[WLOHV6HWȞ&6YV 7DEOH0DFKLQHU\Ȟ&6YV 7DEOH0HWDOVȞ&6YV  Table 4.6. Metals (Sales, NFA, and Borrowings) 7DEOH0HWDOV6WHHOȞ&6YV 7DEOH3DSHUȞ&6YV Table 5.1. Textiles: Set 1 Table 5.2. Textiles: Set 1: Garware Table 5.3. Machinery: Only firms with n > 0 Table 5.4. Metals: Steel: Only firms with n > 0 Table 5.5. Steel: Tata Steel Table 5.6. Steel: JSW Steel Table 5.7. Paper Table 5.8. Paper: Ballarpur Table 5.9. Paper: Tamilnadu Newsprint Table 5.10. Motor Vehicles: Only firms with n > 0 Table 5.11. Motor Vehicles: Maruti Suzuki Table 5.12. Motor Vehicles: Gabriel Table 6.1. Textiles: Set 1: I, IS, and J Table 6.2. Textiles – Set 1 – Loyal: I, IS, and J Table 6.3. Textiles – Set 1 – Shri Dinesh: I, IS, and J Table 6.4. Machinery: I, IS, and J Table 6.5. Metals: Steel: I, IS, and J Table 6.6. Motor Vehicles – Set 1 Table 6.7. Motor Vehicles – Set 2 Table 6.8. Motor Vehicles – Set 3 Table 6.9. Motor Vehicles – Set 4 Table 6.10. Motor Vehicles – Set 5 Table 6.11. Motor Vehicles – Set 6 Table 6.12. Motor Vehicles – Set 7 Table 7.1. Motor Vehicles: Miscellaneous

ACKNOWLEDGMENTS

1. Ms. Mohina Saxena helped us in obtaining Prowess data from the CMIE. She also provided valuable assistance in editing the manuscript. We appreciate her help. 2. An optimal utilization of the big data available from Prowess was possible exclusively due to the programming efforts of Srinivas Subramanya Tamvada. The resulting software is available at https://github.com/McSrini/electronics https://github.com/McSrini/textiles https://github.com/McSrini/vehiclesAndMachinery 3. An exhaustive cross-section and time-series analysis of firms was conducted for several industries. However, only a few results are reported here. The detailed calculations will be made available to any reader on request. Please direct such mails to [email protected] 4. We sincerely thank Adam Rummens and his editorial team that helped us from the beginning to the end.

PREFACE

An entire generation of students was accustomed to hearing Prof. Gerhard Tintner say “make it stochastic” on numerous occasions. What it meant was never fully clear. It remains so even today. Similarly, Prof. Sir John Hicks famously wrote in his book Capital and Growth that the notions of trends and fluctuations in economic phenomena are intrinsically intertwined. Note that Prof. Joseph Schumpeter’s characterization of creative destruction is also generically similar. These authors considered explaining both the deterministic and non-stationary processes together as a necessity. However, economic analysis utilizes the efficient market hypothesis to explain the stationary or static behavior. Explanations of a different nature have been offered when perturbations occur. Further, competition among rivals in a market was considered adequate to eliminate them over time since such phenomena are transient. Instead, disequilibria do occur periodically and persist over time. There is no plausible explanation for the persistence and often expanding structure of stochastic perturbations. The operations of the deterministic system and its dynamics are perforce a source of such variations. The context of many firms offering products of different value to the consumers is quite similar. None of the firms can be deemed to have any market power if all of them have an advantage based entirely on the intrinsic value of their products. However, firms may utilize non-price strategies to improve their market share and consolidate the market advantages in their favor. That is, they wish to obtain transient market power. Such excesses in the market coexist alongside the steady-state nature of product valuation by the consumers. Hence, they should be examined simultaneously. However, the suggestion was that rivalry among firms in the market would eliminate the transient market power. This has not been observed in practice. The existing literature, that emphasizes the Lerner measure exclusively, misses the point altogether. It is important to note that economic theory generally does not explain the firms’ choices and their dynamic variation over time. Against this backdrop the primary purpose of this empirical study is threefold.

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Preface

(1) To define and estimate the value of products of firms to the consumers. (2) To estimate the transient market power of firms and the management choices that account for it. (3) To identify the competitive mechanisms that perpetuate it or eliminate it over time. From a theoretical viewpoint, the valuation of a product results in the market share that a firm can achieve. However, as suggested earlier, firms tend to increase it beyond that limit to achieve advantages over rival firms. Hence, this study develops methods to separate the value indicating component of strategies. This procedure also provided a measure of the transient market power. The analysis was also extended to non-price choices since they provide rival firms the means to achieve changes in market shares. Some strategies of firms would be oriented to reveal the valuation of products. Others would be targeted to increasing market shares or accommodating financial requirements in the short run. Therefore, the choices of firms have been classified into two broad groups. Type I relates to product choice, organizational arrangements, internal logistics and materials handling, and the process of generating retained earnings within the firm for investment purposes. Usually, such choices are directed to revealing the value of products to the consumers. Type II choices relate to the interaction of firms with rivals in the market, outbound logistics and distribution of products, and sourcing external finances from the market. These choices are meant to improve either the market share of a firm and maintain its dynamic stability, or tide over a financial disturbance. A few choices, such as advertising and selling costs, may be classified in either of these groups. The empirical analysis relates to several firms in Indian industries. The data was obtained from Prowess of CMIE (Center for Monitoring the Indian Economy) for the years 2001-2017. Only data relating to Textiles, Machinery, Minerals and Metals, Paper, and Motor Vehicles was examined. The general conclusions can be summarized as follows. (1) The Lerner measure of market power, reflecting the decision of the consumers about the value of the products, changes over time. Such changes are fundamentally due to the economies of scale and scope in production, unexpected changes in the cost of production, shifts in demand, and the inability of firms to absorb cost increases by

Transient Market Power of Firms

xv

raising prices due to competitive pressure. On occasions, the cost increases experienced by a firm may also be a result of utilizing the more expensive external sources to finance their investments and operating expenses. (2) Positive values of both the valuation index of products and transient market power can be observed in practice. In other words, firms attempt to derive advantages over rivals though uncertainties persist regarding the success of the strategies they adopt. It appears that firms constantly change their strategies over time partly to avoid imitation by rival firms. The transient market power does not indicate any steady decline over time for most firms. (3) A substantial part of the non-price strategies is of Type I suggesting that they are directed to improving the consumer valuation of products. This was observed in firms with a low market share. Generally, such firms do not have the resources to pursue improvements in market shares. However, this is not valid unconditionally. Some firms do appear to prefer advantages over the short run instead of waiting for the uncertainties associated with gains over the long run. Firms with a larger market share and/or higher price-cost margin generally possess financial resources to augment or consolidate their market share by utilizing Type II choices. They may, however, persist with some choices that increase the value. Some firms adopt these strategies purely due to financial exigencies. (4) Firms tend to emphasize strategies that affect internal operations to reveal the value of their products. In this endeavor, they compare the relative advantages of one of their choices over another. In the second stage, they will consider comparing their strategies with those of rival firms in their efforts to gain transient market power. In general, firms prefer Type I choices over Type II. In other words, most firms are content with low market shares if they can stabilize the loyalty of customers to their products. However, they tend to use both in markets where there is significant competition from rivals. The desire to pursue such strategies, rather than the availability of organizational or financial resources, appears to dominate such decisions. (5) In the ultimate analysis the consumers will assess the strategies of firms toward fulfillment of their valuation of products. This may be different from what firms consider to be efficient in dealing with rival firms on the market. The transient market power will partly depend on such discrepancies. The convergence of the consumer

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Preface

valuation, the firms realizing that these choices must be a part of their strategies, and the rival firms recognizing that the ultimate equilibrium over the long run emerges only when every party in the exchange recognizes the intrinsic value of products, and modifies its strategies, would be the essence of dynamic stochastic equilibrium. The empirical results indicate that the transient market power of firms is due to a variety of choices of non-price strategies across firms at a point of time and for the same firms over time. The elimination of transient market power is a red herring despite the difficulties in explaining the differences and transitions over time. The persistence of transient market power over a considerable time, even when sizable reductions have been experienced during some intervals, should also be explained. Economic theory, in its quest for the status of a science, postulates a unique outcome corresponding to every change in the environment. It is expected to be valid across individuals, over time, for aggregates of individuals, clusters of firms, and the macro economy. Empirical reality does not correspond to such an invariant behavior. The observed variability is stochastic. The present work is dedicated to the memory of Prof. Tintner in that spirit. Ms. Mohina Saxena of IIT Mumbai helped us in obtaining the Prowess data from CMIE (Center for Monitoring the Indian Economy). She was also helpful in editing the manuscript. We acknowledge her efforts. We gratefully acknowledge Srinivas Subramanya Tamvada for the time spent on writing and testing the software that we utilized. It would not have been possible to handle such big data without his assistance. We are also thankful to Dr. Adam Rummens and his team of editors who guided us from the inception of this book until the time it was available on the market. T.V.S. Ramamohan Rao, Kitchener, Canada Surajit Bhattacharyya, Mumbai, India

CHAPTER 1 INTRODUCTION

“Those who are open-minded and receptive to a fresh way of thinking will get a new insight into the subject – and that is the whole objective.” —(De, 2020).

1.1. Market Environment Firms offer closely related products to consumers in most markets for goods and services. Such products, though they have somewhat distinct markets, are substitutable. Having loyal customers is one of the prerequisites for the success of any of these products over the long run. Two primary sources of the loyalty of customers for such products are discernible. First, consumers attribute some value to each of these products. It results in repeat purchases. This process translates into consumer loyalty to a firm’s products. The resulting inelasticity of demand results in its market power generally expressed in the form of the Lerner measure. Second, the budgetary constraint of consumers is expected to determine the position of the demand curves. It can also be postulated that it depends on the firm’s choices of products and prices. Consequently, it must be acknowledged that the differences in the value of products can also give rise to the relative position of the demand curves that may remain stable over time for various reasons 1. Economic theory generally postulates that all the firms produce a single homogeneous product and that they will have low or negligible market shares. Hence, the emphasis was on the elasticity of demand alone. Similarly, there are no differences in the elasticity of demand for firms in markets characterized as a homogeneous oligopoly. The only acknowledgment is that the costs of production differ from one product to another. As a result, the shift in emphasis was toward the differences in market shares. Note that 1

Note that the consumers experience transaction costs if they wish to switch to another product. Such costs may exceed the extra price they have to pay for the product they are currently using. This can give the impression of consumer loyalty and stabilize the demand curve.

2

Chapter 1

rival reactions will reduce the market share and the market power of a firm that its interaction with the consumers provides even when consumers provide some market power to the firm based on the elasticity of demand for its products. Thus, the market power of a firm arises from two distinct sources, viz., consumers’ valuation of the firm’s products, and the market shares obtained in its interaction with rival firms on the market 2. The differences in the position of the demand curves may themselves be unrelated to the differences in the prices of the corresponding products. They may, for example, be purely due to the income levels of the consumers. Similarly, relative prices of products based on the valuation by consumers, the relative costs of production, and various other factors related to the promotional activities of firms, determine the position of the demand curve for the products of the firm. However, even before reaching out to consumers, the firm should produce the products that are offered to the consumers. They require physical resources, organizational arrangements to convert resources to products, and finances necessary to manage production. The firm also depends on the loyalty of resource suppliers, marketing agents, and those that finance its activities. Firms may not be able to increase prices, based on the increase in costs, due to the nature of competition on the market. In other words, the costs of production and distribution will also have a bearing on the market power. This is unlike the postulates of the Lerner measure. Somewhat more generally, the market power of firms arises from several sources: (a) the intrinsic value of the products as the consumers perceive them, (b) the way firms nurture them in the form of managing technology, logistics of procurement of materials, and distribution of products of the firm, (c) loyalty of customers, the workers, and marketing agents, (d) the competence and efficiency with which firms manage their relations with outside agents (sources of finance, franchises, subsidiaries, etc.,), and (e) some strategies that improve the market share of firms (e.g., selling costs) thereby improving its market viability in the long run.

2 It is important to recognize that the market power of a firm consists of two components: the price cost margins per unit of output sold and the volume of sales. In general, the first component may also be affected by the volume of sales and the market share of the firm.

Introduction

3

The other preoccupation of economic theory was on the changes in the resulting market power. The possible reduction in the number of firms 3 was acknowledged as anti-competitive behavior. The stability of market demand and the inelasticity may be the basic sources since fewer choices available to the consumer and the transaction costs (of searching and changing to another product) have been acknowledged. In general, both theoretical and empirical studies emphasize only the inelasticity of demand or the market shares to the exclusion of others. The actual market power of a firm consists of not only the difference between price and marginal cost but also the economic activity over which the deviation occurs. This was pointed out by Landes and Posner (1981,953). The underlying argument is that the firm gains its advantages by interacting with consumers at the market interface and its responses to rival firms when dealing with competition. The former is reflected in the inelasticity of demand and the latter is reflected in its market share. Both these effects coexist in the generally observed market environments. It is therefore important to recognize that the market power of a firm may be due to the elasticity of demand, the position of its demand curve and the resulting market share, the differences in the costs of production, and the strategies of rival firms in the relevant market. The analytical requirement is to define the combination of the factors that account for the observed changes in the market power of firms. It should be noted that one of the sources of the advantage that firms have is the consumers’ perception of the value of their products. These differences should not be considered as determinants of market power since they increase the welfare of consumers. It would be best to consolidate them in a consumer valuation index 4.

3

The increase in market shares may not be exclusively due to this. The converse is also true. An increase in the number of firms does not, by itself, ensure a reduction in market shares. 4 It must be noted that the perception of the value of a product by the consumer may be different from that implied by the realized market share. Since the former cannot be calculated in any practical setting it will be assumed that the latter, representing an ex post outcome, will be adequate.

Chapter 1

4

1.2. Threshold Value The consumers will find the firm’s products to be more valuable (V) to them 5 as the market share s increases. However, there is a limit on the magnitude of s based on the value of products sold by the firm since the quantity of the product sold by the firm and the resulting market share will be determined by the intrinsic value of the product apart from the budgetary constraints. See Fig. 1.1. Further, note that every firm incurs a cost while attempting an increase in its market share. As a result, a firm either increases its market share to s1 > s* or stops short of s* depending on the costs. Refer to Fig. 1.1(b). Let m denote the maximum market share that the firm can achieve given its capabilities and resources 6. The total value generated is given by Vs*m – Vs*2/2. Let the firm expect a total revenue T from the sale of the product. The following results are significant. An increase in V makes s* larger because greater efforts should be put in to identify the product’s true value. This can be readily verified by noting that, ceteris paribus, ds*/dV = s* (2m – s*)/ 2Vs* > 0. Secondly, let m increase. The consumers visualize the possibility that the product is of lower quality since the firm is putting in a larger amount of effort to sell the product. It implies that s* will fall. Notice that ds*/dm = s*/ (s* - m) < 0 corroborates this. Let T increase instead. The possibility is that the capacity to generate greater total value will induce the firm to expect s* to rise. Note that ds*/dT = 1/ V (m – s*) > 0.

5

Consumers may consider the market share as a good proxy. However, it can also be argued that the firm would gain a larger market share as the value of its products increases. Even if this interpretation is pursued there will be a threshold on the market share beyond which the value will not increase. 6 Note that s may be constrained by these considerations. The definition of m should 1 keep such considerations in perspective.

Introduction

5

Figure 1.1. Intrinsic Value It should be noted that throughout this analysis it was assumed that the firm would signal value initially and the consumer will accept or reject it. The final value will be revealed only when the consumer accepts the offer by the firm 7.

7

Incidentally, note that the firm may derive transient market power by charging prices exceeding the value of products to the consumer. It will be expected that the consumers will discover it and eliminate it over the long haul.

6

Chapter 1

Postulate that every firm in the market is efficient if si = si* for all i. Given the income of the consumers and the alternative uses of their budgets, there is an upper limit on the total quantity of products of the industry that they will buy. Hence, any firm achieving s1 > s* would be a redistribution away from other firms. The market power that some firms derive by realizing s1 > s* must be designated as transient market power. Several observers conjecture that it will be eliminated in the long run if competition among rivals prevails. Transient market power and valuation indices require a proper specification to empirically evaluate this hypothesis. Similarly, it is necessary to examine their trends over time. As noted above, the markets for industrial products tend to be efficient and bring about a semblance of stability and growth. However, attempts to capture advantages for their firms are based on the perceptions of the management regarding organizational objectives. This redistribution of market power has the potential of maintaining the transient market power of some firms instead of eliminating them over time. It is therefore essential to investigate the existence of such long term vs. short term market power, the forces that reduce or perpetuate advantages over the short run, and the internal dynamics of firms that create the observed cyclical differences both in the managerial strategies and their effects on the functioning of markets. This has been the prime mover of this study.

1.3. Valuation Utilizing Market Shares The analysis of the previous section suggests that the market share of a firm reflects the valuation of its products by consumers and vice versa. However, Fig.1.1 indicates the possibility that the actual market share may exceed that reflected in the value of its products. Hence, it is necessary to isolate the true value of the firm’s product from the observed market shares of the firms. Further, some differences in the market power of firms, resulting from the value of their products relative to those of rivals, can be deemed to be due to differences that are commensurate with their threshold values. Such market power is intrinsic to the nature of the market and the accompanying innovativeness of firms should not be discouraged. Only quantities exceeding them provide the firm any market power w.r.to rivals on the market. The transient market power of a firm, from this perspective, is entirely due to the competitiveness of rival firms though it is conditioned by its position relative to consumers on the market. Effectively, these two components of market power have different sources and should be kept

Introduction

7

distinct. It is equally clear that some firms may find it uneconomical to strive towards making the consumers recognize the maximum price they are willing to pay. Such firms will have a lower market share and are unlikely to have any market power. It is necessary to identify these effects and incorporate them in the specification of the market power of firms. In general, a valuation index will be larger than the transient market power index. Suppose a market power index of a firm, integrating the consumer valuation on the market and its interaction with rivals, along with a valuation index can be conceptualized. These two measures, viz., that of the transient market power and the valuation index, can be utilized to infer their movements over time. The generally held hypothesis, that such transient market power will be dissipated over time due to competition from rivals, can therefore be verified. Note that a lower elasticity of demand or a market share conveys less information than that reflected in the consumer loyalty to the products of a firm. The firm may value stabilizing demand over time. This is especially important in dynamic markets where the product profile is changing constantly. Non-price strategies have a pivotal role not only in achieving higher market shares but also in maintaining them at a stable level over time.

1.4. Non-Price Strategies The realized market share of a firm is an ex-post concept. The firm will be achieving this through its actions. That is, to a large extent, it is a consequence of the firm’s efforts to influence the consumers in the presence of competition from rival firms in the market. It is necessary to consider the non-price choices of a firm that result in its market share 8. Constructing valuation and transient market power indices that result from non-price choices of firms is therefore necessary. In essence, the analytical argument shifted, from the market power index at the level of industries, to the level of non-price strategies of firms. Three further issues require attention. First, the consumers cannot make an informed judgment about the products they wish to choose because they do not generally have adequate information about the products of all the firms. 8

As remarked earlier, the budgetary constraints on the consumer and their perception of the value of the products of the firm, apart from other considerations, determine the demand curve.

8

Chapter 1

Hence, it is important to examine the strategies of firms that enable consumers to infer the true value of the different products on offer. It would then be possible to identify the market power of a firm inherent in the relative valuation of its products. Second, it is necessary to understand the strategic differences between firms that provide a firm the transient market power over rivals. That is, the sources of differences in the elasticities and market shares must be identified and accounted for. Third, this description suggests that firms derive some market power from the use of specific strategies even if they do not result in any significant market share for a firm. The firm’s non-price decisions and product choices determine the position of the demand curve and its market share. From this perspective, every firm will have some market power based on the non-price decisions. Note that intangible loyalties, viz., those of consumers, suppliers of inputs, the workers toward organizational goals, and of marketing agents, cannot be competed away by rivals once they are achieved. These effects provide market power advantages to a firm over and above those due to the market shares based on the inherent product qualities. These hypotheses can be examined by utilizing the resulting indices. Essentially the claim is that profits and market shares are only two consequences of the firms’ decisions and the management may wish to achieve several other complementary objectives. In other words, improving the valuation of the firm through its non-price choices cannot be fully reflected in the market shares. This gives rise to two issues. First, define the value of a specific strategy of the firm to the consumer. Second, examine whether it corresponds to the market share defined above. Note that the market power of a firm is entirely due to the competitiveness of rival firms though it is also related to its position relative to consumers on the market. Effectively, these two components of market power have different sources and should be kept distinct. Observe that there will be several strategies that do not provide the firm any market power when every firm is expected to compare each of its strategies vis-à-vis those of rivals. The valuation index may not be adequate. Note that when s1 < s* the firm may indeed utilize non-price strategies to augment its market share, but not necessarily to indicate the higher value of its products. It is necessary to be alert to this possibility while interpreting the results.

Introduction

9

1.5. An Alternative Specification Every firm was so far assumed to compare every one of its strategies with the corresponding choices of rivals to identify the consumer valuation of its products. However, this may be too expensive and impractical for them. Instead, the firm may decide to concentrate on a comparison of its choices among its own in its quest to identify the most efficient choices 9. This approach would necessarily signify a change in both the valuation of its products and the efficiency in arriving at such a valuation 10. In practice, the non-price choices of a firm may be of two generic types. First, the firm may utilize strategies that reflect their product choice, the methods of organizing their production, the logistics of distribution of products to the consumers, and internal sources of finance. Such Type I strategies indicate what the firm can do internally to convey the value of its products to the consumer. The firm can also direct some of its choices to rival firms in the market, financial sources, and so on. Generally, firms utilize such Type II strategies either to improve their market share and/or strengthen their financial position 11.

9 The consumer is more likely to adopt this perspective. The firms will have to contend with rival reactions as a factor in determining its market power as well. 10 One important implication of this approach should be noted. As Posner (2001) and others noted, the definition of an industry boundaries becomes essential when utilizing the market share considerations. However, it will not be necessary if the present alternative can be shown to be empirically more relevant. A third alternative is plausible in view of the above considerations. A firm may compare its own strategies over time with a view to improving its managerial practices. 11It is necessary to consider the following questions to appreciate the distinction between Type I and Type II strategies. (a) How can a strategy convey value but does not increase the market share? (b) Similarly, how can there be an increase in market share if there is no increase in value? To begin with note that in the short run every firm has an installed capacity beyond which its attempts to increase production and market share would be futile. Even in the long run, adjustment costs and transaction costs will limit capacity expansion beyond a point. Also note that the costs to the firm will not be production costs alone. They also consist of the costs associated with non-price strategies. Now imagine the following. A firm is operating at or close to capacity limits. It also finds that the non-price activity costs more than any expected increase in revenue due to an increase in its market share. A firm may still attempt to convey the value of its products to the consumers. This would be necessary to stabilize its market share. Even when the current market share is below the maximum the firm may use non-price and informative strategies without any expectation about an increase in market share. Consider another possibility. The firm

10

Chapter 1

The foregoing analysis indicates that some firms may concentrate efforts on improving the valuation of their products. Such firms predominantly utilize Type I strategies. Intuitively this will be expected if the market share of the firm is low. In other words, the limited availability of financial resources 12 restricts its actions whatever may be the desire of the management. That is, they are constrained by available financial resources even if s1 < s* indicates that they may benefit by utilizing strategies to increase their share of the market. On the other hand, firms with a larger market share may have the financial resources but do not find it necessary to divert resources to Type I strategies. They are more likely to implement Type II strategies. Examining the effect of the different types of strategies on the valuation of products by the consumer and transient market power attributable to variation in the market shares of firms has been the emphasis of this part of the study. Similarly, the conjecture that the transient market power of firms will be eliminated over the long run remains an empirical question. Its persistence may either indicate the measures that a firm and consumers adopt or suggest regulatory action.

1.6. Empirical Work The data for this study was obtained from Prowess of CMIE. It generally pertains to the years 2001-2017. The data for (1) Textiles, (2) Machinery,

is currently experiencing a market share below the maximum. One possibility is that the consumers have not been adequately informed about the value of the products. In such a case more informative non-price strategies allow the firm a larger market share towards the limit. When such an increase in market share is achieved it may be argued that it is entirely due to the information about the value of the products of the firm. In some contexts, the additional information provided by non-price strategies may be negligible. Its promotional activities may then be purely to increase the market share and not so much to convey any useful information about the potential operating limits on its sales and production. Some of its non-price activities may then be directed to obtaining transient market power. The firm may experience the disadvantage only after a certain lapse of time. There is an inherent stochastic nature of the market potentials and intrinsic value of products. As a result, a firm may utilize Type II strategies even when it is not possible to achieve increases in market share. Similarly, it may adopt informative Type I strategies even when such defensive action is not warranted. Interpreting the results one way or the other require more information than that conveyed by the description of Type I or Type II strategies. 12 This may be due to the lower market share and/or lower price cost margins.

Introduction

11

(3) Minerals and Metals, (4) Paper, and (5) Motor Vehicles is analyzed in detail. These five industries differ from each other in many ways. The following similarities and differences are pertinent. (1) Noticeable differences in the flow demand vs. stock demand, quality of products, and durability can be discerned. These features determine the quantity bought during a month or a year and the volatility of demand for any firm’s products. (2) Differences in the elasticity of demand, and more significantly the cross elasticities of demand, exist. For textiles, for instance, the cross elasticities are high. Both these measures are lower for durable goods like Motor Vehicles. (3) Standardization and interchangeability among products of different firms matter in most cases. This is especially significant in the Machinery industry and Motor Vehicles industry where standardization of parts, accessories, and so on is not significant. This has implications for the cross elasticities and the associated loyalty of consumers to the products of a specific firm. The cross elasticities across products of different firms in the industry are relatively small. (4) The products of the Metals industry are materials used in the production of other goods. Hence, the nature of the upstream markets determines the market power of firms in this industry. In general, light and more durable materials have replaced steel and associated inputs. Such substitution also has implications for their market power. The reduction in the demand for the products of the Paper industry is essentially due to the digital revolution. (5) The reduction in the availability of raw materials and the associated increase in prices continue to be a problem for industries like Steel and Paper. (6) In some industries, like Textiles, firms can cater to the demand as it arises if they have adequate availability of products and the associated inventories in locations that suit the consumer. Mistakes may be costly. For example, there was an increase in the inventories of Raymonds due to its spread of retail outlets. This accounted for most of the increases in its costs of distribution and sales. Almost invariably the changes in operating expenses were of concern in most industries. (7) The capital investments, in addition to operating expenses, had an important role in the context of the Metals and Motor vehicles

12

Chapter 1

industries. Expenses disproportionate to their level of production operations were due to the financing of fixed assets. The price-cost margins of firms have been reduced quite independently of the elasticity of demand. (8) Almost all industries experienced significant rival reactions to their pricing. For all practical purposes, firms could not maintain their price-cost margins based on the expected inelasticity of demand. (9) In the context of durables, like automobiles, the consumer values products not merely on the intrinsic usefulness of products but also on the financial position of the firms since the ability to provide the expected level of service after the sale depends on it. The differences in the strategic choices of firms are based on these and similar features. It is necessary to acknowledge that the available data relates mostly to the financial performance of firms. Hence, many non-price choices, involving technology, the organizational details of the firm, and supply chain management could not be accounted for. The possibility that some of these variables are more important in practice cannot be ruled out. Prowess provides data for many firms in each of several industries. The data regarding several variables are available. For this study, 14 variables were chosen. The list of these variables is provided in Appendix I. They have been obtained for the years 2001 until 2017. This was necessary due to (a) the use of a variant of Hall’s method to compute the Lerner Index, and (b) the advantage of tracing the managerial process over time. Several broad criteria were followed while choosing the firms for analysis. (a) The Lerner measure was constructed using a variant of Hall’s (1998) method. Hence, the estimation of Ȟ for each firm necessitated reasonable time series data on C (Cost) and S (Sales). It was necessary to stipulate the availability of at least 12 years of data. The final sample generally provided data for the entire period 2001-2017. (b) The data for non-price strategies (defined in Appendix I) was a significant constraint. Many firms in the big data provided by CMIE did not report the requisite data. They were eliminated. (c) After the initial cleanup, it was noted that some data was either internally inconsistent or missing for specific years. Some further truncation was necessary. (d) The general shortcoming in the CMIE data is that many important firms either did not provide any data or the data provided was incomplete and/or inconsistent. The analysis and the results have this limitation entirely due to the data not being available.

Introduction

13

After the initial analysis, it was observed that (a) about 30 firms in the Textile Industry did not have any role in the determination of market power. However, it was felt that they might be interrelated. Hence, an additional Set 1 was formed using data for these firms. (b) A group of firms producing Steel could be identified in the Metals Industry. This group was also examined separately after the entire Industry data was analyzed. (c) The Motor Vehicle Industry offered a unique opportunity to form separate groups based on the nature of products. Hence, the following sets were constructed: Set 1- Four Wheelers, Set 2 – Two and Three wheelers, Set 3Automotive Ancillaries, Set 4 – Seats, Shock absorbers, etc., Set 5 – Electrical and Electronic parts, and Set 6 – Other spares and parts, and Set 7 was a miscellaneous group. Thus, the analysis was conducted on 13 groups of firms. Turning to non-price strategies, they were classified into Type 1 – Strategies related to internal operations of the firm, and Type 2 – strategies directed to market conditions external to the firm. In general, Type I strategies enable firms to reveal the value of their products to the consumer. The basic limitation is that they do not offer information about supply chain management that may be important in studies of this nature. In general, a universally acceptable set of non-price strategies cannot be enunciated. The diversity of non-price dimensions observed in practice depends on the ingenuity of the management of firms. Interpretations using this data should keep such a limitation in perspective. Note that the consumers may not assess the relative usefulness of all the products before making a final decision even if firms provide information about their products. In other words, effectively only a few firms are competitive in the market. Firms themselves may be viewed as competitors across certain related products, their location, and several related factors. It would be difficult to say that all firms in a two-digit industry are mutually competitive. It is equally difficult to identify the clusters of firms that can be deemed to be competitive among themselves. This is a fundamental limitation of all studies of this nature 13.

13 Of course, the exception is that some forms of strategic interaction, that are confined to firm level choices, will not be subject to this limitation.

14

Chapter 1

1.7. Methods of Analysis In every scientific investigation, the analysis of a phenomenon starts by separating certain empirically observed facts as premises and others as consequences. A logical argument identifying some observed facts as premises and others as the ones that need explanation is generally not available. This distinction may turn out to be a function of the purpose of analysis. The usual understanding is that the assumptions and conclusions have an empirical basis. A theory, or an if-then analysis, is then suggested. That is, the analytical effort consists of creating some concepts and the logical processes of their interrelationships to provide a means to verify the empirically observed facts. The totality of assumptions, the theory, and conclusions will be scientifically validated if the theory utilizes the said assumptions and explains the observed facts 14. However, there is a possibility that more than one theory based on the same assumptions and accepted logical deduction processes may explain the outcomes. Similarly, on occasions, notwithstanding the assumptions that form the basis, a theory is deemed valid if the analytical logic results in the observed conclusions. At the other extreme, it can be argued that a theory is valid if the assumptions and an accepted logical process of deduction lead to the observed reality. Some authors suggest that the logic of deduction, without any reference to the validity of the assumptions or the conclusions, is sufficient to justify a theory. There have been debates about what constitutes verification of any of these aspects. The econometric practices, for instance, appear inappropriate (do not account for the underlying process that generated the data) in most applications since they have a distinct internal logic. As a result, the methodological issues are not resolved and empirical verification of premises, theories, and conclusions proceed in different directions. The study of the market power of firms presents similar paradoxes. Note that the Lerner measure of market power is contingent on the following assumptions. First, there is only one firm in the market. Second, the cost of production of the firm is fixed and given once the level of production is 14

A statement of what constitutes verification is also an important issue. The econometric practices, for instance, superpose their own assumptions and logic of inference. Their utility and relevance to specific economic phenomena are in doubt. Note further that the numerical calculations and the use of computer algorithms create problems of their own. How much error is due to one or the other of these features is simply not addressed in the literature.

Introduction

15

determined. Third, the preferences and budget constraints of consumers uniquely determine the demand curve for the firm. Fourth, firms choose the output to maximize profits. Fifth, given the choice of output by the firm, the price they charge on the market is determined by the demand curve. These assumptions specify the fixed price-cost margins of the firm. None of these assumptions or conclusions have been verified in practice. Therefore, depending on the veracity of the Lerner measure is a matter of faith rather than scientific validity. Consider the context of the present study. Several intuitively obvious assumptions had to be made to interpret the empirical results. Very few assumptions have been validated. Similarly, there is no guideline to verify whether the conclusions are in line with observed empirical reality. Only the logic of a few intermediate steps of the argument can be said to be intuitively verifiable. The ultimate choice regarding the underlying truth remains an open question. Neither is it possible to say that one theory is superior to another nor can it be suggested that one conclusion should be preferred over the others. At best, it may be concluded that a more detailed search for empirical regularities about assumptions and conclusions is in order. Fundamentally, the achievements of this study can be detailed as follows. (1) Defining and estimating the measure of the value of a firm’s products (2) Specifying and measuring the transient market power of firms, (3) Examining the elimination of transient market power over time, and (4) Outlining the differences across firms in several industries.

1.8. Plan of the Book The plan of the rest of the book is as follows. Chapter 2 will recall the major trends in the theoretical concepts of market power indices at the firm level. Chapter 3 indicates that the market power of a firm depends not only on the loyalty of consumers as reflected in the elasticity of demand but also on the position of the demand curve reflecting the share of the market of the industry that it commands. As a result, the firm should be expected to maximize its market power rather than profits or market shares. However, the firm must utilize non-price strategies to entice consumers to buy its products. Hence, the burden of creating market power shifts to such choices. Presumably, they may alter the elasticity of demand as well as the market shares. Hence, it was argued that a measure of the value of products and the market power associated with the firm attempting to capture some market

16

Chapter 1

share from rivals should be conceptualized. The latter will be designated as the transient market power since it will be more unstable than the former. The dynamic variations in non-price strategies may also be stochastic since the choices of consumers and rival firms tend to be unpredictable though they change around a stable trend. Depending on cross elasticities of demand for rival products, firms may choose non-price strategies either by comparing their choices with those of rivals or devising their strategies without bothering about rivals’ strategies. It is expected that consumers will also neglect some promotional activities of the firm. Measures of market power of a firm have been developed keeping both these aspects in perspective. Chapter 4 considers the issues arising out of the empirical measurement of the Lerner index. Several new concerns and their empirical importance will be highlighted. Chapter 5 outlines the results of the estimation of the valuation and transient market power measures based on market shares. Implications for the several hypotheses set out earlier will be detailed. Chapter 6 attempts to examine the empirical implications of measurement if non-price choices are accounted for. This chapter also indicates that changes in market shares cannot be inferred from the variations in non-price strategies per se. Generally, the alterations in nonprice strategies contain more information than that conveyed only by the changes in market shares. Chapter 7 takes up the empirical measurement based on an alternative specification of the utilization of non-price choices. A rather different perspective, compared to that obtained in the two earlier chapters, will be presented. Chapter 8 provides an outline of some theoretical issues that have not been addressed so far. An overall assessment of the empirical results and several shortages that should be revisited when more detailed data becomes available will also be offered. Appendix I specifies the sources and related details of the data. The definitions of the non-price indices used in this study will be provided and the changes that can be brought about when more data is available will be outlined. Appendix II outlines the symbols used for ready reference.

CHAPTER 2 EARLIER ATTEMPTS

2.1. Hall’s Measure Lerner (1934) initiated the classical specification of market power. Let the market demand curve for the only firm in the market be p = p(y), where y = output and p = price per unit of y Similarly, let C = C(y) be the cost of production. Assume that the firm maximizes profit. The firm’s choice of output and price will be such that MC(y) = MR(y) = p(1-Ș  where MR = marginal revenue, MC = marginal cost, and Ș = elasticity of demand This results in the market power of the firm defined by the index v = (p-MC)/p = Ș Estimating the Lerner index by measuring either the marginal cost or the elasticity of demand has been difficult. However, as in Hall (1998), it is possible to write p/MC = (p/AC) (AC/MC) Total cost (C) 15 can be computed as Sales (S) – Profit ʌ from the available data. Compute C = ASȞ

15 However, computing variable cost is itself dicey since the fixed cost cannot be inferred from gross fixed assets and deprecation. Further, the textbook assumption that the firm will close if S < Variable cost does not apply in practice. Many firms continue operation in the hope of a more favorable future.

18

Chapter 2

Observe that the Ȟ would be the same as that calculated with y (if it is available) instead of S since C = AyȞ, and C = B(py)Ȟ will yield the same Ȟ It can now be deduced that v = (p – MC)/p = 1 – MC/p = 1 – y MC / py However, by definition, yMC = Ȟ\ AC. Hence, v = price-cost margin = (1 – Ȟ&6 This can be calculated for each firm if time series data is available for S and C 16. One hypothesis is that v is an immutable constant over time. However, C/S remains invariant only if constant returns to scale prevail and there are no autonomous shifts either in the cost or demand curves 17. In general, it varies from one firm to another and over time. Second, it is expected that v and the market share s move in opposite directions. This can be demonstrated as follows. Suppose p = p(y) and Ș is fixed. From the profit maximization condition

16

Hall (1998) writes AC/p = C/py = 1 - sʌ so that p/MC = Ȟ-sʌ). Hall considers this analogous to the Lerner Index. Further, the choice for computation depends on data availability. 17 The theoretically defined Lerner measure assumes that all increases in variable costs, whatever may be their sources, are passed on to consumers. This may not be possible in markets where many competitive firms operate primarily due to cross elasticities of demand and substitution away from products that increase prices. In such a case the observed (p-MC)/p may be less than Ș Second, the price charged by a firm may exhibit downward rigidity. This may be a result of the search and transaction costs to the consumers in their attempt to switch between products. The observed (p-MC)/p may be larger than what the possible reduction in MC would indicate. Third, it was suggested by some authors that (p-MC) may only represent the need to cover fixed costs. In general, it may not even be feasible if profit maximization is the primary objective. This suggests that, apart from the problems of measuring fixed costs, it would be appropriate to take the total costs into account while constructing the Lerner measure. More implications of this suggested measurement will be elucidated in the sequel.

Earlier Attempts

19

p(1-Ș = MC it can be readily verified that G\GȘ = SȘ2 [ dMC/dy – dp/dy (1-Ș @ > 0 That is, dy/dv < 0. Designate this as Hypothesis 1. For all practical purposes, v is not a constant over time.

2.2. Other Variants Two distinct approaches to the measurement of market power are available if the above dimensions are considered in isolation. First, the differences in products signal variations in the elasticity of demand for their products. In general, only the Lerner measure is acknowledged as a measure of the market power of firms. However, this will be different across firms. Let vi = market power of the firm as reflected in the elasticity of demand for its products. It can be written as vi = (pi – MCi)/pi = Și, where pi = price per unit, MCi = marginal cost, and Și = elasticity of demand This specification does not account for the interaction between firms 18. Second, the differences may be purely due to changes in the costs of production. Consequently, most studies emphasize a unique elasticity of demand for all the firms assuming that the industry is a homogeneous oligopoly. That is, they assume that the products of firms, even if they are differentiated, have a market where the price set by it can be represented by p = p(y,) where y = ™\i and the summation is over i = 1, 2, ..., n. The profit for firm i can now be written as ʌi = p(y) yi - C( yi), where C(yi) = the cost of producing yi.

18 It must be acknowledged that some studies, e.g., Fischer and Kamerschen (2003), considered conjectural variations of firms while constructing such indices.

20

Chapter 2

The conventional assumption of profit maximization then results in p(y) + yi p1(y) = MC (yi), where p1 = dp/dy and MCi is the marginal cost of firm i. Even this characterization makes the Cournot assumption that all other firms hold their yi constant. Hence, p(y) – MC(yi) = yi dp(y)/dy Consequently, vi = [p(y) – MCi@S\ = si/ Ș where si = yi/y That is, the price-cost margins depend on market shares as well. Variations in the market shares are due to the differences in costs. Some studies, that acknowledge differences between firms, define the market power of the industry exclusively in terms of the shifts in the demand curves and consequently market shares. Consider v = The Lerner measure = ™Vi [p(y) – MCi@S = ™Vi2Ș = +Ș The Herfindahl index is defined as H = ™Vj2, where the summation is over j = 1, 2, …, n. This index incorporates the market power of a firm in its interaction with rival firms. The assumption that the elasticity of demand for all the products is the same 19 suggests that the Lerner measure need not be accounted for. However, the index needs a suitable modification if the differences in the elasticity across firms are acknowledged. These two approaches are at the two ends of a spectrum and a meaningful integration is warranted. Two types of criticism were put forward instead of pursuing this line of argument. First, Scherer (1970,73) argued that the use of the quadratic term cannot be justified on economic grounds. Second, Hall and Tideman (1967,164) noted that assigning equal weights to all sj2 cannot be justified when dealing with differentiated products. Elzinga and Mills (2011), Syverson (2019), and several others before them pointed out other limitations of these approaches. These two limitations are fundamental 20

19

Note that even when homogenous oligopoly is postulated the H index can be multiplied by v or equivalently, 1/ Ș This approach would have avoided unnecessary criticisms. 20 It will be shown in the next chapter that there are several other shortcomings of this measure when the measurement is based on Hall’s approach.

Earlier Attempts

21

though they are mostly related to the mechanics of measurement rather than the economic process that underlies the choices. The following approach is theoretically more satisfactory. Let pi = pi (yi, y*), where y* includes each of the output choices of other firms, represent the demand curve for the products of firm i. As usual, assume that ci = ci (yi) is the cost curve of firm i. Maximizing the profits of firm i, keeping the reactions yj(yi) in perspective, results in (pi – MCi)/ pi = Și - ™j İij șij , where İij = ˜Si ˜\j) (yj /pi) is the elasticity of pi w.r.to yj, and șij = ˜ j˜\i) (yi/yj) represents the elasticity of the output response of firm j w.r.to a change in the output of firm i (essentially the conjectural variation). Obviously, Li = Și) - ™j İij șij will reduce to the Lerner measure if and only if either İij = 0 or șij = 0. In general, in the presence of competitive rivals, the market power that a firm achieves is less than that indicated by the Lerner measure. This result will be invoked several times in the rest of the chapters when interpreting the observed empirical regularities. Empirical estimation of İij and șij presents formidable difficulties. As a result, the search for plausible and estimable indices has been in progress.

2.3. Firm Related Measures Defining indices to identify the market power at the firm level is rather sparse. However, broad guidelines can be obtained from a few earlier attempts to define the market power of firms as distinct from the industry level market power. Kiyota et al (2009) defined mi = market power of firm i = si 2 / ™Vk 2, where the summation is over k  i

22

Chapter 2

It is not altogether clear if the choices of rival firms will have a multiplicative effect on mi. The summation over k  i cannot be justified if it is indeed valid. Rao (2012, 2015) proposed several other measures based on si. First, mi = 1 – Ci / pi si S, where Ci = cost of production of firm i, and S = ™\i Note that if si = 1 and sk = 0 for all k  i this measure reduces to mi = (pi – ci )/pi , where ci = average cost of firm i. Second, the market power of firm i relative to rivals can be written as mi = 1 - ™k si2 /[sk 2/(n- @ since sk2/si2 represents the competitiveness of firm k w.r.to firm i. An alternative measure proposed in Rao (2012) recognizes the relationship between firms and measures it using ȡ2 = si (1-si)/ ™ si2 where the summation is over i = 1, 2, …, n. The effective market power of firm i is then mi = (1 – ȡ 2) si 2 The above special cases of market power will be valid even if this definition is adopted. Note that none of these measures offers any economic justification for its choice.

2.4. New Measures The fundamental idea in Rao (2020) underlying the construction of a market power index is to incorporate both the effects noted above. Consider any one firm producing a specific product. The consumers will exhibit a demand curve pi = pi (yi)

Earlier Attempts

23

with its implied elasticity and position of the demand curve if it is the only one in the market. Following the logic of the Lerner measure vi = (pi – MCi)/ pi = Și represents the market power of the firm. Note that the interaction of the firm with the consumers on the market gives rise to market power vi represented by the Lerner measure. However, consumers assign a market share ei to the products of this firm while evaluating it against the variety of products available on the market. Hence, the effective market power of the firm, in its relation to the consumers on the market can be specified as Ii = vi ei per unit of S (the total market sale). Rival firms reduce the market share of the firm. Let si be the realized market share. Then, the market power of the firm, taking the rival reactions into account, will be mi = Ii si An ex-ante measure of ei is generally not available. However, the ex-post market share si is an appropriate measure of the ex-ante ei. For, si would not be realized if this were not the case. Hence, ei may be replaced by si in the calculation of the market power of the firm. This results in Ii = vi si as a representation of the market power of firm i as it relates to consumers on the market. However, the firm only has si of the market given that rivals offer substitutable products to reduce its market share. Hence, effectively the market power of the firm, taking rival reactions into account, can be written as mi = Ii si = visi2 This measure incorporates the interaction of the firm with its consumers on the market as well as that of rival firms on the market 21. Note that defining the market power for this kind of industry is not relevant. However, it can be written as

21 A more satisfactory derivation of this market power index will be offered in chapter 3.

24

Chapter 2

m = ™Pi = ™ vi si2 if one is necessary. This extension has two advantages. First, it offers an economic justification for the use of the square term si2. Second, the weights have an economic rationale. The most important observation is that monopoly measures at the firm level are more pertinent. However, the same cannot be said of an index at the industry level. It is only necessary to acknowledge the differences in market power across firms 22. Note the following special cases. First, assume that the market is a homogeneous oligopoly. Then, vi = v for all i by assumption. The market power index reduces to m = v ™ si2 Ignoring the constant results in the Herfindahl index of market power H = ™ si2 Second, let the market consist of only one firm. In such a case, si = 1 for the firm and the Lerner measure of monopoly m = vi emerges. Third, suppose si = 1/n for all i. The market power index is now m = ™ vi)/ n2 indicating that the differences in the valuation of products by the consumer alone matter.

2.5. Conclusion The above analysis suggests that significant progress has been recorded in the definition of the market power of firms. However, the sources of such market power may be the non-price choices of the firm. It is necessary to make progress along these lines. Further, measures of transient market power of firms need attention. The following chapters will address these issues.

22 Note that this method makes a basic assumption that the market share of the firm reflects what the consumers allow it as well as that obtained by the firm in its interaction with rival firms on the market. These two aspects may be different ex ante even if they tend to be the same ex post.

CHAPTER 3 THEORETICAL CONSIDERATIONS

3.1. The Milieu Several firms cater to the consumers’ needs in practically every industry. The objective of economic theory is to identify a unifying principle as a description of the behavior of all the firms. The first attempts were directed to profit maximization of firms and price was chosen as the unifying mechanism. However, firms recognize the heterogeneity of values that consumers seek. They have been making attempts to design products that cater to a wide variety of requirements. The consumers may accept the variety created by the innovation. A new pattern of choices emerges when the innovation is absorbed into the system. This may not correspond to the theoretically defined competitive behavior. The shortage is w.r.to economic theory rather than empirical reality. Attempts were then made to suggest that either the goal of the firm changed to maximize its market share, or at least utilize it as an instrument, in its efforts to maximize profits. In other words, economic theory was in search of a new regularity that does not contradict its original stance. However, the business world remained chaotic. The ingenuity of individual firms was directed to strategies that provide the firm its market share and superiority. Therefore, economic theory had to amend the common principles (often called a unifying theory) to correspond to the new empirical regularity. However, new choices and/or new combinations of strategies to allow individual firms to maintain their superiority over rivals emerged. The economic theory sought some common patterns despite this. Irrespective of the generic structure of theory, be it neoclassical or gametheoretic, the effort was to identify common attributes of behavior, infer possible consequences, and examine whether they correspond to certain norms. The analysis also attempts to unravel mechanisms, within the accepted theory, that can indicate the return to a steady-state devoid of stochastic disequilibrium.

26

Chapter 3

Two questions are pertinent. (1) What is the source of the need to be innovative and deviate from the relevant norms? (2) Is it necessary to obtain a greater market share and use it to achieve a higher level of profits? The economic theory could not differently conceptualize the market power that firms seek. Deviations from currently accepted procedures have been characterized as transient. Generally, economic theory postulated that firms would return to steady-state norms. Empirical methods could not do any better. A new set of norms and objectives were imposed. These procedures do not adequately represent how individuals conceptualize achieving dominance. The only scientific reality is that several innovative concepts and empirical procedures have been accepted, and absorbed as necessities, to make sense of the stochastic and unpredictable industrial climate. These approaches are a consequence of the premises on which the theorist and empiricist build. They are necessarily drawn from observation. However, as Heath (2010, 31) observed, “We can observe people’s actions, but we cannot observe their motives. We don’t know what people are thinking or what they are trying to achieve.”

However, the objectives and the resulting actions are the prime movers of the resultant dynamics. At best, theories make attempts to accommodate some observed reality while explaining accepted norms of behavior. The stochastic and turbulent nature of the behavior of economic agents is the only immutable axiom in the industrial scene. This kind of introspection led Bolton et al (2014, 268) to suggest that “fundamental human needs are the same the world over. However, the ways (that) they are met should be locally interpreted and conceptualized, and thus meaningful to the individual consumer. Only by being close to the customer and thinking about the small things can organizations realize the big differences in practice.”

In general, a unique economic theory may not capture the turbulent and stochastic nature of individual requirements and the behavior of firms to accommodate them. Against this backdrop, this study proposes a stochastic dynamic theory of the economic behavior of firms in a differentiated oligopoly. The essential argument is the recognition that every firm will have some market power based on the consumer’s valuation of its products. Similarly, every firm will

Theoretical Considerations

27

have some transient market power based on its interaction with rivals on the market. The transient market power is dynamic and the variations of nonprice strategies that provide a firm such market power are stochastic. Hence, market power maximization was considered as the common unifying principle for developing a theory underlying the behavior of firms. A few general patterns can be expected. (1) To paraphrase Hicks (1935,8), in non-competitive environments, where firms experience sharply rising subjective costs, they are more likely to utilize their advantage much more by not bothering to choose strategies that are close to those of the rivals. Instead, they design their strategies to achieve the maximum possible market power to correspond to the consumer valuation of their products. However, firms adopt a variety of constantly changing strategies in pursuit of transient market power. The transient market power, obtained by deviating from consumer valuation of products, may be eliminated by the competition among rival firms in the market over the long haul. This is not observed empirically. (2) Delving deeper, the emergence of one dominant firm, that reduces the market power of rivals to negligible proportions, turns out to be the economic mechanism that eliminates transient market power. That is, the oligopolistic market will eventually have one dominant player who defines the prices of products and all other firms accept it as parametric. In other words, the elasticity of demand for the products of rivals tends to infinity, and therefore the price-cost margins tend to zero, reducing transient market power to zero. The market is virtually a competitive fringe controlled by the price setting of the dominant leader. (3) The emergence of a dominant firm must be interpreted to mean that the rest of the firms constitute a homogeneous oligopoly. That is, their market shares are determined entirely by the differences in the costs of production of firms. The conventionally defined Lerner measure cannot account for the effect of market shares. In essence, firms cannot maintain price-cost margins when confronted with autonomous changes in the costs of production. (4) The variations in costs have also been stochastic given the changes in the behavior of firms, availability of raw materials, and their prices. The emergence of technical change adds to this variability. Such changes contribute to the variations in the market shares of firms.

28

Chapter 3

(5) It is possible to suggest that firms trade off profits toward maximization of market power. This can be achieved by shifting their demand curves to the right so that the levels of output that maximize profits are such that p = MC or, possibly, p = AC. Firms would have gained advantages that cannot be eliminated by competition when the new equilibrium is established. (6) The dominant leader may choose strategies to cannibalize the market shares of rivals and eliminate them. This hypothesis cannot be supported by the variety of consumer preferences and their stochastic variability over time. (7) The demand curves for the different firms on the market are not the same. In a dynamic economy, transient market power is determined by the emergence of rival products based on lighter and more durable material, the changes in the value of products, and the demand for new products brought about by network effects. In other words, market power based on the intrinsic value of products has also become stochastic dynamically. The major achievement of this study is to account for the stochastic dynamics observed in practice while integrating these patterns into the economic theory of the non-price strategies of firms. It is also possible that transient market power constitutes a purely defensive reaction to counter the cannibalization efforts of rivals. Investigating the causes underlying the stochastic variability of the strategies of firms and unraveling the objectives of firms generally is necessary. None of the economic mechanisms, suggesting the elimination of transient market power over time, appear to be significant. The empirical reality is that such market power is perpetuated over time. It cannot be emphatically argued that the market demand and rivalry among firms will return to the p = MC equilibrium with an infinitely large Ș and a uniform cost of production. The factor markets are also as dynamically stochastic as the product markets whatever may be their stable trends over time.

3.2. Dynamic Changes This study proposes a stochastic dynamic theory of the economic behavior of firms in a differentiated oligopoly. The essential argument proceeds along the following lines. (a) Every firm in the market provides products that have a unique value to the consumer. Such a valuation may also vary dynamically. The

Theoretical Considerations

29

essential property of such a valuation is that neither the consumer nor the firm can provide a specific measure unambiguously. For all practical purposes, this is the source of the stochastic nature of these markets. (b) The price that the consumer pays for a product may not adequately reflect consumer valuation. Firms make attempts to reveal it to the consumer through the choice of their non-price strategies. (c) The market share of a firm is essentially determined by the product’s value. However, the observed market share, which is based on the consumer valuation of products, will also depend on the choices of non-price strategies of rival firms. As a result, the observed market share of a firm may not contain information about the value of products. (d) It may be claimed that non-price strategies of firms contain information about the value of products over and above that contained in the observed market share of firms. To measure it explicitly is an important task for the empirical work of such industrial markets. (e) There will be no market power of firms in the industry if every firm seeks and obtains an advantage based exclusively on the intrinsic value of their products. Somewhat more generally, there will be no market power if firms get to know the valuation of their products, recognize the valuation of products of rival firms, and adjust their strategies to attain an equilibrium. In general, such an argument acknowledges that the innovative ideas of firms should not be stifled. (f) However, information asymmetry will induce firms to devise nonprice strategies to divert some market advantages in their favor and reduce those of rivals. This redistribution is the basic determinant of the transient market power of firms. The pious hope of economic theory was that information asymmetry and the propensity of rivals to take advantage of it will be eliminated over the long run. It was surmised that the rivalry among firms would dissipate transient market power. (g) Note that the consumers should also recognize that the changing strategies of firms are an attempt to accommodate the differences in the consumer valuation of products. In other words, consumers should acknowledge that the changes in the non-price strategies of firms eventually reflect only these differences. Therefore, a dynamic equilibrium in the market emerges if all parties acknowledge that the choices of firms are directed to such a balance among all the parties.

Chapter 3

30

(h) In practice this may not materialize. Instead, transient market power will remain. The consumer loyalty and market share advantages that a firm achieves are likely to persist over time since such intangible benefits are difficult to dislodge once they have taken root. This study postulates the maximization of transient market power as the unifying principle for a theory underlying the behavior of firms in such markets. A few details of the analysis may now be considered. The market power of a firm is a result of the demand curve arising out of the consumer preferences for its products and their budgetary constraints. In markets with several competing firms, the resulting market power does not exclusively depend on the inelasticity of demand 23. Instead, it can be argued that market shares do contain additional information about the market power of firms. Consider an industry comprising of n firms offering substitutable products. Assume that the decisions of all the firms are in equilibrium (i.e., firms have stabilized their strategies in such a way that every firm offers an output that maximizes its profit). Let the demand curve for firm i be pi =Ai yi -Și, where pi = price per unit of sales, yi = quantity sold, and Și = elasticity of demand As a first approximation, let the cost of production and distribution of the firm i be Ci = Fi + .5ciyi2 Let y1i maximize the profit. Similarly, let y2i and y3i be such that pi = MCi, and pi = ACi respectively, where MCi is the marginal cost and ACi is the average cost. The Lerner measure of market power of firm i is vi = (pi – MCi)/ pi = Și

23

Recall that in the previous chapter the influence of the output elasticity of firm j to the output choice of firm i as well as its effect on the price charged by firm i have been shown to alter the measure of market power.

Theoretical Considerations

31

vi is a measure of the market power of a unit sales by firm i. In a dynamic differentiated oligopoly, it will be expected that each firm attempts to shift its demand curve to pi = (Ai+di) yi-Și , where di is a displacement such that (Ai+di) (1-Ș y2 -Și = ciy2 The firm may also conceptualize di in such a way that the equilibrium output is y3. That is, given the stochastic variability of demand, firms will attempt to increase their market shares without reducing the price-cost margins. It will be acknowledged that y1i and the corresponding market share s1i reflect the consumer valuation of the products of the firm. The market shares s2i and s3i corresponding to sales y2i and y3i may be realized on the market even if temporarily. Hence, rival firms will note that the market power based on the observed s exceeds the market power attributable to y1. The firms may also acknowledge the following. (a) d = 0 corresponds to the steady-state when the competition between firms converges in the long run. (b) The strategies of the firm may also be such as to alter Și and not exclusively the position of the demand curve. (c) Costs will also change and along with them a new dynamic equilibrium, with a different value of Și, will emerge. The realized market shares can be considered as a reflection of the differences in the value of the products of different firms. Essentially, firms obtain a clearly defined market share based on the intrinsic value of their products. The consumers in the market will not have the information about the intrinsic value of the different products on offer and/or they will find the search costs to be disproportionate to the value addition they seek to obtain. The firms may themselves provide that information. However, every one of them will also incur some cost of doing this. There is a possibility that the expected additional advantage exceeds the cost of providing information. As a result, firms may try to obtain larger market shares. For all practical purposes, it can be claimed that every firm makes attempts to reduce the market share of rivals in its quest to achieve greater market power. The additional market power that the firm obtains, over and above

32

Chapter 3

that implied by the market shares based on the intrinsic value of its products, will be designated as transient market power. It will be a redistribution away from rival firms since the consumer preferences and their budgetary constraints determine the total demand for all the substitutable products. Competition among rival firms eliminating such transient market power over the long haul can be conceptualized.

3.3. Measures Proposed The demand curves with which the analysis of the previous section started are not well defined. They are expected to represent the steady-state in an otherwise stochastic market environment. It can be expected that the firm attempts to obtain an advantage by moving the demand curve to a position where y2i or y3i would be its output level that maximizes profit. The success of the firm depends on the consumer valuation of its products relative to the transaction costs of shifting between them. Before proceeding further, it is necessary to identify the total market over which the market power measure is defined. Observe that other lighter and more durable products are replacing steel in the context of the Metals industry. Similarly, digital technologies are replacing paper products. Hence, these technologies must be reckoned with while defining the total market for the products. Assume that a market consists of n firms. Let S be the total market sales and let vi be the price-cost margin of firm i (i = 1, 2, …,n). vi measures the market power (based on the Lerner measure) of the firm per unit of S sold. Hence, the total market power can be represented by viS. However, this total S must be shared among the n firms. In markets characterized as differential oligopoly every firm interacts with (1) consumers on the market that assign an intrinsic value to its products, and (2) rival firms that compete for market share. Consider the interface of the firm with the consumer. The price per unit of these products can be denoted by pi(S) since the sales of other firms also influence pi. The elasticity of demand for firm i may now be written as Și = - (dpi/dS) (S/pi)

Theoretical Considerations

33

Note, further, that si = Si/S, and dS/dSi = 1 24. Maximizing the profit of firm i w.r.to Si it can be readily verified that the market power per unit of sales of firm i will be visi, where vi is the conventional Lerner measure of market power. Consequently, the total market power of the firm will be Mi = visiSi, where Si is the sales of firm i. However, Mi can be achieved based on the interaction of the firm with rivals. They provide the firm a market share si. That is, the total market power of the firm will be Mi = visiSi = visi2S. Hence, the market power of the firm, per unit of sales of the entire industry, will be mi = visi2. Consider the special case where si = 1 and sk = 0 for all k  i = 1, 2 , …,n. Note that mi reduces to vi, the Lerner’s measure of price-cost margins. Similarly, if si = 1/n for all i, si* = 1/n can be expected as well. The mi will then be mi = vi/n2. The market power of the industry containing these n firms, whose market demand curves will probably be such that vi = v for all n, is m= v/n. This corresponds to 1/m as a representation of n equal firms having market power v. Note the following. (a) si* may not be equal to si in dynamic stochastic markets. Independent measurement is warranted. (b) The cost curves of the firms may themselves be different. This variation may add to the changes in si* as well as si. (c) The differences in the choices of every firm may vary over time depending on its perception of (1) how consumers are valuing its products vis-à-vis those of others, and (2) the rival actions 25. Economic theory assumes that the demand and cost curves with which the analysis started will be achieved in the new steady state of the dynamic stochastic process. That is, there will be a Și for all the firms and the cost curves will also stabilize to C = Fi +.5ciy2 without the necessity for Și = Ș 24

One way of interpreting this result is to suggest that a change in Si results in changes in the elasticities of demand alone and not the positions of the demand curves. The alternative is to argue that this is the typical Cournot assumption. In either case, the assumption that pi = pi(S) is valid since the total S is affected. 25 The following observation is pertinent. Let S denote the total units of output sold by all firms in an industry. Assume that a fraction qi of this sales has the value (quality) desired by the consumer. Similarly, let si be the market share of the firm in the total sales. Clearly, qi • si. However, Fig.1.1 of chapter 1 indicates that firm i attempts to increase its market share beyond qi. That is, si • qi . The consumers will discover this sooner than later and reduce purchases from firm i. Hence, qi = si will be attained over a short time. This elimination of transitory market power is a result of consumer reaction to the actions of the firm. It is certainly not a result of the reactions of rival firms.

Chapter 3

34

and ci = c for all n. None of the firms is ever in a conceptual equilibrium at any time. Even in such a case, it would be valuable if it is possible to empirically validate the transitions from one unit of time to another. The essential task for empirical and theoretical work regarding this economic process consists of identifying the value of products to the consumers, the variable choices of the firm that propel one disequilibrium state of the market to another, and identifying the relevant economic mechanisms.

3.4. Firm Strategies Let Xij represent the magnitude of the non-price characteristic j for firm i, where i = 1, 2, … , n and j = 1, 2, …, N. Define s.j = ™i Xij, and sij = Xij / s.j Similarly, define si. = ™j sij, and tij = sij / si. Assume that the N choices of the firm are substitutable to each other 26. As before, assume that the firm is alone in the market. Then vi represents the value consumers attach to their products as revealed on the market. sij represents the fraction of this market power that can be attributed to strategy j of firm i. Hence, postulate that mij = vi sij represents the market power of choice j. Note that the weight of this among the strategies of firm i is tij. Hence, the market power of firm i can be represented by Ii = ™j vi sij2 ™j sij

26 In any practical context they may be complementary as well. A mixture of the two may also be the reality. Conceptually their characterization by consumers may be at variance with their classification by firms. Applied behavioral economics can be expected to resolve some of the pertinent questions. However, as of now, there is no conceptual or empirical information. The substitutability assumption may well be the worst scenario.

Theoretical Considerations

35

The choice of strategy j by firm k will have market power vk skj2. Firm i assumes that its market power will be reduced by a fraction (n-1). Hence, the market power of firm i, as represented by the intrinsic value of its products, can be written as nij = vi sij2 - ™k vk skj2/ (n-1) The corresponding sij* can be estimated as sij* = sij - ™k vk sk2 / (n-1) vi sij The intrinsic value of the products of the firm, by aggregating over the choices j, can then be represented by ISi = ™j nij ™j sij The difference Ti = Ii – ISi will be an estimate of the transient market power of the firm. As observed earlier, the market share of a firm does not represent an appropriate evaluation of the value of the firm’s products to the consumer. Much of the market power of firms is transitory and it is unlikely to decrease over time. Only smaller subsets of firms are likely to create competitive groups 27. However, identifying such clusters of competitive firms on any objective basis has been difficult. Consider any strategy of a firm. Three contexts may arise: (a) Consumers may find that it conveys the value of the products to them. The firm may obtain a market share advantage corresponding to this. The firm will continue using this strategy over time and the market power that it has is purely due to its valuation. As a result, there will be no transient market power. (b) A possible context is one where the firm has an advantage over rivals, but the consumers do not feel that the strategy adds any valuable information to them. Consumers will ignore it. Even in such a case, the firm 27 There is a fundamental difference between the approach of this study and that of game theory. Game theory generally acknowledges that firms form a cluster to collude and be competitive with firms in other clusters. On the other hand, this study postulates that firms within a cluster may also be competitive among themselves. At best, firms within a cluster act independently. Empirical reality appears to favor this assumption.

36

Chapter 3

may persist with the strategy. The firm will obtain transient market power in its dealings with the consumers. However, it is incurring a cost that does not maintain or increase the value of v. In other words, its market power is due to its market share alone. (c) Another case may also arise. The consumers find that their choice informs them about the value of the product but the firm does not derive any market power advantage in its interaction with rival firms. The firm may continue using such a strategy. Some firms may find it advantageous to stabilize their market shares, based on consumer loyalty, even if they are low. The firm has a transient market power advantage due to rival reactions. If case (a) arises, the increases in v and/or s provide the firm its market power. It need not depend on transient market power. Case (b) suggests that it should discontinue choices that do not appeal to customers so long as they do not lose market share advantages. The most likely scenario is (c). Firms may develop and utilize other strategies to gain market shares that will then be supported by the consumer valuation of products. The market power index IS considered taking advantage of the reactions of rivals as the major concern of the firm. The alternative of a market power index J based on the consumers’ valuation of the different strategies of the firms should be considered as well. Both these measures will be important in offering guidance to the management towards their aim to maximize market power and eliminate the need to depend on transient market power. The only practical method of constructing the alternative index J is to proceed in two steps: (a) firms initiate their strategies in the first instance based on their objectives, and (b) the consumers evaluate such strategies and react to them by either considering them as efficient or ignoring them as of no value to them. Two possibilities can be visualized. (a) J > IS indicates the firm’s preference to a higher value of v even if s does not change. (b) IS > J suggests that, at least in the short run, the firm prefers to stabilize its market share though it only has transient market power in its relationship with the customers. The ideal to strive for is the case where I = IS = J. It is possible if there is a convergence among the viewpoints of the consumers, the firm, and the rival firms. It arises only when the choices of the firm prove their efficiency w.r.to their relations with the consumers on the market as well as their interface with rival firms. The possibility that firms with low market shares continue operations in the market can be explained along these lines. Transient market power will be eliminated in the long run if the strategic choices of firms and consumer valuations stabilize the market shares of firms at the intrinsic value of the firm’s products. In most stochastic disequilibrium states, that arise dynamically, the costs exceed efficient levels.

Theoretical Considerations

37

Consider the intrinsic value of the products of firm i and the ability of strategy j to reflect it. Postulate that sij* corresponds to the share of j reflecting this. However, the firm may utilize sij  sij* for a variety of reasons. The perspective of consumers regarding such choices can be examined thus: (a) If sij < sij* the elimination of such a strategy will not reduce their valuation of the products. (b) Suppose sij = sij*. The choice of j corresponds to the consumer valuation of products. (c) sij > sij* may indicate the possibility of the firm using an inefficient choice k  j. (d) Observe that consumers do not generally place any value on some strategies. Hence, firms attempt to shift the market power they expect from such strategies to others. This will improve the efficiency of their strategic choices by eliminating those that the consumer ignores. The consumer considers it as transient market power. (e) The consumers’ choices can eliminate transient market power. The excess of market power attributable to strategy j may then be conceptualized by defining the intrinsic market power by nij = vi [ sij2 - ™K sik2 / (N- @ Or, equivalently, the intrinsic value of sij can be represented as sij* = sij - ™K sik2 / sij (N-1) since nij = vi sij* sij The market power of firm i, based on its valuation by the consumers, can be specified as Ji = vi ™j Qij / ™j sij , where Qij = sij2 - ™K sik2/(n-1)

Chapter 3

38

This will be the alternative to ISi as the market power of firm i 28. The transient market power of firm i will be Ti = vi ™K sik2 / (N-1) ™j sij The following observation is pertinent. Since Qij > 0, for at least one value of j, it follows that Ji > 0 for all i 29. Detailing some special cases would be instructive. First, let sij = 1 for the specific j under consideration and = 0 for all other j 30. Then, Ji = vi indicating that the valuation index reduces to the well-known measure of market power. Second, let sij = 1/N for all j. In this context, Iij and Qij reduce to zero. In other words, equal weightage to all non-price choices will not yield any advantages to the firm. Third, suppose sij = sij* for all j given i. That is, the strategies are chosen merely to convey the value of products to the consumer. In such a case, the valuation of the firm reduces to zero. These indices reflect the intuition underlying Posner’s conjecture. The hypothesis about the relationship between si and Type I vs. Type II choices cannot be inferred, based on a similar theory, since the relationship between sij and si is not readily available. This will remain an empirical question.

3.5. Theory vs. Reality Some aspects of the differences between theory and reality that were sought to be integrated may be detailed here. First, firms tend to focus on the dynamic stability of the valuation index by changing their non-price 28 Observe that this approach will make some values of j for each firm redundant as generators of value of the products. 29 Exceptions may arise if the estimated value of v < 0. i 30 Brander and Zhang (1983) and Yamin et al (1999) pointed out that a firm adopting two or more strategies may perform better than one utilizing a single strategy. Consider two strategies j and k that are complementary. The consumers may assign weights wj and wk to them. In such a case considering sic = wj sij + wk sik as a single strategy would be the best way to proceed. It should now be recognized that even if si = 1 and si of any alternative is 0, Ji = 1 would imply that pursing strategies j and k in tandem would be superior to either one of them used in isolation. The result of Yamin et al should be interpreted with this in perspective. A similar argument applies if a product is valued for two or more attributes and strategies need to be designed to inform the consumer about all of them.

Theoretical Considerations

39

strategies. Second, the introduction of non-price strategies of firms signals that profit maximization, or maintaining a stable market share, is not the sole objective that they pursue. Third, as a practical reality, the products of every firm have specific value to the consumers, and as such, firms have some stability of market shares and inelasticity of demand. Similarly, it is unlikely that efficient non-price choices can realign C, S, and Ȟ such that v = 1 – Ȟ C/S = 0. Hence, transient market power measures based on v and s will not tend to zero. Fourth, difficulties in economic theory changing to accommodate the reactions of firms to the randomly changing structure of consumer values have been specified. The environment that firms confront, including consumer valuation and rival reactions, is perforce stochastic. Firms adopt variations in strategies dynamically. Such changes are the essential source of the market power of firms. However, economic theory is too slow to absorb such possibilities into its mainstream discourse. Irrespective of the relationship between IS and J, every firm will have some transient market power. It will be eliminated only if I = IS = J. This will come about only when the firms and consumers recognize the requirements of each other and act accordingly. The rivalry, between firms and the operation of markets, has a minimal role in this convergence.

CHAPTER 4 HALL’S MEASURE

4.1. Lerner Index Consumers generally allocate their budget, to different goods and services they buy, based on their preferences. Consumers’ valuation of the products of different firms determines such preferences. The experiences of the consumers in the use of the products of a firm account for the persistence of demand over time. The ensuing loyalty of consumers results in the implied inelasticity of demand. The market power of a firm can be generally conceptualized to depend on this inelasticity of demand. The measurement of the implied market power and its manifestations in empirical practice constitute the basic theme of this chapter. It will be presumed throughout this chapter that each firm has a unique demand curve in its interface with the consumers. The Lerner measure then determines the market power of each firm. The Lerner measure of market power, viz., v = (p - MC)/p = Ș is a static concept. As noted earlier, several assumptions, that are not valid in empirical settings, underlie the specification. In general, v is not a function of Ș alone. Instead, it depends on various other factors. In particular, (1) Firms cannot and do not maintain a constant price-cost margin over time. In general, it cannot be expected to depend on the elasticity of demand alone. The reactions of rivals and the implied shifts in the position of the demand curve of the firm account for it. Hence, market shares are a determining factor in the observed market power

Hall’s Measure

41

of firms 31. Rival reactions may not allow firms to maintain a constant v. (2) Price setting by firms does not uniquely determine the quantity demanded. It depends on the choices of rival firms in addition to consumer preferences based on their valuation of products of a firm. As a result, cross-price elasticities matter in determining the market shares of firms. (3) Production conditions are dynamic. The changes in the factor markets, the efficiency of managing operations of the firm, including the technology embodied in its capital assets, and the financial arrangements necessitated by markets external to the firm determine them. It may not be possible to markup prices as the Lerner measure stipulates. (4) A part of the market power arises from the interaction of firms with consumers on the market. However, some of it may be due to their reactions to rival actions. Sudden, and perhaps unexpected, changes in demand and/or costs of production and distribution alter v. Hall’s measure alerted analysts to some of these features. The details related to specific firms in an industry and variations over time and across firms are difficult to disentangle. However, the contribution of the proximate causes that result in changes in the Lerner measure can be identified.

4.2. Hall’s Variation A variant of Hall’s measure of the Lerner index is utilized throughout this study. The basic argument is that Hall’s measure is not an immutable constant. An attempt will be made to trace the changes and the empirical evidence for the expected patterns. In general, it does not uniquely represent the relationship of the firm with the consumers. Recall that v = 1 - Ȟ (C/S) where C and S are the cost of production and revenue from the sale and Ȟ is the elasticity of C w.r.to S. Algebraically, this measure changes over time for variations in any one or all the three parameters that it involves. 31

The market power of a firm must be defined over a volume of sales and not exclusively as a per unit of sales measure. Shifts in the demand curves of a firm may be accompanied by changes in the elasticity as well.

42

Chapter 4

However, Ȟ remains a constant since it is measured for each firm based on time series. The value of v for any one firm depends on the nature of economies of scale and scope. Diseconomies of scale will reduce it temporally. In practice, the market conditions for the inputs, the loyalty of the workers, and the efficiency of managing the organizational processes account for the costs of production. Hence, autonomous changes in costs reducing the value of v may be expected. Similarly, the strategic choices of the firm and its rivals determine the position of the demand curve. Significant decreases in sales may also render v < 0. The general expectation in textbook economics is that a firm that maximizes profit will cease to function if the sales revenue is below the variable costs. But the practical reality is that the firm may continue its operation for some time in the hope that it can turn the situation around in its favor. A negative value of v is likely. Indeed, as Fig.1.1 in Chapter 1 indicated, there is a possibility that the market share achieved may be less than the expected threshold value. Such contexts suggest that the firm may make attempts to increase its market share to stay in business. The firm will have a larger market share if the elasticity of demand is high. In general, a negative correlation between v and s will be expected. However, the above argument suggests that a high elasticity of demand is not the only source of a reduction in v. Similarly, an increase in s may be purely for autonomous reasons. The negative relationship between v and s may not materialize in practice. This can be tested empirically. Turn to the assumption that the market is a homogeneous oligopoly. Given the variety of products available on the market, it appears unlikely that a single demand curve will govern the choices of consumers. However, it does appear plausible that firms in the market experience distinct costs of production. Two logical conclusions emerge. First, firms experiencing greater economies of scale will have flatter cost curves and this results in larger market shares. The first hypothesis will then be s = s Ȟ  s1 < 0 (where s1 is the derivative of s w.r.to Ȟ and the second hypothesis is that s = s &6  s1 < 0. It is also possible to verify these hypotheses empirically. Theories that postulate a homogeneous oligopoly develop some other patterns of behavior which are logically consistent (and verifiable empirically). However, this cannot be proof that the assumptions are relevant. Perhaps some other theory, based on alternative assumptions and perfectly logical

Hall’s Measure

43

analysis, could lead to the same conclusions. The assumption of a homogeneous oligopoly cannot be justified as a practical alternative even if it is difficult to arrive at such theories. Another dimension of the nature of products should be emphasized. Most industries, such as electronics, machinery, and metals, do not offer products that have value by themselves. For example, a TV set is only as good as the programs on offer. Similarly, the internet connectivity and the application to which the device is used determine the value of a computer or a mobile phone. The upstream production activities condition the demand for such products and/or their elasticity of demand. Turn to the costs of production. The general expectation is that a firm with a lower market share will have unfavorable conditions in the factor markets. In such a case v may be lower than that indicated by the elasticity of demand alone. Inputs utilized by small firms may be qualitatively different in a realistic setting. They may also have market advantages in the purchase of such inputs. The net effect on v remains ambiguous. It would be difficult to assign any strict relationship between s and v in practice. Observe that most firms depend on external borrowings to finance their activities. The borrowings are not necessarily related to the volume of production. Instead, some long-term borrowings may be necessitated by the acquisition of fixed assets. In such contexts, the costs incurred in financing the activities of the firm may not be strictly related to the volume of sales let alone exhibit constant returns to scale. This is another aspect of the measurement of v that may not correspond to the conventional expectations. A composite market power index that takes both the effects of v and s may turn out to be high even for low values of v. The position of the demand curve matters in specifying the profits accruing to the firm. In general, market share maximization may be added to profit maximization as an objective of a firm. Many conventional expectations may not be valid in any realistic market setting.

4.3. Empirical Results 4.3.1. Textiles Consider the findings for the entire sample. The usual assumption that the market is a homogeneous oligopoly implies that the v measure for all the firms will be the same. However, note that the values of v are not the same

Chapter 4

44

across firms in the sample. Second, acknowledge that the market share will be high if the cost curve is flat Ȟ < 1). A negative correlation between both Ȟ and s and v and s will be expected since the differences in costs alone are expected to be the source of changes in market shares 32. A perusal of the data in Table 4.1 suggests that Ȟ is not a constant for all firms though many values are close to unity. That neither Ȟ and s nor v and s are negatively correlated offers convincing proof of this proposition. See Fig.4.1. Table 4.1: Textiles (Ȟ&6 YV Name Aarvee Denim Alok Industries Amarjyoti Ambika Textiles Arex Industry Arvind Ltd Ashnoor Tex BSL Ltd Bengal Tea Cheviot DCM Ltd Damodar Ind Eurotex Garware Tech Ginni Silk Ginni Filaments HP Cotton Hissar Spinning Indian Card Indo Count JCT Ltd JJ Exporters KG Denim Kallam Textiles Kamadgiri

Ȟ 1.0113 1.0302 1.0041 1.0067 1.1324 1.0245 1.0015 1.0263 .9831 1.0364 1.0063 .9987 .9864 1.0140 .9465 1.0173 .9346 .9250 1.0699 .9847 .9690 .9555 1.0195 1.0137 1.0221

C/S .9544 .9105 .8653 .8210 .8440 .8556 .9750 .9360 .9386 .8610 .9415 .9597 .995 .9267 .9128 .9436 .9656 .9198 .9284 .8957 .9633 .9145 .9694 .9367 .9769

v .0349 .0621 .1311 .1735 .0403 .0928 .0235 .0394 .0698 .1077 .0526 .0415 .0162 .0603 .1360 .0402 .0976 .1492 .0067 .1180 .0666 .1263 .0117 .0505 .0015

s .0096 .2931 .0026 .0068 neg .0681 .0013 .0050 .0029 .0035 .0075 .0077 .0037 .0103 neg .0110 .0012 neg neg .0212 .0133 neg .0077 .0033 .0034

32 It must be noted that the values of s were calculated for all the firms in the original data set chosen. However, some firms had to be subsequently eliminated due to missing data. The s values have not been recalculated. Hence, the sum of the reported values of s may not add to unity.

Hall’s Measure

Kandagiri Lakhsmi Mills Loyal Textiles Maharajashree Maral Overseas Mayur Minaxi Mohit Mohota Nahar Industries Nahar Spinning Orbit Exports PBM Polytex Pranavaditya Premco Global RLF Industries RSWM Raghbir Synthetics Rajapalayam Reliance Chemotex Ruby Mills Shri Nachammai Suryalakshmi Suryalata Suryavashi United Textiles Vardhman Textiles Vippy Spinpro Welspun India Winsom Textiles Wires & Fabriks Shree Bhavya Season Textiles Shri Dinesh

1.0424 .9106 1.0281 .9235 .9776 .9638 1.0473 .9947 1.0155 1.0157 1.0382 .8900 1.0044 1.0208 .9051 .9515 1.0070 1.0001 1.085 1.0011 .7532 .9644 1.0116 .9859 .9591 1.0420 .9545 1.0044 .9851 .9926 1.0353 1.0100 .9338 .8834

.9505 .9558 .9365 1.0186 .9296 .8589 .9349 .9724 .9803 .9451 .9380 .7927 .9340 .9784 .8040 .7695 .926 .9386 .9170 .9464 .6470 .9780 .9355 .9413 .9813 .9588 .8629 .9417 .8275 .9432 .9126 .9880 .8855 .8668

45

.0093 .1297 .0372 .0594 .0913 .1721 .0209 .0327 .0045 .0401 .0262 .2945 .0620 .0013 .2724 .2678 .0650 .0448 neg .0526 .5256 .0568 .0537 .0720 .0587 neg .1764 .0542 .1848 .0639 .0552 .0021 .1771 .2343

.0026 .0029 .0185 .0063 .0085 .0073 neg .0034 .0041 .0236 .0280 .0021 .0028 neg neg neg neg neg .0051 .0032 .0026 .0021 .0093 .0051 .0014 neg .0748 .0012 .0604 .0086 .0014 .0032 neg .0011

Notes: All the cross-section tables hereafter are for the year 2015. Neg - negligible

By the nature of the method of measuring v, a high Ȟ or C/S implies lower values of v. Almost invariably Ȟ > 1 and diseconomies of scale explain low values of v. Some firms, like Maharajashree, Super Spinning, and

Chapter 4

46

Vardhman Polytex had values of C/S > 1. In general, the capital assets were financed by external borrowing. This resulted in a high value of C though S did not match the increases in fixed assets. The reasons for specific sales values of firms are rather distinct from the values of their fixed assets. Similarly, it was noted that the increase in costs was quite unrelated to that in sales at least for some firms. The impact of external factors, like the availability of raw materials and their prices, cannot be ruled out. The possibility is that the costs of borrowing explain several of the difficulties of C exceeding that justified by sales volumes. The market for the products Figure 4.1: Textiles YV 1.2

1

0.8

0.6

0.4

0.2

0 1 3 5 7 9 11131517192123252729313335373941434547495153555759 Legend: Blue Ȟ Orange C/S, Grey v, and Yellow s

of these firms are mostly localized perhaps due to logistic costs of supply to markets and the inability of firms to increase prices commensurate with those implied by higher costs (indicating that v is also a result of the

Hall’s Measure

47

competitive pressure on pricing that cannot be maintained as indicated by the price-cost margins). Consider the time-series evidence. Table 4.2 reports correlations between Ȟ and s as well as v and s across all firms in the sample for every year between 2001 and 2017. The most significant inference is that the expected negative correlation does not materialize. Figs.4.2-4.5 provide the time-series evidence regarding two representative firms. The negative correlation between v and s can be observed only after 2011 for Alok industries. After 2013 the increase in S had no significant effect on C/S until 2015. After 2010 there are indications of an autonomous increase in costs that cannot be explained by the increase in sales alone. The reduction in s appears to be the primary reason for the increase in C/S for the last two years. Similarly, the increase in net fixed assets indicates that the firm also had short-term borrowing requirements based on its production and sales. The trend in sales explains the steep increase in borrowings after 2014. The firm considered Table 4.2: Textiles: Correlations Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

&RUUȞV .038024 .037260 .083421 .042863 .031533 .019101 .060106 .039496 .058858 .048625 .024091 .063056 .066483 .058917 .063272 .076369 .077774

Corr(v.s) -.17071 .00681 .051182 .010000 .036845 .038416 .042443 .102893 .067095 .034143 .055288 .118510 .029220 .059041 .045435 -.090673 -.249885

48

Chapter 4

Figure 4.2: Textiles – $ORN,QGXVWULHVYV&6

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Legend: Blue v, Orange s, and Grey C/S

continuing its operations over time in preference to generating profits. The case of Welspun offers a contrast. The increase in sales after 2010 was significant as suggested by Fig.4.2. There is a positive correlation between v and s. Further, the decrease in C/S was primarily due to the increase in sales after 2011.

Hall’s Measure

49

Figure 4.3: Textiles: Alok Industries 6DOHV %RUURZLQJV and 1)$ 300000

250000

200000

150000

100000

50000

0

Legend: Blue NFA, Orange Borrowings, and Grey Sales

Suppose consumers develop brand loyalty for one of the products. There will be an increase in the inelasticity of demand and v tends to be larger. It will be expected that v does not decrease over time and perhaps s increases since such loyalties cannot be eliminated. Welspun exhibits both these trends over time. However, there is no similar evidence for Alok Industries. Brand loyalty may be the source of the observed outcome for Welspun. It is still necessary to examine the strategies of the firm that explain it. Recall that Set 1 for Textiles was constructed to examine whether a subset of firms in the entire sample may be competitive among themselves. See Table 4.3. Fig. 4.6 suggests that neither Ȟ vs. C/S nor v vs. s offered any significant negative correlation. Fig. 4.7 presents the sales, borrowings, and NFA. They also indicate that there is a positive correlation between Ȟ and s for both HP Cotton and Shri Dinesh. Refer to Fig.4.8 and Fig.4.9.

50

Chapter 4

The conclusions for this industry can now be summarized. First, there is clear evidence that markets do not correspond to a homogeneous oligopoly. Differences in products across firms are substantial. Second, the evidence regarding the lack of a negative correlation between v and s reinforces the above inference. Third, contrary to the expectations of the Lerner index, changes in costs could not be passed on to the consumers. Fourth, unexpected fluctuations in costs and/or sales necessitated changes in borrowings to maintain net fixed assets. These firms generally considered survival in the long run as more important compared to profit maximization over the short term. Hence, examining the variations in nonprice choices based on the differences in v would be necessary to obtain a better appraisal of the performance of these firms. Figure 4.4: Textiles: Welspun 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Legend: Blue v, Orange s, and Grey C/S

Hall’s Measure

Fig. 4.5. Textiles – Welspun 6DOHV %RUURZLQJV 1)$ 70000 60000 50000 40000 30000 20000 10000 0

Legend: Blue NFA, Orange Borrowings, Grey Sales

51

52

Chapter 4

Table 4.3: Textiles – Set 1 Ȟ &6 Y V Name APM Industries Aarvee Denim Amarjyoti Spinnin Cheviot Eurotex industrie Garware Technic Ginni Filaments HP Cotton Kanadagiri Spinni Lakshmi Mills Loyal Textiles Mayur Uniquoter Minaxi Textiles Mohota Industrie PBM Polytex Reliance Chemot Sambandam Spi Season Textiles Shree Bhavya Shri Dinesh Suryalakshmi Co Suryalata Spin Suryavamshi Spi Wires & Fabriks

Ȟ .9469 1.0112 1.0041 1.0364 .9864 1.0140 1.0173 .9346 1.0424 .9106 1.0281 .9638 1.0473 1.0155 1.0044 1.0011 1.0212 .9338 1.0100 .8834 1.0116 .9859 .9591 1.0353

C/S .9267 .9544 .8654 .8610 .9975 .9267 .9346 .9656 .9505 .9558 .9365 .8589 .9349 .9802 .9340 .9464 .9342 .8855 .9880 .8668 .9355 .9413 .9813 .9126

v .1255 .0349 .1311 .1077 .0162 .0603 .0404 .0976 .0093 .1297 .0372 .1721 .0209 .0045 .0620 .0526 .0461 .1731 .0021 .2343 .0537 .0720 .0588 .0552

s .0272 .0641 .0176 .0235 .0245 .0690 .0737 .0080 .0173 .0196 .1240 .0488 .0048 .0278 .0191 .0211 .0212 .0034 .0215 .075 .0625 .0344 .0094 .0094

Hall’s Measure

53

Figure 4.6: Textiles - Set 1 YV&6 1.2

1

0.8

0.6

0.4

0.2

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Legend: Blue Ȟ Orange C/S, Grey v, and Yellow s

Chapter 4

54

Figure 4.7: Textiles – Set 1 6DOHV %RUURZLQJV and 1)$ 16000 14000 12000 10000 8000 6000 4000 2000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Legend: Blue NFA, Orange Sales, Grey Borrowing

Hall’s Measure

55

Figure 4.8: Textiles – Set 1 (HP Cotton and Shri Dinesh: Y V &6 1.2

1

0.8

0.6

0.4

0.2

0

Legend: HP Cotton – Blue v, Orange s, Grey C/S, Shri Dinesh – Yellow v, Light Blue s, Green C/S

56

Chapter 4

Figure 4.9: Textiles – Set 1 (HP Cotton and Shri Dinesh; 6DOHV %RUURZLQJV and 1)$ 1200

1000

800

600

400

200

0

Legend: HP Cotton – Blue NFA, Orange Borrowings, and Grey 6DOHV Shri Dinesh – Yellow NFA, Light Blue Borrowings, and Green Sales

4.3.2. Machinery Turn to the evidence for Machinery based on the cross-section of firms. The following observations are pertinent. (1) An increase in v signals greater consumer loyalty and a decrease in the elasticity of demand. However, there is a reduction in the market share. The shifts in the demand curves are more prominent compared to the changes in the elasticity of demand. The use and users of the products of different firms are not the same. Substitutability and cross elasticity of demand is low. Similarly, Table 4.4 indicates that Ȟ is not a constant though it is close to unity for most firms. A negative correlation between v and s will be expected if the differences

Hall’s Measure

57

Table 4.4: Machinery Ȟ &6 Y V Name

Ȟ

C/S

v

s

ABB India ABC Bearings Austin Engg Axtel Ind BEML Ltd Bosch Ltd Cenlub DHP India Elecon Eng Elgi Equipments Escorts Federal-Mogul Hittco ITL Ltd International co Johnson Contr Kabra Extru Kirloskar Bros Kulkarni Power Manu Graph Mazda Menon Bearing Menon Piston NRB Bearings Polymechlast Praj Industry Rajoo Engg Rexnord Shakti Pumps Shilp Gravuers Siemens Solitaire Timkin India Trinton Valves United Drilling Veljan Denison WPIL Ltd Yukin India

1.0195 .9222 .9603 1.0099 .9969 .9989 1.0159 .9145 .9758 1.0002 .9918 1.0150 .9366 .9945 .9470 .9758 .9977 1.0051 1.0180 .9303 .9938 1.0184 .9918 1.0244 .9527 .9783 .9953 1.0146 .9702 1.1426 .9879 1.0336 1.0182 1.0088 .9133 .9909 .9763 1.017

.9513 .9176 .9591 1.0922 .9766 .8655 .9427 .8165 .8446 .808 .9741 .9347 .9926 .9475 .9506 .9320 .8993 .9574 .9568 1.0292 .8930 .8577 .9353 .8844 .9688 .8817 .9325 .9307 .8880 .8323 .8732 .8806 .8997 .9244 .7181 .7989 .9186 .9742

.0301 .1539 .0790 1 in the context of most firms, have a prominent role in explaining the lower values of v. Similarly, the correlation between Ȟ and C/S being negative indicates that increases in C/S explain the reduction in v. Companies like Blue Star, IP Rings, Kilburn Engineering, and Walchandnagar Industries experienced Ȟ > 1 and the cost increases accounted for v < 0. (3) Note that lighter and durable materials have been creating competition for products of the Machinery industry. That is, competition from firms in a related industry accounts for the reduction in demand experienced by these firms. The reductions in v are a result of financing capital assets by borrowing and the sales not keeping pace with increases in C. It was noted that the increase in costs was disproportionate to sales for some firms. The effect of autonomous factors, i.e., unrelated to production and distribution of the products of the firms, may be inferred.

Hall’s Measure

59

(4) Competitive pressure is the primary reason why prices do not correspond to cost increases as expected by the Lerner measure. The time-series evidence for both Bosch and Shilp Gravures indicated a steady market share. v moved inversely with C/S though the fluctuations in it were relatively minor. Sales were increasing from 2008 and reduced the pressure on borrowing. The increase in sales for these firms suggests that competition from firms substituting lighter materials and adopting standardization did not have any significant effect on these firms. On the other hand, the experiences of Escorts and BEML were different. Escorts experienced a fluctuating and somewhat downward trend in s whereas BEML had a steady decline in s. The trends indicate that the fluctuations in v were not just a result of the reduction in sales. Even the cost increases they experienced contributed to the reduction in v.

4.3.3. Minerals and Metals Observe from Table 4.5 that v is not the same for all firms. Suppose the differences between firms are only due to costs. A negative correlation between Ȟ and s and v and s can be expected.

60

Chapter 4

Figure 4.11: Machinery: Bosch Ltd YV&6

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Legend: Blue v, Orange s, and Grey C/S

Hall’s Measure

Figure 4.12: Machinery – Bosch Ltd 6DOHV %RUURZLQJV and 6DOHV 140000 120000 100000 80000 60000 40000 20000 0

Legend: Blue NFA, Orange Borrowings, and Grey Sales

61

62

Chapter 4

Figure 4.13: Machinery – Shilp Grauvers Y V &6 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Legend: Blue v, Orange s, and Grey C/S

Hall’s Measure

Figure 4.14: Machinery – Shilp Grauvers

800 700 600 500 400 300 200 100 0

Legend: Blue NFA, Orange Borrowings, and Grey Sale

63

Chapter 4

64

Figure 4.15: Machinery – Escorts and BEML si and vi 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

Legend: Blue Escorts si, Orange Escorts vi, Grey BEML si, and Yellow BEML v Table 4.5: Metals (Ȟ &6 Y V Name Alicon Asiana Balsore Bhagwati Carnation Cubex Gujarat Foils Hindustan Tin Hissar Metals

Ȟ 1.0224 .9990 .8209 .9356 1.0224 .6943 .9971 .9852 1.0100

C/S .9393 .9886 .9578 1.0100 .9676 .9695 .9604 .9532 .9891

v .0397 .0124 .2137 .0550 .0108 .3269 .0424 .0610 .0010

s .0025 .0010 .0030 .0003 .0004 .0002 .0018 .0012 .0008

Hall’s Measure

India Steel Indsil Hydro Inv&Precision JSW Steel Jaiswal Jindal Kalyani Kanishk Kirlo Ferrous Magna Mahalakshmi Maharastra Man Industries Mukund Oil Country PG Foils Pachmahal Pennar Rapicut Ratnamani Sarda Shetron Shiv Agro Shivalik Simplex Shrikalahasti SAIL Sunflag Suraj Suryaroshni TI Financial Tata Metaliks Tata Steel Tinplate Uttam Galva Vardhman Welspun

.9399 .9460 1.0420 .9830 .9620 1.0049 .9823 .9968 1.0367 1.0354 .9367 1.0075 .934 .9346 .3658 1.0134 .9501 .8494 .9538 .9756 1.0469 .9618 .9875 1.0079 .9890 .9351 .9723 1.0242 .9953 1.0084 1.0142 1.0552 .9916 .9584 .9897 .9788 .9999

.9734 .8782 .9226 .8948 .9685 .9159 .9189 .9899 .9294 .9037 .9609 .8933 .9327 .9756 .9377 .9731 .9933 .9586 .9338 .8709 .9163 .9507 .9599 .9105 .9535 .8845 .9302 .9655 .4432 .9644 .9462 .9201 .8158 .8760 .9637 .9703 .953

65

.0851 .1692 .0386 .1204 .0701 .0796 .0974 .0133 .0366 .0643 .1000 .1000 .0734 .0883 .6664 .0138 .0563 .1858 .1094 .1503 .0407 .0856 .0521 .0824 .0570 .1729 .0956 .0111 .0584 .0275 .0404 .0292 .1910 .1604 .0463 .0503 .0419

.0020 .0004 .0003 .1734 .0114 .0237 .0053 .0011 .0053 .0004 .0007 .0050 .0048 .0108 .0009 .0001 .0015 .0033 .0002 .0052 .0052 .0006 .0009 .0004 .0007 .0039 .0028 .0067 .0008 .0104 .0142 .0042 .0048 .0032 .0254 .0011 .0176

66

Chapter 4

Figs. 4.16-4.17 do not support these hypotheses. It is not possible to analyze the market power of firms in the industry assuming a homogeneous oligopoly. The features underlying the behavior of v for these firms may now be taken up. Note that Ȟ > 1 is always an indication that v may decrease over time with the possibility of v < 0 on occasions. Referring to Table 4.5 this can be observed for Alicon, Carnation, Hissar, and others. High sunk investments induced borrowings for firms like JSW Steel, Jindal, Mukund, and SAIL. Refer to Table 4.6. However, such investments did not correspond to commensurate increases in S. This resulted in an increase in C/S which explains a reduction in v. Increases in borrowing explain the increases in cost over and above those necessitated by S. Similarly, the increases in C/S, which do not have a strict relation to the changes in S, signal the possibility of autonomous increases in costs. The markets for the products of many firms are localized (primarily due to the high transportation costs required to move them across regions). Further, the competitive nature of the firms indicates that such cost increases could not result in the price-cost margins implied by v and thus its value is reduced. Turn to the evidence from the time series. For Tata Steel, there is a positive relationship between v and s though after 2013 the relationship is somewhat negative. There is no indication of a reduction in sales and market share. The only possible explanation is that they experienced autonomous increases in costs. The firm was attempting an increase in its net fixed assets since 2003 though net borrowings were not increasing. The context of JSW Steel was somewhat different. v exhibited a declining trend for much of the time though there was a steady increase in the market share. There is a clear indication that the firm experienced autonomous increases in costs of production. The attempts of the firm to increase sales by improving its net fixed assets resulted in increased borrowings since 2013. Note that the increase in S was far more significant compared to the trend in NFA as reflected in Figs. 4.18- 4.19. The increases in borrowings at a faster rate than NFA also suggest that a part of the borrowing is to finance operating expenses and costs of production. Fig.4.20 indicates that the firm experienced some relief in its borrowings due to an increase in s, and therefore S as in Fig. 4.19.

Hall’s Measure

67

Figure 4.16: Metals Y V &6 1.2

1

0.8

0.6

0.4

0.2

0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 Legend: Blue Ȟ Orange C/S, Grey v, and Yellow s

Chapter 4

68

Figure 4.17: Metals 6DOHV %RUURZLQJV 1)$ 80000 70000 60000 50000 40000 30000 20000 10000 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Legend: Blue NFA, Orange Borrowings, and Grey sales

Table 4.6: Metals 6DOHV %RUURZLQJV and 1)$ S.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

NFA 1701.1 92.9 9344.2 176.8 130.6 201.5 1207.3 712.4 147.3 2481.7 374.7 409.3

Borrow 1521.3 627.0 1163.2 66.2 346.8 51.5 1792.9 1044.3 704.6 746.3 263.4 307.4

Sales 6402.5 2631.0 8474.9 645.0 978.6 557.9 4862.3 3176.0 2238.6 5260.5 1110.4 766.7

Hall’s Measure

13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46.

385694. 14010.9 272151.0 4424.0 162.7 5418.5 409.4 68.2 11643.5 3535.3 24475.6 2796.9 179.5 1160.2 2147.9 48.9 4247.5 6896.3 668.2 79.7 347.4 786.5 4873.0 360926.0 5702.4 740.3 9364.7 9042.5 2001.2 252485.0 6803.1 47007.1 776. 28076.2

281341. 4971.5 283148. 2186.3 53.1 1327.3 204.4 47.1 506.5 4426.7 26028.8 1498.5 1279.1 563.9 1506.5 28.9 388.4 5274.2 1068.8 81.7 441.5 686.1 4286.5 298977.0 4174.4 1296.0 9476.4 14207.4 2138.2 281984. 449.3 31322.1 994.7 40088.5

69

458911.0 29806.1 140501 12289.8 2907.4 13631.5 1051.4 187.2 13496.5 13639.9 28028.9 258.8 2506.1 3966.6 8279.1 381.8 16834.4 13478.6 1608.2 237.1 951.7 1676.7 10823.2 447864.0 16872.2 2339.1 28032.0 38105. 10940.9 408723.0 9273.2 69521.3 2833.4 49528.8

Chapter 4

70

Figure 4.18: Metals - JSW Steel 1.2

1

0.8

0.6

0.4

0.2

0

Legend: Blue C/S, Orange v, and Grey s

4.3.4. Steel Consider the evidence about the cross-section of firms. This group of firms is a subset of the Metals Industry. Quite clearly, v is not the same for all the firms. Refer to Table 4.7. It may be noted that the hypotheses about the correlation between Ȟ and s as well as v and s are not valid. Fig. 4.20 indicates that v and s are positively correlated contrary to expectations. Increases in S did not result in proportionately greater shifts in v even for high values of Ȟ The shifts in the demand curves are far more significant compared to costs. Ȟ and v are positively correlated. Hence, as before, it can be concluded that an analysis based on the assumption of a homogeneous oligopoly will not be useful.

Hall’s Measure

71

Therefore, it is necessary to examine the factors that explain the observed variations in v and s. Note that high investments resulted in an interest burden due to debt financing. It had the effect of increasing C. However, the increase in C do not appear to be significant as reflected in the increase in the C/S ratio. Further, increases in C/S are not strictly positively related to S. It implies that there have been autonomous increases in costs. The competitive nature of the firms is such that firms could not absorb cost increases by increasing prices as stipulated by the v index. The observed price-cost margins can be explained by the changes in the market shares resulting from the interface of the firms with rivals. Turn to the evidence regarding time series. For Tata Steel, there was a significant downward trend in v. Sales have been increasing steadily since 2005. Given a somewhat declining market share and prominent decreases in its net fixed assets, the firm maintained a steady increase in sales by increasing Figure 4.19: Metals – Jindal 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Legend: Blue C/S, Orange v, and Grey s

72

Chapter 4

borrowings to account for increased operating expenses. Similar patterns are discernible in the context of JSW Steel, Jindal Steel, and Kalyani Steels. Competition between firms within the industry cannot explain the reduction in the market shares. A decline in the demand for products in the Steel industry has been a result of the availability of lighter materials from related industries. From Figs. 4.21 and 4.22 it can be inferred that increases in NFA account for the increase in sales. The pressure on borrowings and costs reduced after 2014. In the earlier years, until 2007, Tata Steel depended on maintaining net fixed assets, controlling cash on hand/current liabilities, and taxes/total income. After 2008 they had to depend on cumulative retained profits to sustain net fixed assets and selling expenses/sales to maintain their brand image over the long haul. Their efforts were mostly to convince the consumers of their products to gain their loyalty and maintain market power. Consider JSW Steel and Jindal Steel. Fig.4.23 indicates that over time JSW Steel increased sales only by increasing NFA and Borrowings. Similarly, Fig.4.24 for Jindal Steel suggests that the increase in sales was not proportional to increases in NFA and Borrowings. On the other hand, as Fig. 4.25 suggests, Kalyani Steels experienced faster growth in sales compared to those in NFA and Borrowings. Kalyani Steels managed the current ratio, working capital/sales, and taxes/total income efficiently for much of the time until 2010. They managed to finance fixed assets by cumulative retained profits while maintaining an efficient fraction of retained profit/sales. The firm sparingly utilized selling expenses to promote its products. The process did not result in their achieving adequate market shares to enable them to exhibit any advantage in the short run. In sum, these firms could achieve shifts in demand curves and consequent increases in v despite competition from rival products replacing steel. Tata Steel experienced some reduction in its market share despite an increase in sales. It is crucially important to acknowledge that the increase in the market power was essentially due to shifts in the demand curves.

Hall’s Measure

73

Fig. 4.20: Metals – Steel Y V &6 1.2

1

0.8

0.6

0.4

0.2

0 1

2

3

4

5

6

7

8

9

10

Legend: Blue Ȟ Orange C/S, Grey s, and Yellow v

Table 4.7: Metals: Steel Ȟ &6 Y V s.no 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

name Ashiana Indian JSW Steel Jindal Kalyani Kanishk Panchmah Steel Auth Sunflag Tata Steel Uttam Gal

Ȟ .9990 .9399 .9830 1.0608 .9823 .9968 .9501 .9723 1.0242 .9916 .9897

C/S .9886 .9734 .9144 .9239 .9189 .9899 .9933 .9302 .9655 .8158 .9637

s .0015 .0030 .2544 .0775 .0078 .0017 .0022 .2700 .0099 .2340 .0372

v .0124 .0851 .1204 .0200 .0974 .0133 .0563 .0956 .0111 .1100 .0463

11

74

Chapter 4

Figure 4.21: Metals – Steel – Tata Steel and JSW Steel Y V 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

Legend: Blue Tata Steel s, Orange Tata Steel v, Grey JSW Steel s, Yellow JSW Steel v

4.3.4. Paper The Paper industry has been facing two challenges. First, there has been a decline in the availability of raw materials. This accounts for the autonomous increase in costs. Second, the digital revolution reduced the demand for paper significantly. Both these features explain a decrease in v. Further, these features made it necessary to manage inventories efficiently and increases in current liabilities and external financing have become a necessity. The estimates for the cross-section of firms, presented in Table 4.8, do not indicate a direct relationship between v and s. That is, factors, other than the elasticity of demand, account for the observed variations. However, there is

Hall’s Measure

75

no suggestion that larger firms experienced greater pressure on costs due to the shortage of raw materials or their prices. Fig. 4.26 exhibits a positive correlation between Ȟ and C/S. However, v decreases with increases in C/S and increases with lower Ȟ These results follow the expected trends. Turn to the time series evidence for Ballarpur and Tamilnadu Newsprint. Figs. 4.27 and 4.28 indicate that there is no significant trend in either v or C/S. Though the consumers’ valuation of the products of Ballarpur is high, as reflected in the values of v, their market share is decreasing over time due to difficulties in production, distribution, and lack of demand. Rivals did not consider competition to be important since the significance of Ballarpur declined after 2014. Figure 4.22: Metals – Steel: Tata Steel 6DOHV %RUURZLQJV 1)$ 800000 700000 600000 500000 400000 300000 200000 100000 0

Legend: Blue NFA, Orange Borrowings, and Grey Sales

Chapter 4

76

Figure 4.23: Metals – JSW Steel 6DOHV %RUURZLQJV and 1)$ 600000

500000

400000

300000

200000

100000

0

Legend: Blue NFA, Orange Borrowings, and Grey Sales

Hall’s Measure

Figure 4.24: Metals- Jindal Steel 6DOHV %RUURZLQJV and 1)$ 500000 450000 400000 350000 300000 250000 200000 150000 100000 50000 0

Legend: Blue NFA, Orange Borrowings, and Grey Sales

77

Chapter 4

78

Figure 4.25: Metals – Kalyani Steels 6DOHV %RUURZLQJV 1)$ 14000 12000 10000 8000 6000 4000 2000 0

Legend: Blue NFA, Orange Borrowings, and Grey Sales

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79

Table 4.8: Paper Ȟ &6 Y V Name Perfect Pac Yash Paper Star Papers Huhtamaki Tamilnadu Seshasaye AMJ Land NPAgarwa Rajeshwar Mohit South Ind West Coast 3PLand Cosboard Internation Ballarpur

Ȟ .9944 1.0308 1.0241 1.0286 1.0467 .9673 1.0252 1.0018 .9694 1.0150 .9749 1.0183 1.0070 .9840 1.0475 .7634

C/S .8342 .9412 .9568 .9153 .8683 .9488 .9177 .9994 .9329 .9507 .8906 .9276 .9823 .9304 .9517 .9298

v .1607 .0298 .0202 .0586 .0912 .0829 .0592 .0 .0956 .0351 .1318 .0555 .0109 .0845 .0031 .2902

s .0053 .0141 .0225 .0947 .1887 .0833 .0230 .0593 .0085 .0075 .0154 .1368 .010 .0033 .0945 .0370

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80

Figure 4.26: Paper Y V &6 1.2

1

0.8

0.6

0.4

0.2

0 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

Legend: Blue Ȟ Orange C/S, Grey v, and Yellow s

On the other hand, products of Tamilnadu Newsprint do not have a similar market presence as reflected in the low values of v. However, as indicated in Figs. 4.29 and 4.30, their efforts to improve their market have been successful. The firm aggressively sought a larger market share and improved its market power in the short run as well. Thus, borrowings grew at a slower pace despite increases in NFA. The steady value of C/S suggests that the firm did not have any difficulties with the markets for raw materials. The localized nature of markets may be the main reason for its being insulated from perturbations in markets.

4.3.5. Motor Vehicles Industry The problem, for most firms in the Motor Vehicle industry, is the diseconomies of scale in production. Consider the results for the crosssection of firms. Set 1 indicates that a high v does not deter firms from

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81

achieving a higher market share. A part of the reason may be the variations in costs of production. v and s are generally positively correlated. Time-series: After early setbacks, until 2008, Mahindra and Mahindra gained market share thereafter. However, its v values have been declining. It appears that they experienced disproportionate increases in costs in their quest to increase market shares. It is also possible that they could not increase prices proportionate to costs as suggested by the Lerner measure. In other words, the competitive pressure prevented it from doing so. For Ashok Leland, the valuation in the market and consequently v has been steady. However, the market shares have gone down due to competition from rivals. Amtek Auto had a steady increase in market share though it experienced significant increases in costs resulting in a reduction in v after 2009. Reductions in v cannot be attributed to competitive pressure since S Figure 4.27: Paper – Ballarpur 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Legend: Blue C/S, Orange v, and Grey s

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is increasing. For Gabriel, there is a positive relationship between v and s. It maintained progress in s as a well-known brand among producers of shock absorbers. However, the minor fluctuations in v suggest that the firm had experiences of autonomous cost shocks. Note that there was a steady increase in s and a slight decrease in v between 2008 and 2017. Sundaram Fasteners recorded constant values of s and v. Referring to Figure 4.31 it may be noted that s is increasing for Jay Bharat while it is declining for Sundaram. Jay Bharat has a steady v while the increases in v for Sundaram were slower than those in s. The shifts in demand were significant even in these cases. Figure 4.32 depicts a different trend. For Amtek a negative correlation between v and s is discernible. However, after 2004 the correlation for Maruti is positive. Maruti experienced pronounced shifts in the demand for its products.

4.4. Conclusion The following observations emerge from the analysis of this chapter. (a) It was generally observed that the implied inelasticity of demand was due to the valuation of products by consumers, repeat purchases, and consumer loyalty towards the products of a firm. However, the Lerner measure of market power, and its variant based on Hall’s modification, does not exclusively represent the effect of the elasticity of demand. (b) The elasticity of demand per se is an inadequate representation of market power. The price that a firm charges a consumer depends on competition from rival firms that may not allow each firm to mark its price up as the Lerner measure suggests. Price determination becomes important instead of the prices being set as given by the markup over costs. These choices perforce depend on the extent to which rival firms adjust their reactions. Dominant firms will not be required to reduce it by as much as others.

Hall’s Measure

Figure 4.28: Paper – Ballarpur 6DOHV %RUURZLQJV and 1)$ 30000

25000

20000

15000

10000

5000

0

Legend: Blue NFA, Orange Borrowings, and Grey Sales

83

84

Chapter 4

Figure 4.29: Paper – Tamilnadu Newsprint Y V &6 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Legend: Blue C/S, Orange v, and Grey s

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85

Figure 4.30: Paper – Tamilnadu Newsprint 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

Legend: Blue NFA, Orange Borrowings, and Grey Sales

(c) The Lerner measure refers to the market power per unit of sales. It was initially thought that price-cost margins are the sole desideratum around which firm behavior can be codified. However, the position of the demand curve and its share in the market for all related goods determine the total market power for a firm. Hence, the market power per unit sales in the entire market depends on the market share as well. Attempts to achieve higher market shares should be added to the theory to provide it some coherence with empirical reality. (d) The measure captures the effects of factors mainly outside the control of any firm. Thus, it is sensitive to the returns to scale in the production and distribution of products. Variations in costs may also be due to conditions in the factor markets and exigencies in product markets. Price determination essentially depends on the extent to which the firm must recover fixed and/or irreducible costs.

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Figure 4.31: Motor Vehicles: Jay Bharat and Sundaram 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Legend: Blue Jay Bharat s, Orange Jay Bharat v, Grey Sundaram s, and Yellow Sundaram v

Hall’s Measure

Figure 4.32: Motor Vehicles: Maruti and Amtek Auto 0.6

0.5

0.4

0.3

0.2

0.1

0

Legend: Blue Maruti v, Orange Maruti s, Grey Amtek s and Yellow Amtek v

87

CHAPTER 5 MARKET SHARES

5.1. The Premises Economic theory eulogizes the parsimony of assumptions while explaining an observed phenomenon. Thus, in the initial stages, the price was considered adequate to describe the behavior of firms. Subsequent analysis, based on a homogeneous oligopoly, retained the assumption of a single price but acknowledged that firms differ with w.r.to their production costs. Therefore, it was acknowledged that differences in market shares were necessary. A possibility, of obtaining larger market shares, while maintaining profit maximization, was considered. Changes in the position of the market demand for firms were expected to be the basic source. That firms do compete for market shares in their endeavor to maximize profits was acknowledged. Firms were expected to seek such changes while maintaining their price-cost margins. The assumption that each firm would have a stable, though distinct, demand for its products, due to the competition between firms in the market, was considered adequate. Consumers generally have an idea about the value of products when they buy them. Similarly, repeat purchases ensue when their use of the product reinforces this view. The resulting demand curve for the firm, which is postulated to reflect the valuation adequately, and the implied elasticity of demand tend to be stable. However, it can be expected, in markets with many competing products, that the market share of any one firm depends on the value of its products relative to those of rivals. In other words, the position of the demand curve, in addition to that bestowed upon it by the inelasticity of demand, has implications for the market power of a firm. The converse may also be true. Both the consumer valuation and market share may be a consequence of other choices of a firm. This chapter will explore the possibility that firms

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89

try to reduce the market power of rivals based on their market shares since there is no clear information about these cause-and-effect relationships. Rival firms will find it adequate to obtain as large a market share as possible. Firms with low market shares may attempt to obtain transient market power. However, a firm with a high v (and therefore a positive valuation in the minds of consumers) may survive in the market even if its market share is low.

5.2. The Measure The market power of the firm, per unit of sales of the entire industry, was represented as mi = visi2 in chapter 3. However, in practice, consumers expect that the realized si exceeds the si* corresponding to the intrinsic value of its products. For, as Fig. 1.1 suggests, the cost of doing so may be less than the increase in value that the firm obtains. Such a characterization can explain the efforts of the firm to capture as large a share of the market as feasible. It results in a redistribution of market power in its favor. It is, therefore, necessary to develop a specification of si* from the observed values of si for all the rival firms. Postulate that the firm usurps a part of the market power of a rival in its quest to increase its own. It may be conjectured that firm i tries to capture a portion vksk2/ (n-1) of the market power of the rival firm k. Hence, the market power that the firm can achieve, based on its intrinsic value of products, can be written as 33 ni = vi si2 - ™k vk sk2/ (n-1) Consequently, it can be inferred that si* = si - ™k vksk2/ visi (n-1). Note that the transient market power of firm i will be

33 The basic assumption underlying this formulation is that firm i reduces the market power of all other firms in equal proportion. There may be differences in practice. However, a reasoned and objective specification of the differences is difficult. Cynically stated, this formulation adopts the assumption of uniform ignorance. It must also be noted that this can be designated as a valuation index rather than that of the firm’s market power.

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Ti = vi si2 – ni = ™k vk sk2/ (n-1) based on this procedure. Note two important properties of this measure. First, in the context of markets of this nature, efficient markets may be characterized as those for which si = si* for all i. Consequently, ni = 0 for all i 34. The implication is that each firm is entitled to the advantage based on si*. The market is efficient if every firm gets its due. There will be no market power and/or transient market power in such an equilibrium. Second, suppose si = 1 for i and = 0 for all k  i. ni = vi confirming that the monopoly firm has market power equal to the Lerner measure in such a case. Note that a positive value of market power, as defined above, represents the actual deviation from si = si* for all i. In other words, the firm can be characterized as competitive if every firm realizes the potential value of its products. Only a few firms will have positive market power 35. It is equally important to recognize that transient market power results from a redistribution of market shares away from those obtained due to the intrinsic value of the products. As a result, the sum of all such transient market power indices must be zero. This follows readily from the observation that ™ ni = 0.

34 This can be proved in the following manner. Since s * = s - ™ v s 2 / n s (n-1), i i k k i i si* = si implies that ™ vk sk2 = 0. If this is valid for all i it can be concluded that visi2 = 0 for every i . Hence, it follows that ni = vi si * si = vi si2 - ™ vk sk2/ (n-1) = 0. 35 Consider ȡ2 = s (1-s )/ (n-1) ™ s 2 as the degree of possible substitution of i i i competitive products to that of firm i. For, (1-si) ™ sj can be taken as an index of substitution of rival products. It may be argued that the valuation of a product is high if the degree of substitution is low. Hence, (1-ȡ2) si may be viewed as the valuation of product i by the consumers. One advantage of using this method is that it provides a method of calculating the positive valuation of products by the consumers. The empirical experience has not been conclusive. A second alternative can also be conceptualized. For, consumers may assign a higher value to products that have been produced at a lower average cost. Hence, the inverse of the average cost of production of a firm can be designated as its valuation in the mind of the consumer. It may not be possible to fix one of these measures as superior to others on apriori theoretical arguments. The applied behavioral economics approach may have to come to the rescue.

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91

5.3. Empirical Results 5.3.1. Textiles Table 5.1 presents the results for a cross-section of firms in the Textile industry. The following observations are pertinent. The products of these firms are closely substitutable due to (a) the high cross elasticities among the products of different firms and (b) the lower transaction costs that the consumers need to incur while switching between products. As a result, firms cannot achieve higher levels of transient market power. Instead, every firm attempts to retain the loyalty of its customers while augmenting its market share. Such firms are utilizing higher market shares to signal the value of their products to consumers. Hence, the proportion of firms for Table 5.1: Textiles – Set 1 Name APM Ltd Aarvee Denim Amarjyoti Cheviot Eurotek Garware Tech Ginni Fila HP Cotton Kandagiri Lakshmi Loyal Mayur Minaxi Mohota PBM Reliance Sambandam Season Shree Bhavya Shri Dinesh Sryalakshmi Suryalata Suryavamshi Wires&Fabriks

v .1322 .0362 .1029 .0880 .0074 .0844 .0327 .0976 0 .1273 .0530 .2056 .0185 .0111 .0413 .0280 .0337 .1613 .0044 .2206 .0734 .0657 .0178 .0451

s .0272 .0641 .0176 .0235 .0245 .0690 .0737 .0080 .0173 .0196 .1240 .0488 .0048 .0278 .0191 .0211 .0212 .0034 .0215 .0075 .0625 .0344 .0098 .0094

m .00009 .00015 .00003 .00005 0 .00040 .00018 0 0 .00005 .00082 .00049 0 0 0 0 .00001 0 0 .00001 .00029 .00008 0 0

n .00005 .00011 0 .00001 0 .00025 .00018 0 0 0 .00055 .00038 0 0 0 0 0 0 0 0 .00017 .00005 0 0

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92

which n > 0 tends to be high. However, firms guard against the possibility that rivals reduce their market share. It accounts for the balance observed in practice. Consider the evidence from the time series. The relatively high values of s for Garware Technical Fibers indicate that it conveys a high value of products. As a result, the values of m and n are close to each other. That is, they do not seek high transient market power. See Table 5.2. The firm considers maintaining its valuation as superior to efforts to obtaining a higher transient market power. The inference is that other firms, for which n = 0, place a disproportionate emphasis on transient market power. Generally, such firms have low market shares and they do not have the financial resources to improve them consistently. That is, in comparison to the value of products they expect to generate, such firms also find the costs of seeking higher market shares to be too high. The preference of such firms is to maintain a stable but low market share. Table 5.2: Textiles – Set 1 – Garware Tech Fibers Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

v .0853 .1042 .0886 .0864 .0793 .0758 .0861 .0759 .0524 .0616 .0665 .0567 .0564 .0503 .0603 .0844 .1071

s .0475 .0456 .0495 .0482 .0543 .0589 .0677 .0781 .0791 .0691 .0558 .0624 .0584 .0595 .0690 .0762 .0802

m .00017 .00022 .00022 .00020 .00023 .00026 .00040 .00046 .00035 .00030 .00021 .00022 .00019 .00018 .00029 .00049 .00069

n .00009 .00015 .00009 .00008 .00012 .00012 .00029 .00044 .00035 .00023 .00010 .00021 .00012 .00011 .00026 .00044 .00062

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93

5.3.2. Machinery Observe that only a few firms have n > 0 in the cross-section of firms. Refer to Table 5.3. Each of the firms has an independent demand curve due to the lack of standardization of products. Table 5.3: Machinery – Only firms with ni > 0 Name ABB India Bosch Siemens

v .001 .1355 .1374

s .1556 .8456 .2034

m .00073 .00817 .00569

n .00040 .00802 .00550

Consequently, they need not increase the valuation of their products. Instead, they need to focus on improving market shares even if such gains result only in transient market power. Consider the context of the few firms that have n > 0. They already have high market shares and defending them, while it is important, is not a priority. Firms concentrate on maintaining consumer loyalty to the value of their products. The evidence, based on the time series in Fig. 5.1, relates to Bosch and Siemens. Bosch recorded a steady increase in both m and n though the transient market power remained high. After 2015 Siemens recorded much larger improvements in m compared to those in n.

5.3.3. Metals Referring to Table 5.4 note that the experiences in the Metals industry and Machinery are similar. Table 5.4: Metals – Steel – Only firms with ni > 0 Name JSW Steel SAIL Tata Steel

v .1204 .0956 .1910

s .2544 .2567 .2340

m .00779 .00630 .01045

n .00691 .00534 .00972

The time series experience in Fig. 5.2 suggests that though Tata Steel experienced variable values of m it maintained consumer loyalties. This is an indication that market power fluctuations are large primarily due to competition from rival products. On the other hand, though JSW Steel

94

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experienced some cost problems before 2004, they recovered sufficiently to record high trends in m and n. Figure 5.1: Machinery – %RVFK and Siemens 0.01 0.009 0.008 0.007 0.006 0.005 0.004 0.003 0.002 0.001 0

Legend: Blue Bosch m, Orange Bosch n, Grey Siemens m, and Yellow Siemens n

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95

Figure 5.2: Metals – JSW Steel and Tata Steel 0.007 0.006 0.005 0.004 0.003 0.002 0.001 0

Legend: Blue JSW Steel m, Orange JSW Steel n, Grey Tata Steel m, and Yellow Tata Steel n

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Figure 5.3: Steel – SAIL 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0

Legend: Blue m, Orange n

Most of the useful results pertain to the Steel firms. By way of contrast to the results in the Metals industry, Fig. 5.3 indicates that the m and n values for SAIL are close together throughout 2001-2017. Consider Tables 5.5 and 5.6 and Figs. 5.4 and 5.5 for Tata Steel and JSW Steel. Apart from the problems of JSW before 2004, both these firms have an increasing trend in both m and n though convergence is not experienced.

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97

Table 5.5: Steel – Tata Steel Year

v

s

m

n

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

.1549 .1107 .1798 .2025 .2594 .2612 .2563 .2671 .2340 .2412 .2598 .2210 .1912 .1934 .1910 .1092 .1572

.2426 .2534 .2568 .2469 .2318 .2408 .2258 .2116 .2222 .2234 .2270 .2198 .2394 .2367 .2340 .2610 .2918

.0091 .0071 .0119 .0123 .139 .0152 .0131 .0120 .0115 .0120 .0134 .0107 .0110 .0108 .0105 .0075 .0134

.0081 .0071 .0105 .0095 .0100 .0131 .0108 .0098 .0100 .0107 .0122 .0099 .0101 .0101 .0097 .0075 .0122

Table 5.6: Steel – JSW Steel Year

v

s

m

n

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

.052 . .0 .1933 .2697 .2601 .2464 .2407 .1076 .1926 .1572 .1133 .1177 .1021 .1204 .1012 .1572

.0454 .0667 .0731 .0744 .1028 .0956 .1062 .1194 .1253 .1619 .1785 .2072 .2221 .2534 .2544 .2475 .3118

.00010 .0 .0 .00107 .00285 .00238 .00278 .00343 .00169 .00505 .00501 .00486 .00581 .00655 .00779 .00620 .01528

.0 .0 .0 .0 .0 .0 .00005 .00836 .0 .00330 .00345 .00375 .00467 .00565 .00691 .00618 .01426

98

Figure 5.4: Steel – JSW Steel 0.018 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0

Legend: Blue m, Orange n

Chapter 5

Market Shares

99

Figure 5.5: Steel – Tata Steel 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0

Legend: Blue m, and Orange n

5.3.4. Paper The cross-section evidence in Table 5.7 indicates that, in general, v < 0 due to high C/S and consequently m was not computable. Observe that among the firms with m and n > 0 the values were close together only for Tamilnadu newsprint. Consider Table 5.8 for Ballarpur and Table 5.9 for Tamilnadu. Both the firms experienced severe competition from rivals but maintained a high transient market power between 2003 and 2008. They could concentrate on projecting the value of their products to consumers after 2008. However, transient market power for Tamilnadu Newsprint was much smaller throughout 2001-2017. The results for JK Paper and West Coast, presented in Fig. 5.6, offer a contrast. In general, the transient market power for both the firms is high until 2008. They could concentrate on preserving the valuation of their products instead of seeking transient market power and exhibited convergence after 2008.

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100

Table 5.7: Paper Name Perfectpac Yash paper Star Paper Huhtamak Tamilnadu Seshasayee AMJ Industry NPAgarwal Rajeshwara Mohit South India West Coast 3PLand Cosboard International Ballarpur

s .0053 .0141 .0225 .0947 .1887 .0833 .0230 .0593 .0085 .0075 .0154 .1368 .0130 .0033 .0945 .0370

mi .0 .0 .00001 .00053 .00325 .00057 .00003 .0 .0 .0 .00003 .00104 .0 .0 .00277 .03973

ni .0 .0 .0 .00002 .00310 .00002 .0 .0 .0 .0 .0 .0 .0 .0 .00007 .00005

Table 5.8: Paper - Ballarpur Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

v .3218 .3252 .3422 .3520 .3656 .3766 .3798 .3461 .3836 .3372 .3182 .3016 .3183 .2971 .2902 .3344 .0

s .3016 .3201 .3165 .3191 .3017 .2827 .2861 .1429 .1300 .1385 .1269 .1212 .0924 .0810 .0370 .0438 .0148

m .0293 .0346 .0343 .0359 .0333 .0301 .0311 .0071 .0065 .0065 .0051 .0044 .0027 .0016 .0004 .0007 .0

n .0006 .0006 .0 .0 .0 .0 .0 .0029 .0024 .0026 .0032 .0028 .0039 0031 .0 .0041 .0039

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Table 5.9: Paper – Tamilnadu Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

v .1719 .1725 .1643 .1734 .0880 .1034 .1180 .1715 .1508 .1678 .1821 .1220 .0901 .0978 .0912 .1020 .0934

s .1158 .1123 .1012 .1017 .1113 .1211 .1160 .1457 .1423 .1413 .1462 .1758 .1878 .2062 .1887 .2085 .2179

m .0023 .0022 .0017 .0018 .0011 .0015 .0016 .0037 .0031 .0034 .0034 .0038 .0032 .0042 .0033 .0044 .0044

n .0006 .0006 .0 .0 .0 .0 .0 .0029 .0024 .0026 .0032 .0028 .0039 .0031 .0 .0041 .0039

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Figure 5.6: Paper – JK Paper and West Coast 0.0035 0.003 0.0025 0.002 0.0015 0.001 0.0005 0

Legend: Blue JK Paper m, Orange JK Paper n, Grey West Coast m, Yellow West Coast n

5.3.5. Motor Vehicles The results for the cross-section of firms in Table 5.10 suggest that for firms that have a n > 0 the values of m and n were close together except for Rico Auto and Suprajit. The low values of s for these two firms induced them to seek transient market power by adopting suitable policies.

Market Shares

103

Table 5.10: Motor Vehicles – without separating sets – only firms with ni > 0 Name Mahindra & M Maruti Suzuki Amtek Auto Rice Auto Gariel India Bharat Forge Suprajit Engg Steel Springs Manjul Showa

v .1099 .1251 .0526 .3059 .0534 .2146 .0908 .0279 .0513

s .2665 .3601 .4801 .1063 .7379 .1349 .2371 .2845 .1304

m .00781 .01622 .01213 .00346 .02908 .00391 .00511 .00226 .00087

n .0041 .0147 .01080 .00036 .02828 .00369 .00147 .00204 .00079

Consider the evidence regarding the time series. It is essential to recognize that Maruti Suzuki experienced severe competition most of the time. See Table 5.11. On the other hand, as evident from Table 5.12, Gabriel is more established and did not have much competition. However, note that Motherson had to pursue much less transient market power compared to Gabriel. See Fig.5.7. Table 5.11: Motor Vehicles – Maruti Suzuki Year 201 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

v .0718 .1012 .0981 .0997 .1196 .1221 .1132 .0989 .1333 .1330 .1099 .1068 .1103

s .2298 .2233 .1542 .1573 .1666 .1602 .1673 .1977 .2025 .1933 .2665 .2416 .2367

m .0038 .0051 .0023 .0025 .0033 .0031 .0032 .0039 .0055 .0050 .0078 .0065 .0062

n .00006 .00004 .00120 .00412 .00005 -

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104

Table 5.12: Motor Vehicles – Gabriel Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

v .0555 .0614 .0845 .0571 .0516 .0307 .1362 .0337 .0321 .0597 .0549 .0589 .0425 .0450 .0534 .0640 .0711

s .5048 .566 .5333 .5204 .4767 .4488 .3820 .3288 .5210 .4265 .4211 .4732 .6030 .6334 .7379 .5539 .9698

m .0142 .0164 .0240 .0155 .0117 .0062 .0199 .0037 .0087 .0109 .0097 .0132 .0155 .0181 .0291 .0196 .0669

n .0084 .0122 .0198 .0111 .0062 .00003 .01324 .00593 .00639 .00617 .01038 .01452 .01599 .02828 .01663 .06669

Market Shares

105

Figure 5.7: Motor Vehicles – Gabriel and Motherson 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0

Legend: Blue Gabriel m, Orange Gabriel n, Grey Motherson m, Yellow Motherson

5.4. Conclusion The following conclusions emerge from the empirical analysis in this chapter. (a) Close to zero values of n were recorded for most firms except for the few with high market shares. This indicates one of two things: (1) market shares do not have any useful information about the value of products to consumers, or (2) much of the market power that firms derive from market shares is transient. Perhaps it would be more realistic to suggest that market shares are a consequence of the consumer valuation of products and not the other way around. Therefore, it is necessary to examine the non-price choices of firms as the primary mechanism through which firms convey the value of their products to consumers.

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(b) A high market share of a firm, especially when it is a result of the non-price strategies of firms, is not due to the inelasticity of demand. However, it reduces the market power of rivals. Similarly, a high s cannot explain a high v. The causation can be the other way around. In general, the observed behavior of firms does not justify the assumption that competition w.r.to market shares matters. (c) Suppose the value of m is close to n when s is large. The difference is close to zero either because vk = 0 or firm i reduces sk to zero. Consider n = 0 noted in the context of many firms. Firms only have transient market power and s does not convey any valuation of their products. The firms have too little market share and conveying the value of their products does not get precedence over their ability to avoid rivals undercutting them. The transient market power ™k vk sk2 / (n-1) can be eliminated over time by competition in one of three ways. (a) n increases, (b) sk for all k  i can be reduced to zero or close to it, and/or (c) variations in C or S reducing vk to zero. (d) The market power of firms in markets of this nature cannot be explained by the inelasticity of demand and/or differences in their market shares per se. Market power as conventionally defined is not adequate for firms to consolidate it. (e) In general, the observed behavior of firms does not justify the assumption that market share competition matters. Each firm cannot be expected to influence its market share by reducing those of others. It must be done through specific actions of rival firms. Non-price strategies have a prominent role. An attempt should be made to examine the strategic choices firms employ to generate the market share that they have. (f) Competition for market shares is an abstract form that consumers may not be aware of. They may not consider it as a means through which they can learn enough about the value of a firm’s products. Indeed, that is the only way of interpreting the outcome that market shares per se do not convey the value of products to the consumers. Market shares may at best be considered as a mechanism through which firms calibrate their transient market power.

CHAPTER 6 NON-PRICE CHOICES

6.1. The Approach Consumers rarely have any information about the market shares of firms. Similarly, as noted in the previous chapter, firms do not obtain any information about the value of products if they compete with rival firms for market shares. In general, market shares cannot be assumed to reflect the value of the firm’s products irrespective of whose viewpoint prevails. It is far more plausible that the value of products determines the market shares instead of the other way around. However, whatever be their valuation, consumers may not buy the products because the prevailing prices and their budgets may constrain them. Hence, the valuation of products may not necessarily translate into market shares. More realistically, note that consumers value the quality of products, promptness of delivery, level of service after sales, and many other factors. Maintaining supply chains, both inbound and outbound logistics, may well be a deciding factor in the firms’ attempts to convey the value of their products to the consumers. Such non-price choices may incidentally provide the firm higher price-cost margins, larger market shares, and/or transient market power. However, firms may be pursuing many other objectives. Hence, the effect of non-price strategies cannot be captured by an exclusive emphasis on price-cost margins and/or market shares. In general, it is possible to observe the consequences of the decisions of firms. However, it is difficult to properly establish the relationship between different strategies, price-cost margins, market shares, and the transient market power of firms. Consequently, unraveling the objectives that firms seek to achieve is practically impossible. Note the following additional observations. (a) The organizational and financial constraints may well be a source of a low level of operation for most firms in these industries. They may

108

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be restricting firms from seeking a larger market share. Such firms generally have localized markets. As a result, their market shares will be lower. In the context of durable goods, the stock of their products already in use determines the reputation and the value of the products of a firm. The flow demand in any localized market tends to be small and rather random. (b) The consumers may find the transaction costs of switching to be large even if a national leader establishes a wholesale or retail outlet in the region. This may also be due to their reluctance to acknowledge that there will be steady supplies to meet their requirements. Consumers tend to consider the strategies of firms as revealing the value of products even if this proviso is kept in perspective. They are not likely to acknowledge the firm’s strategic choices to compete with other firms. Hence, the strategies of firms will be directed mostly to reveal the value of their products to consumers and stabilize their market shares in the long run. Hit-andrun transient market power, even if some choices of the firm indicate it, will not be of much consequence to the consumers. It would perhaps be more prudent if such firms, with low market shares and lacking financial resources to compete in a wider market, concentrate on convincing the consumers of the value of their products and seek a stable, though not necessarily high, market share. (c) A firm, with a larger market share and/or the loyalty of consumers, may direct its strategies to consolidate and maintain its position. On the other hand, they may also have the resources and urge to develop strategies to capture a part of the market share from other firms. In other words, they have advantages in developing transient market power as well. Attempts at an expansion of market shares may also have implications for financial requirements. In such a case, some of the strategies of firms may be directed to financial stability. Such choices may have the semblance of providing transient market power as well. Firms will lose their market share due to the inability to cater to the demand as it arises. In general, overcoming financial constraints serve the purpose of converting transient market power into advantages over the long run. (d) Firms may influence cost curves through managerial choices. Similarly, non-price strategies influence the market shares of firms. Such strategies also help consumers estimate the value of the products on offer. Hence, non-price strategies affect both the cost and market shares. Both these aspects have implications for the market power of firms. In practice, firms compare every one of their

Non-Price Choices

109

non-price choices with those of rivals to convey the value of their products to the consumers. Hence, it is possible to conceptualize and estimate valuation and transient market power indices based on this conjecture. Several characteristics of every product, but not necessarily the prices consumers pay on the market, determine the value of a firm’s products. The value may also depend on several strategies that firms utilize. These strategies may be related to the technology of products, their presentation, the inventories available at retail outlets and distribution of products, the financial burden that firms are experiencing, and so on. Non-price choices generally determine the realized market power of a firm. Hence, firms compare each of their strategies with those of rivals while assessing the impact on their market power. Such comparisons will indicate the market value of its products and the resulting market power. Market share considerations may have a prominent role even if non-price choices may be directed to other objectives. It was observed in the previous chapter that the assumption about firms making comparisons of their market share with those of rivals does not result in a significant consumer evaluation of the value of the firm’s products. Much of the market power of firms is transient and is unlikely to be reduced over time. On the other hand, it may be suggested that smaller subsets of firms are likely to constitute competitive groups. However, it has not been possible to identify competitive firms on any objective basis. Hence, only set 1 in the Textile industry will be examined. Similarly, in the Metals industry, only firms producing steel will be analyzed. The conventional wisdom is that over time the transient market power will be eliminated. But firms tend to maintain and/or increase such transient market power by developing strategies dynamically. It will not decrease due to the firm’s quest to seek and obtain advantages in market shares over the long run. Instead, significant fluctuations in the transition have been recorded. The cyclical progress of strategies may not exhibit a growth trend around these swings in the long run.

6.2. Efficient Choices: A Digression It would be useful to digress a bit from the main theme at this point and consider the competitive mechanisms that can enable the transient market power to converge to zero.

110

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The transient market power of strategy j of firm i is Tij = ™k vk skj2 / (n-1) by definition. Hence, the transient market power will be zero if and only if vk = 0 for all k. Since the measurement of vk is such that vk = 1 – Ȟk Ck / Sk vk = 0 if and only if Ȟk Ck = Sk Let Ck* be the cost of production and sale of the products of firm k. Fig.1.1 of Chapter 1 acknowledged that there will be a clearly defined cost in the use of every non-price strategy of firm k. Let ckj skj be the cost of utilizing strategy j to firm k. Then, the efficient combination of non-price strategies for which skj > 0 will satisfy the equation Ȟk Ck = Ȟk ( Ck* + ™j ckj skj ) = Sk Such a choice of Ck will be subject to 1 – skj = ™j skj Ck will be determined by both the parameters ckj and skj. To begin with, assume that each of the rival firms k fixes skj. Then, the changes ckj will determine the effect of market rivalry reducing vk. Let nk be the number of firms for which skj* is positive. Firms will find it more difficult to discover and imitate the choice if nk is large. That is, ckj = f(nk) is an increasing function of nk. Consequently, Ck = ckj skj will also increase. Thus, competition from rivals can be expected to proceed to a point where Ȟk Ck = Ȟk ( Ck* + ™k ckj skj ) = Sk The transient market power will then cease to exist. Firms may also alter skj in response to the choice of sij by firm i. The following implications are noteworthy.

Non-Price Choices

111

(1) The efficient choices will be such that skj will correspond to the threshold value defined in Fig.1.1 since any Ȟk Ck > Sk would imply that vk < 0. The transient market power of firm i will reduce to zero if every firm chooses an efficient combination of non-price strategies. It can be inferred that rival firms will move toward such an efficient combination in their quest to gain an advantage over rivals. (2) The above characterization allows the firm a variety of choices at every point of time and they will be altered over time depending on the changes in ckj. This digression explains the variety of choices that firms adopt. However, it is not feasible to calculate ckj due to data restrictions. (3) Note that the choices depend on the value of Ȟk. Ȟk < 1 implies that the firm is experiencing economies of scale. It would then utilize a larger number of efficient choices. Similarly, autonomous increases in costs decrease the scope of the firms unless they can find alternative financial resources. (4) S may be affected by the choices of firms. It is possible to account for such a contingency. In general, Ȟk Ck / S k may be a function of skj and the rest of the analysis can be altered accordingly. (5) The resultant efficient choices may relate to firms pursuing a single strategy or multiple strategies. The argument, that firms utilize many strategies and vary them over time to avoid rivals discovering their strategies and imitating them, would not be relevant if the above argument is invoked. (6) The possibility that firms will attempt to stay away from this efficient equilibrium cannot be ruled out. For all practical purposes, they may tradeoff profits to maintain some transient market power. (7) This analysis is quite general and can accommodate variations in the characterization of transient market power. In sum, the channels through which competition among rivals eliminates transient market power can be conceptualized and operationalized if adequate data is available.

6.3. Empirical Results 6.3.1. Textiles Consider the results for the firms in Textiles – Set 1. For the year 2015, practically every firm had positive values of IS. See Table 6.1 and Fig. 6.1.

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112

Three reasons may be offered. First, a higher value of s indicates the availability of financial resources to utilize non-price strategies. IS may increase due to competitive strategies across firms. Second, the case with high values of v would be similar. Fig. 4.7 and Table 4.3 suggest that firms find it necessary to choose strategies to indicate the value of their product, relative to those of rival firms, irrespective of their financial position. Third, in the Textile Industry, the substitution between products of different firms is high. Further, competition between firms is significant since the demand is generally widely distributed and localized. Hence, firms find it necessary to improve IS. However, note that the transient market power indicated by the difference between I and IS is large. Essentially this validates the expectation that rival firms attempt to undercut each other when their products are substitutable. Table 6.1. Textiles – Set 1 Name APM Industries Aarvee Denim Amarjyoti Cheviot Eurotex Garware Tech Ginni Fila H P Cotton Kandagiri Lakshmi Mills Loyal Textiles Mayur Minaxi Mohota PBM Polytex Reliance Sambandam Seasons Shree Bhavya Shri Dinesh Suryalakshmi Suryalata Suryavanshi Wires & Fabriks

v .1225 .0349 .1311 .1077 .0162 .0603 .0404 .0976 .0093 .1297 .0372 .1721 .0209 .0045 .0620 .0526 .0461 .1731 .0021 .2343 .0537 .0720 .0588 .0552

s .0272 .0641 .0176 .0235 .0245 .0690 .0737 0080 .0173 .0196 .1240 .0488 .0048 .0278 .0191 .0211 .0212 .0034 .0215 .0075 .0625 .0344 .0094 .0094

I .0062 .0013 .0063 .0104 .0 .0039 .0017 .0068 .0004 .0066 .0019 .0201 .0010 .0002 .0048 .0022 .0015 .0086 .0006 .0385 .0018 .0035 .0019 .0035

IS .0033 .0002 .0042 .0072 .0 .0021 .0007 .0050 .00005 .0047 .0012 .0174 .0002 .0 .0012 .0008 .005 .0071 .0 .0369 .005 .0011 .0001 .0017

J .0035 .0004 .0026 .0064 .0 .0023 .0007 .0045 .00015 .0033 .0010 .0141 .0004 .00005 .0026 .0008 .0006 .0034 .00003 .0280 .0006 .0019 .0007 .0018

Non-Price Choices

113

Turn to the evidence in time series. Referring to Fig.6.2 for Season Textiles it may be noted that IS was increasing over time and moving closer to I. The firm is choosing its strategies to effectively signal the value of its products and reduce its dependence on transient market power. By way of contrast, Fig. 6.3 for APM industries does not indicate any steady trend. Its efforts were mainly directed to reveal the value of their products to maintain superiority over the long run. Figure 6.1: Textiles – Set 1 0.045 0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0 1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031 Legend: Blue I, Orange IS, and Grey J

114

Chapter 6

Figure 6.2: Textiles - Set 1 – Season Textiles 0.01 0.009 0.008 0.007 0.006 0.005 0.004 0.003 0.002 0.001 0

Legend: Blue I, Orange IS, and Grey J

Non-Price Choices

Figure 6.3: Textiles – Set 1 – APM Industries 0.007 0.006 0.005 0.004 0.003 0.002 0.001 0

Legend: Blue I, Orange IS, and Grey J

115

Chapter 6

116

Table 6.2: Textiles – Set 1 - Loyal Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

I .00129 .00093 .00782 .00163 .00149 .00185 .00169 .00138 .00040 .00104 .00103 .00055 .00055 .00051 .00083 .00108 .00119

IS .00111 .00049 .00779 .00064 .00040 .00059 .00050 .00063 .0 .00056 .0 .0 .0 .0 .00025 .0 .0

J .00042 .00034 .00698 .00051 .00061 .00082 .00072 .00057 .00015 .00038 .00048 .00024 .00032 .00025 .00044 .00069 .00073

j’s * 2,4,5,7,9,10 (4,2) 2,3,9,10,14 (2,3) 5 (1,0) 4,5,9,10,14 (2,3) 4,9,10,14 (1,3) 4,6,9,10,14 (2,3) 4,9,10,14 (1,3) 4,6,9,10,14 (2,3) 4,9,14 (1,2) 4,9,14 (1,2) 4,9,10 (1,2) 4,9,10,14 (1,3) 4,9,10 (1,2) 1,4,9,11 (2,2) 4,5,9 (2,1) 4,9 (1,1) 9 (0.1)

Note: The index J and the j’s were defined in chapter 3. Their interpretation will be taken up in chapter 7. * The numbers in parathesis are the number of T1 and T2 respectively.

Loyal Textiles and Shri Dinesh provide different perspectives. See Tables 6.2 and 6.3. Significant IS values persist over time for both these firms. Shri Dinesh has a much lower transient market power compared to Loyal Textiles. The decreasing market share of Shri Dinesh encourages the firm to initiate more significant variations in its non-price strategies. The higher values of v allow the firm to sustain this trend. Competition from rivals can explain the urge of Loyal to obtain and maintain higher transient market power.

Non-Price Choices

117

Table 6.3: Textiles – Set 1 – Shri Dinesh Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

I .00617 .00645 .02203 .00558 .00538 .00893 .00950 .01381 .01283 .01069 .01384 .01032 .01094 .01653 .02717 .02417 .01389

IS .00585 .00601 .0 .00345 .00391 .00608 .00756 .01243 .01241 .00984 .01368 .0 .0 .01622 .02499 .0 .01281

J .00360 .00386 .01856 .00301 .00294 .00515 .00581 .00942 .00870 .00684 .01031 .00633 .00772 .01261 .02190 .02123 .01049

j’s 3,4,8,12 (3,1) 3,4,8,12 (3,1) 5,8 (1,1) 4,8,12 (2,1) 4,8 (2,0) 4,8,12 (2,1) 4,8,12 (2,1) 4,8,12 (2,1) 4,8,12 (2,1) 8,12 (1,1) 8,12 (1,1) 4,8,12 (2,1) 8,12 (1,1) 8,12 (1,1) 8 (1,0) 8 (1,0) 8 (1,0)

6.3.2. Machinery Consider the evidence based on the cross-section of firms from the Machinery Industry. See Fig. 6.4 and Table 6.4. As expected earlier, comparison across firms is not possible due to the lack of standardization of products and components. A high valuation of products is neither necessary nor sufficient to explain the market shares of firms. Hence, low values of v do not suggest a high s. For Siemens, v was increasing from 2010 despite a decrease in s. The value that these firms can project through their non-price choices is not significant. Consequently, it was observed that IS was zero for most firms. Low values of v and s generally reinforce this observation. The desire on the part of firms, to induce consumers to switch between products despite the low cross elasticities of demand, explains the high values of transient market power. The availability of their products in localized markets may also explain their market power. The low values of v and I suggest that the competition from rival firms in related markets (that offer substitutable products) is substantial. Better materials and electronics used in machinery may be the major sources of this phenomenon. Much of

Chapter 6

118

the use of localized machinery is of low value (agricultural implements and housing construction). Figure 6.4: Machinery , ,6 and - 0.045 0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0 1

3

5

7

9 11 13 15 17 19 21 23 25 27 29 31 33 35 37

Legend: Blue I, Orange J Note: The value of IS zero throughout

Non-Price Choices

119

Table 6.4: Machinery (IS values are zero for all the ILUPV S.No 1. 2.

Name ABB India Ltd AC Bearings

si .1556 .0034

vi .0301 .1539

Ii .00062 .00396

Ji .00029 .00171

3.

Austin Engineering BEML Ltd Bosch Ltd Cenlub Industries DHP India Elecon Engineering Elgi Equipment Escorts Federal Mogul

.0019

.0790

.00262

.00133

.0572 .2456 neg

.0265 .1355 .0424

.00074 .00440 .00120

.00040 .00252 .00053

neg .0105

.253 .1758

.01781 .00403

.01223 .00113

.0156 .0775 .0321

.1091 .0339 .0513

.00225 .00072 .00094

.00091 .00036 .00040

.0012 .0019

.0578 .1000

.00146 .00216

.00052 .00090

.0326

.0906

.00295

.00174

.0056

.1028

.00246

.00116

1,5,7,9,12 (3,2)

.0325

.0377

.00077

.00044

1,4,7 (3,0)

.0018

.0260

.00073

.00029

4,10,14 (1,2)

.0044

.0426

.00255

.00177

5,8 (2,0)

.0024 .0021

.1126 .1266

.00779 .00277

.00541 .00116

21.

ITL Industries International Combustion Johnson Controls Kabra Extrusion Kirloskar Brothers Kulkarni Power Tools Manu Graph India Mazda Menon Bearings Menon Pistons

2,3,7,13 (3,1) 5,7,8,12 (3,1) 5,7,8,10,11,14 (3,3) 5,8,9 (2,1) 4,6,7,12,14 (3,2) 1,4,5,7,9 (4,1) 1,4,5,6,8 (5,0) 1,4,5,10,12 (3,2) 2,5,7,10 (3,1) 1,2,3,7,8,12,13 (5,2) 4,5,12 (2,1)

.0030

.0725

.00146

.00059

22.

NRB Bearings

.0135

.0940

.00223

.00071

23.

Polymechlast Machines Praj Industries Rajoo Engineers

neg

.0770

.00190

.00092

7,8 (2,0) 1,4,5,8,12,13 (4,2) 1,4,5,12,13 (3,2) 4,5,9,10,12,14 (2,4) 1,5,12 (2,1)

.0152 .0024

.1375 .0719

.00496 .00141

.00256 .00059

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

24. 25.

j’s 1,5,7,9,12 (3,2) 4,6,10,12,14 (2,3) 2,5,7,9,13 (3,2)

4,7,8,9 (3,1) 1,5,7,9,12,13 (4,2)

Chapter 6

120 26. 27. 28. 29. 30. 31. 32. 33. 34.

Rexnord Electronics Shakti Pumps Shilp Gravuers Siemens Solitaire Machine Tools Timken India Triton Valves

.0001

.0558

.00122

.00052

1,5,9,12 (2,2)

.0060 .0012 .055 neg

.1385 .0491 .1374 .0898

.00597 .00107 .00404 .00268

.00361 .00049 .00223 .00119

4,5,9 (2,1) 1,5,6,12 (3,1) 5,7,8 (3,0) 2,6,8,9,12 (3,2)

.0184 .0036

.0840 .0676

.00257 .00140

.00129 .00057

United Drilling Tools Veljan Denison

.0021

.3442

.03891

.02993

5,7,8,9,13 (3,2) 1,5,10,11,12 (2,3) 8,9,13 (1,2)

.0016

.2084

.00632

.00270

4,5,7,12,13 (3,2) 35. WPIL Ltd .0046 .1032 .00321 .00169 5,7,9,13 (2,2) 36. Yuken India .003 .0115 .00019 .00007 1,7,10,12,13 (2,3) Note: The definition of the J index is available in chapter 3. Its interpretation and results related to the j’s will be taken up in chapter 7.

Bosch Ltd and Siemens were chosen for the time series analysis. Bosch has a steadily increasing market share. In both these cases, the competition between firms only results in transient market power that persists over time. In general, primarily due to the nature of products, competition between firms in this market is low despite their attempts to gain superiority. The results for Mazda and Shakti Pumps were somewhat different. The difference between I and J for Shakti Pumps was larger. That is, the firm had greater transient power for all years between 2001 and 2007.

6.3.3. Metals: Steel The analysis of the cross-section of firms in the Steel industry suggests that the market shares have been highly variable. Refer to Table 6.5. One reason for this is the availability of lighter and durable materials as substitutes. They have significant competition from outside the industry. Consequently, they cannot utilize superior non-price choices relative to rival firms within the industry to generate sufficient value for their products. At best, they attempt to generate and maintain high transient market power. Turn to the evidence for Tata Steel and JSW Steel on a time-series basis. Both have been market leaders since 2010. However, as expected, the market valuation of their products declined purely due to the competition of better materials from other industries. Both the firms could improve IS for

Non-Price Choices

121

a few years though JSW Steel performed better than Tata Steel. The gains in market shares were marginal though they achieved a higher valuation of products from the consumers on the market. These firms experienced autonomous increases in costs which they could not pass on to consumers (maintain price-cost margins) though they made attempts to stabilize their market shares. For all practical purposes, a shift in their objectives towards maintaining or increasing market shares is discernible. In general, they could not stabilize the valuation by consumers on the market as represented by I. Their effort to obtain transient market power is evident since they could not do better by competing with superior substitutable products offered by firms outside the industry. The significant contrast between these two firms is the decreasing value of I and J for JSW Steel. Consider the results for Kalyani and Panchmahal in Figs. 6.10 and 6.11. Kalyani could control C/S through its investments and experienced steadily increasing sales. On the other hand, as reflected in C not keeping pace with Sales, Panchmahal experienced autonomous increases in costs, could not improve the utilization of NFA to control costs, and could not improve v. As a result, both firms experienced steadily decreasing I values. In general, firms appear to consider efficiency in their choices as the priority. They will seek a comparison of their strategies across firms if resources permit. Otherwise, they will be content with transient market power. That is, their market power is a result of the markets for their products, autonomous increases in costs, and financial resources available to make adequate investments. Consumer valuation of products gets priority over competitive advantages in their interaction with rivals.

122

Chapter 6

Figure 6.5: Machinery – %RVFK and Siemens 0.02 0.018 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0

Legend: Blue Bosch I, Orange Bosch J, Grey Siemens I, and Yellow Siemens J Note: The value of IS was zero throughout

Non-Price Choices

123

Table 6.5: Metals – Steel (IS zero for all the ILUPV S.No 1.

si .0015

vi .0124

Ii .00103

Ji .00059

2.

Firm Ashiana Ispat JSW Steel

.2544

.1204

.00632

.00193

3.

Jindal Steel

.0775

.0200

.00173

.00076

4.

Kalyani Steels Kanishk Steels Panchmahal Steel Steel Authority Sunflag Iron and Steel Tata Steel Uttam Galva

.0078

.0974

.00618

.00318

.0017

.0133

.00067

.00041

.0022

.0563

.00528

.00279

.2700

.0956

.00554

.00189

.0099

.0111

.00058

.00025

.2340 .0372

.1910 .0581

.01543 .00432

.00825 .00294

5. 6. 7. 8.

9. 10.

Note: The value of IS was zero throughout

j’s 7,8,10,13 (2,2) 4,6,8,9,12 (3,2) 6,8,11,14 (2,2) 1,4,5,7,12,13 (4,2) 1,2,3,8,12,13 (4,2) 1,2,5,9 (3,1) 1,2,3,6,7,8,12 (6,1) 1,2,4,8,12,13 (4,2) 4,7,8,12 (3,1) 9 (0,1)

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124

Figure 6.6: Machinery – Mazda and Shakti Pumps 0.018

0.009

0.016

0.008

0.014

0.007

0.012

0.006

0.01

0.005

0.008

0.004

0.006

0.003

0.004

0.002

0.002

0.001 0 2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

0

Legend: Blue Mazda I, Orange Mazda J, Grey Shakti Pumps I, and Yellow Shakti Pump J Note: The scale on the right only for I of Shakti pumps. IS values for both firms were zero.

Non-Price Choices

125

Figure 6.7: Metals- Steel 0.018 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0 1

2

3

4

5

6

7

Legend: Blue I and Orange J  IS was zero throughout

8

9

10

11

126

Chapter 6

Figure 6.8: Steel – Tata Steel , ,6 and - 0.03

0.025

0.02

0.015

0.01

0.005

0

Legend: Blue I, Orange IS, and Grey J

Non-Price Choices

Figure 6.9: Steel – JSW Steel , ,6 and - 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0

Legend: Blue I, and Orange J Note: IS was zero throughout

127

Chapter 6

128

Figure 6.10: Steel – Kalyani Steels , ,6 and - 0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0

Legend: Blue I, Orange IS, and Grey J

6.3.4. Paper Consider the results for the cross-section of firms. The estimated value of IS = 0 throughout. See Fig. 6.9. In other words, firms in this industry cannot signal the value of their products to consumers if they wish to remain competitive with rivals in their choice of non-price strategies. The best that any firm can achieve is an advantage w.r.to market shares and the associated transient market power due to the declining demand for paper products and competitive rivalry among firms. Observe from Figs. 6.13 and 6.14 that both Ballarpur and Tamilnadu Newsprint managed to register positive values of IS for some years. These firms seek a balance between market power, due to consumer loyalty, and transient market power.

Non-Price Choices

129

6.3.5. Motor Vehicles Industry Firms, in sets 1 through 4 in the Motor Vehicles industry, offer substitutable products. Hence, patterns analogous to those in the Textile industry can be expected. However, this was not the case. In general, consumers appear to develop brand loyalty for specific firms and stabilize their market shares. Tables 6.6 – 6.12 and Figs. 6.15 through 6.18 suggest the following. (1) The IS values for Force, Gabriel, and Sundaram were high. Their ability to compete against rivals to obtain higher market shares was not a deterrent to maintaining the value of their products. However, Gabriel indicated the convergence of I and IS. (2) Jay Bharat had a larger v compared to Jay Ushin. This explains the low values of I and J for Jay Ushin. It is also clear that their emphasis was on convincing the consumers of the value of their products instead of competing with rivals for market share. (3) The IS values of Jay Ushin suggest that they could not achieve such an advantage though they attempted to compete with rivals for a higher market share. At best, both these firms strive to achieve transient market power to the extent they can. Figure 6.11: Steel – Panchmahal (I,6 and J 0.018 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0

Legend: Blue I, Orange IS, and Grey J

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Figure 6.12: Paper , ,6 and - 0.06

0.05

0.04

0.03

0.02

0.01

0 1

2

3

4

5

6

7

Note: The value of IS is zero for all firms Legend: Blue I, Orange J

8

9

10 11 12 13 14 15

Non-Price Choices

Figure 6.13: Paper: Tamilnadu , ,6 and - 0.025

0.02

0.015

0.01

0.005

0

Legend: Blue I, Orange IS, Grey J

131

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Figure 6.14: Paper – Ballarpur , ,6 and - 0.1 0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0

Legend: Blue I, Orange IS, Grey J

Table 6.6: Motor Vehicles – Set 1 S.No 1.

Name si vi Ii ISi Ji j’s Ashok .0973 .0550 .0140 .0043 4,6,9,10,11,14 Leland (2,4) 2. Force .0175 .1578 .0394 .0173 1,2,3,7,8,12,13 Motors (5,2) 3. Mahindra .2665 .1099 .0243 .0109 1,7,8,13 (3,1) 4. Maruti .3601 .1251 .0229 .0102 1,6,7,9,12,13 Suzuki (3,3) Note: The last column contains the j’s (non-price strategies) which make Qij > 0.

The numbers in the brackets, in this and subsequent tables, are the number of type I and type II strategies.

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133

Table 6.7: Motor Vehicles – Set2 S.No 1. 2. 3. 4.

Name Amtek Auto JMB Auto Jamna Auto Rico Auto

si .4801

vi .0526

Ii .0266

ISi -

Ji .0150

.0882

.0529

.0099

-

.0037

.1408

.1416

.0209

-

.0115

.1063

.3059

.0809

-

.0388

j’s 2,6,11,14 (2,2) 1,3,5,10,12 (3,2) 1,4,5,12,13 (3,2) 45,7,8,9 (4,1)

Table 6.8: Motor Vehicles – Set 3 S.No 1.

Name Auto Axels

si .2440

vi .0264

Ii .0086

ISi -

Ji .0020

2.

Frontier Springs

.0181

.0822

.0436

.0376

.0136

3.

Gabriel India

.7379

.0534

.0262

.0159

.0149

j’s 1,2,3, 5,6,7, 10,12, 13,14 (5,4) 2,4,8, 10,11, 14 (3,3) 4,5,9 (2,1)

Table 6.9: Motor Vehicles – Set 4 S.No 1. 2. 3. 4. 5.

Name Bharat Forge Bharat Gears Himtech Forge RACL Geartech ZF Steering Gear

si .7933

vi .2146

Ii .0740

ISi -

Ji .0311

j’s 5,8,13 (2,1)

.0785

.0410

.0140

-

.0061

5,10,11 (1,2)

.0055

.1610

.0577

-

.0344

5,7,9 (2,1)

.0193

.0863

.0205

-

.0831

.0620

.1667

.0282

-

.0127

2,3,5,6,10,11,14 (4,3) 1,4,5,6,7,12 (5,1)

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Table 6.10: Motor Vehicles – Set 5 S.No 1. 2. 3.

Name Jay Bharat Maruti Rasandik Engineering Suprajit

si .6062

vi .0493

Ii .0062

ISi -

Ji .0028

.0975

.0067

.0023

-

.0014

.2310

.0908

.0356

-

.0227

J’s 1,2,6,12 (3,1) 6,10,11,14 (1,3) 7,8 (2,0)

Table 6.11: Motor Vehicles – Set 6 S.No 1. 2. 3.

Name Steel Strips Wheels Sundaram Fasteners Talbros Automotive

si .2845

vi .0279

Ii .0080

ISi -

Ji .0020

j’s 4,6,8,10,12,14 (3,3) 4,7,9,13 (2,2)

.5695

.0868

.0266

-

.0097

.0750

.0627

.0213

-

.0061

2,3,7,8,11,13 (4,2)

Table 6.12: Motor Vehicles – Set 7 S.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Name ANG Industries Automobile Corp Banco Products Bharat Seats Jay Ushin

si .0119

vi .0041

Ii .0035

ISi -

Ji .0030

j’s 5,11 (1,1)

.0299

.1161

.0278

-

.0217

9 (0,1)

.0334

.1713

.0323

-

.0154

4,7,8,9,13 (3,2)

.052 .0547

.0254 .0103

.0030 .0009

-

.0019 .0005

Motherson Sumi Munjal Showa Remson Industries Simmonds Mashall SML Isuzu Subros Ltd

.4011

.1265

.0116

-

.0033

.1304

.0513

.0100

-

.0062

1,10,12,14 (1,3) 1,6,10,12,14 (2,3) 1,3,6,7,9,12,14 (4,3) 5,7,8,13 (3,1)

.0094

.0189

.0023

-

.0010

.0109

.0902

.0135

-

.0033

3,5,10,12,14 (2,3) 3,5,7,14 (3,1)

.0877 .0978

.0636 .0903

.0097 .0134

-

.0041 .0074

2,3,4,5,7,8 (6,0) 6,10,11,14 (1,3)

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The time-series results for Force Motors and Gabriel indicate that the market shares remained steady despite the efforts of competitors to reduce their advantage. The choices of these firms w.r.to non-price choices contributed to this. It is, however, difficult to ascertain if consumer loyalty is purely due to the products or nonprice strategies. The transient market power advantages in the four-wheeler market are lower than those exhibited by Gabriel partly because there are fewer competitors in set 3. As indicated by Sundaram and Gabriel in set 3 these firms could manage their nonprice choices to consolidate the value of their products and had much less compulsion to maintain transient market power to stay competitive in the market.

6.4. Non-Price Rivalry The following observations are pertinent based on the above empirical evidence. (1) Note that the values of sij over j generally account for the observed si. Then, the weight for sij will be tij since it is calculated for each firm while aggregating over j. That is, the expectation is that si = ™j sij tij. This was computed. It was observed that it was not justifiable in almost all cases. sij contains information over and above si that provides the firm the market power that it has. Ultimately, the indices based on vi and sij, such as ISi, matter. (2) There is some empirical evidence that firms compete with rivals w.r.to every non-price strategy they utilize to convey the value of their products to the consumers. This is particularly valid in cases where the cross elasticities of demand are high. However, it is plausible that firms make such comparisons to augment transient market power. (3) Consumer valuation of products does not depend on differences w.r.to their choices of specific non-price decisions. Firms find such comparisons too expensive relative to the value addition they expect. (4) The combination of strategies that any firm chooses, without necessarily referring to what other firms are doing, accounts for the consumer valuation of products. Consumers may also overlook some strategies of firms.

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Figure 6.15: Motor Vehicles – Force Motors , ,6 and - 0.06

0.05

0.04

0.03

0.02

0.01

0

Legend: Blue I, Orange IS, and Grey J

Non-Price Choices

Figure 6.16: Motor Vehicles – Gabriel 0.06

0.05

0.04

0.03

0.02

0.01

0

Legend: Blue I, Orange IS, Grey J

137

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Figure 6.17: Motor Vehicles – Sundaram 0.06

0.05

0.04

0.03

0.02

0.01

0

Legend: Blue I, Orange IS, and Grey J

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139

Figure 6.18: Motor Vehicles – Jay Bharat and Jay Ushin , ,6 - 0.03

0.025

0.02

0.015

0.01

0.005

0

Legend: Blue Jay Bharat I, Orange Jay Bharat J, Grey Jay Ushin I, and Yellow Jay Ushin J Note: For Jay Bharat, the IS values were positive for 2002, 2003, 2006,2008, and 2016. Similarly, for Jay Ushin IS values were positive for 2003, 2010-2012, and 2016-17. However, for both these firms, the values were too small to plot in the same figure.

(5) Firms choose their non-price strategies with several objectives in perspective: price-cost margins and profit maximization, maximization of market shares, attracting and maintaining market shares dynamically, adjusting to market conditions governing costs of production in addition to sudden shifts in demand, as well as making changes based on the financial market considerations. Firms may influence cost curves through managerial choices. A similar inference, about the non-price strategies of a firm and its influence on market shares, can be conceptualized. Hence, this chapter suggests that non-

140

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price strategies have effects on both the cost and market shares. Both these aspects have implications for the market power of firms. Such strategies tend to help consumers estimate the value of the products on offer. One of the mechanisms that firms utilize to convey the value of their products to the consumers is to compare every one of their non-price choices with those of rivals. The empirical results indicate that such an approach offers little information about the value of the firm’s products. Firms may be targeting transient market power based on market shares. Such comparisons may also be purely defensive so as not to allow rivals to encroach on their market. It is also hypothesized that firms may find such comparisons far too expensive in comparison to the value addition they provide the consumer. The observation that many consumers simply ignore a bulk of advertising and other promotional messages reinforces this possibility.

CHAPTER 7 TRANSIENT MARKET POWER

7.1. A Few Observations Chapter 1 indicated that the market power of a firm arises from its interface with the consumers on the market and its interaction with rival firms. One possibility is that its market share contains information about the value of products resulting from its interface with the consumers. Hence, the firm attempts to evaluate the intrinsic value of its products by referring to its market share. Firms also tend to reduce the market shares of rivals in their attempt to derive transient market power. Such market share advantages will also depend on the firm’s valuation of products relative to the cost of achieving it. The analysis of Chapter 5 was based on such premises about market shares. However, the empirical results indicated that market shares do not contain any useful information about the value of products. Consequently, rival firms adopting strategies to cut into market shares of each other will have little significance in unraveling consumers’ valuation of products of a firm. It was conjectured that a better approach would be to acknowledge the influence of non-price strategies. In general, the non-price strategies of a firm may have more information in addition to that about market shares 36. Therefore, it was postulated that considering non-price strategies, delinked from market shares, would identify the mechanisms through which firms convey information about the value of their products to consumers. This was considered in detail in chapter 6 retaining the assumption that firms evaluate each of their non-price strategies vis-a-vis those of rivals for the same strategies. However, consumers may not find such across firm comparisons as relevant for three reasons. (a) They do not convey any information about the value 36

It was not possible to identify the channels through which non-price strategies alter the market shares of firms. Further analysis of the channels through which they convey the information about the value of products is necessary.

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of products. (b) The cost of such comparisons is excessive relative to the expected value increases. (c) There will be disproportionate transaction costs of switching between products once consumers developed loyalty to the products of any one firm. Similarly, consumers assign specific importance to each of the non-price strategies of firms in their attempts to calibrate the value of products. That is, they would view some strategies as more relevant in the process of discovering the intrinsic value of products. The empirical results of the previous chapter suggested that this approach is superior if firms experienced significant cross elasticities for their products. In general, it was noted that comparison across firms is directed more towards transient market power rather than the valuation of products. The viewpoint of consumers must be brought into the analysis since they ultimately determine the value of products. Indeed, intuitively, consumer valuation of products depends on the strategic choices of firms including the product choice, quality, the price offered, promptness of delivery, service after sales, and warranties. Consequently, it may be argued that consumers evaluate the entire range of strategies of each firm while comparing the value of products that they buy. However, while identifying the value of products, consumers may not be aware of, or not pay attention to, some strategies of firms 37. Frequent changes in the nature and quantity of non-price strategies may also be similar. In general, consumers may consider the quantum of some strategies of a firm to exceed those necessary to evaluate the value of products. Similarly, consumers may also view some strategies as a defensive reaction of firms to stay ahead of rivals. Consumers will ignore such strategies. These considerations must be in focus while constructing a consumer valuation index based on how consumers view different aspects of information conveyed by the strategies of firms. This change in emphasis can provide a better insight into the persistence of the transient market power of firms over time. It is necessary to assume that firms make the choices and consumers react to them. This process may result in IS > J. That is, consumers feel that firms place a greater emphasis on maintaining their position vis-à-vis rivals and 37 Every product will have several characteristics that provide a value to the consumers. One group of consumers may value one subset and another group may consider some other characteristics to be more significant. The variety of non-price choices of a firm may try to cater to several such preferences.

Transient Market Power

143

ignore some strategies that provide them information about products. On the other hand, IS < J occurs when the consumers view the strategies as a reflection of the greater emphasis that firms place on maintaining the value to them. In such a case firms tend to accept a lower market share and try to stabilize it. The resulting transient market power is eliminated only when consumers recognize that competition across firms is integral to the measurement of the market power of firms. Dynamic changes in the non-price strategies of firms signal such tendencies. IS will converge to J if all parties acknowledge the considerations of others. A new and efficient dynamic equilibrium will materialize. The present chapter outlines a method of approaching the issues from the perspective of the consumers. The IS and J measures detailed in chapter 3 will form the basis. The empirical results will indicate progress toward efficient strategies based on the convergence of the views of the consumers and the firms. They will also provide a more appropriate measure of the transient market power of firms. In the ultimate analysis, the market power of a firm is dynamic and stochastic. It depends on the inelasticity of demand generated by consumer loyalty and the stability of the demand curve, the position of the demand curve that a firm desires to obtain, the actions of rivals that allow the firm the market share that it desires, and the recognition and the adjustments that consumers make. In general, market power is not a concept related only to the unit sales of the firm. It must encompass all the above factors even if a per unit of sales measure is desired.

7.2. Empirical Results The index of value, based on how firms convey the value of products to consumers through their strategies, has been defined in ch.3. The estimated values were reported in ch.6. Similarly, the market power J was developed from the strategies j that satisfy Qij > 0. The number of strategies, j’s, that account for the positive values, have been classified as T1 (Type 1) or T2 (Type 2). The rest of this section will consider the qualitative nature of the strategies as well as their quantitative magnitudes reflected in J. The reasoning in section 7.1 suggests the following broad patterns.

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(1) Consumers prefer strategies that reflect valuation (strategies of Type I) compared to Type II strategies. (2) Firms react to rival strategies and financial exigencies that account for unexpected changes in costs, reductions in demand, and/or the requirements to acquire fixed assets. Some strategies may also be utilized to augment the market share of the firm in its interaction with rival firms. However, financial exigencies, instead of market share considerations, may explain T2 > T1. (3) T1 > T2 is not an expression of the adequacy of such strategies to convey information about the value of products to the consumers. Their quantitative magnitudes have an important role. Hence, it is necessary to examine an index such as J and its relationship to the IS index developed in the previous chapter. (4) It was noted in chapter 6 that the IS values for many firms are zero. They exhibit positive values only for a few firms and for some years between 2001 and 2017. Rather more specifically, IS = 0 indicates that rivals neutralize the strategies of the firm. As a result, its strategies are an inadequate expression of the value of its products. IS > 0 suggests that at least some strategies convey valuable information to consumers. Similarly, J > IS indicates that the firm prefers to emphasize its relations with consumers instead of their reactions to rival strategies. (5) Let sij* represent the choice of a strategy that conveys information about the intrinsic value of products to consumers. The firm utilizes sij > sij* to minimize the possible negative effect due to consumers negating some of its choices or its assessment of the cost efficiency of utilizing fewer strategies. In either case, it may be surmised that consumers generally anticipate that sij > sij* so long as the costs to the firm do not exceed the potential to generate value. Consumers will discover this and make the firm choose sij = sij* eventually. In other words, the reaction of consumers, though not that of rival firms on the market, explains such a convergence to efficient levels. (6) IS will be greater than J if firms give priority to competition among rivals whenever cross elasticities of demand are high. This can be expected as the dominant trend if the values of v are high. Similarly, firms with a high s, and thereby their ability to improve their market shares, will not bother to expand their markets. (7) As noted above, the difference between J and I is the transient market power of the firm in its relations with the consumers. Similarly, J > IS suggests that the firm seeks greater transient market power when dealing with rival firms. The actual choice depends on the assessment

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145

of the firm about the possible loss of value and/or market shares. The convergence of J to IS therefore indicates that the consumers acknowledge that the strategies that maximize the information they convey to them should also balance them with the reactions of rivals that are interested in maintaining a stable market share in the long run. (8) In general, it can be argued that all the parties involved calibrate the relative values of the products of rivals and direct their strategies to such intrinsic values if I, IS, and J are equal. It is, however, unlikely that such convergence materializes. Firms can be expected to gain transient market power in their interaction with consumers as well as rival firms. Such changes brought about by firms account for the dynamically varying choices of T1 and T2. (9) In industries, such as Textiles, Metals, and Paper, where the cross elasticities of substitution between products of different firms are high, firms orient their strategies to maintain their relative position among rivals though they do not entertain reductions in market shares created by adverse consumer valuation of their products. The role of Type I strategies in such a context may be to stabilize their market shares by improving consumer loyalty. Advertising and selling expenses, inventory, and an increase in retail outlets over a wider geographical area will have such dual roles. A few details about different industries may be noted now.

7.2.1. Textiles Recall that products of different firms in the Textile industry have relatively high cross elasticities of demand. Hence, consumers expect that the strategies of firms will be directed to react to the strategies of rival firms. However, note that T1 > T2 thereby suggesting that the emphasis of the firms is mostly toward signaling the value of products to consumers. Similarly, high values of s do not induce firms to use more non-price strategies. However, a decreasing value of v signals autonomous increases in costs. This prompts firms to resort to external borrowings. Consumers may consider this as a negative indicator regarding their products. The requirement to keep consumers in their fold mattered more than the availability of finances while increasing T1. More T2 strategies are discernible when the financial position deteriorated. However, J > IS and T1 > T2 were maintained. The indication is that financial constraints are not a deterrent to targeting consumer valuation of products.

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Seven firms recorded a value of IS greater than that of J. These firms prefer comparing each of their strategies with those of rivals in their quest to project the value of their products to consumers. Generally, all these firms have low market shares but high enough values of v. It can be inferred that they operate in markets where their products are well established and have relatively inelastic demand (at least the cross elasticities tend to be minor). This signals the following pattern of managerial choices. Consumers consider certain strategies to be useful in revealing the value of products to them. Firms choose their strategies accordingly. However, they can compete against rivals given the high v values that they experience. Hence, firms place a value on IS as well. Other firms are not able to emulate these firms essentially due to a lack of resources and/or higher elasticities of demand that they experience. Market power over the long run is more important for them in comparison to transient market power. The differences in the elasticities of demand for their products are an important determinant of the differences in the choice of their strategies. Loyal Textiles and Shri Dinesh experienced these persistent trends over time. The necessity for choosing a low T1 is indicated by the high values of s for Loyal. Further, the increase in C/S is autonomous since s is rising over time. It suggests that the firm could not afford high T1 as well. However, given the nature of competition, Loyal had to seek transient market power to stay ahead of competitors. T2 > T1 for many years. The priority was to keep s high and stable. Shri Dinesh had to look inward to regain or maintain its market position given its low and decreasing s. Given a high value of v, it had little reason to seek transient market power. Thus, J is close to I most of the time. Falling s and resource availability within the firm made its management concentrate on the efficiency of its non-price choices rather than compete with rivals. T1 > T2 suggests this trend. Seeking a greater market share (Type II strategies) would not be efficient for most of the firms if they have limited resources 38. A large value of s would reverse the roles. Such firms find it possible to utilize Type II strategies to augment their market share. The shifts in the demand curve are perhaps more prominent than the changes in the elasticity of demand.

38 The resources available to the firm, in its pursuit of non-price strategies, depend not merely on the market share but also on the price cost margins. Thus, a firm with a low market share, if it exhibits a higher price cost margin, may nevertheless utilize a variety of non-price strategies to consolidate and/or increase its market share. This was noted in Rao (2020, p.65).

Transient Market Power

147

Figure 7.1: Textiles – Loyal and Shri Dinesh 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Legend: Blue Loyal T1, Orange Loyal T2. Grey Shri Dinesh T1, and Yellow Shri Dinesh T2

7.2.2. Textiles – Set 1 The results are analogous to those recorded earlier. As can be noted from Fig. 7.2 Seasons Textiles indicated a preference to maintain the value of its products in preference to a higher market share. Seven firms, viz., Amarjyoti, Cheviot, HP Cotton, Loyal, Mayur, Reliance, and Shri Dinesh indicated IS > J. These firms consider it important to react to rival strategies. As a result, their strategies did not place an equal emphasis on the consumer valuation of their products.

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Figure 7.2: Textiles – Set 1 – Season 7H[WLOHV APM Industries 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2002200320042005200620072008200920102011201220132014201520162017 Legend: Blue Season T1, Orange Season T2, Grey APM T1, and Yellow APM T2

The following pattern represents the hierarchical choice of efficient managerial practices. To begin with, firms choose strategies that are the most efficient within their portfolio. In general, firms with a low market share do not have the resources to compete for higher market shares. They tend to be satisfied with maintaining the value of their products and consumer loyalty. Generally, J > IS for such firms. At the ensuing stage, they will consider strategies that give them an advantage relative to rivals. The substitutability of products of different firms in the Textile industry compels these firms to adopt such strategies.

7.2.3. Machinery Table 6.2 presents the relevant estimates of J. As noted earlier, each firm has a market that is virtually independent of rival firms as indicated by the lack of standardization of products. The IS measure is zero for all the firms

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149

due to this. It also suggests that such firms have the sole aim of projecting the value of their products to the consumers by adopting efficient strategies. This feature explains the prevalence of positive J values for all the firms. Apriori, it will be expected that large firms need not utilize several j’s since they are already well established. On the other hand, firms with low market shares will not generally have the resources to implement many nonprice strategies. The estimated results do not support this conjecture. In other words, the availability of finances has not been a significant consideration for the choice of the variety of strategies that firms employ. However, the observation that T1 > T2 has been consistently valid irrespective of their market shares. Firms tend to give priority to signaling the value of their products to the consumers and not so much to improve their market shares. Most firms depend on retained earnings and their accumulation over time to finance net fixed assets. They tend to moderate operating expenses and selling costs to be in control of finances. Firms generally resort to borrowing and external finance only if unforeseen market conditions either increase their inventories and/or create autonomous increases in costs of production and sales. The major sources of increases in T2 are external finances and the necessity to moderate interest payments. As such it cannot be concluded that they are utilized to increase market shares. Only a few firms depend on exports and the underlying uncertainties have been a source of financing problems for the firms. Consider the time series analysis of some firms in this industry. Note the following findings for Shakti Pumps and Mazda. These firms indicate contrasting preferences as reflected in Fig.7.3. Mazda was content with preserving the value of its products. Thus T1 > T2 for all the years. However, Shakti Pumps chose to prefer T2 > T1 for many years. It corroborates this preference since IS > J. The analysis of Escorts and BEML indicated the following trends. First, these firms have been emphasizing Type I strategies mainly to improve the consumer valuation of their products. Thus, for instance, they emphasize inventories, operating expenses, and building internal financial resources to finance net fixed assets mainly to improve the consumer valuation of their products. This viewpoint was supported by the observed T1 > T2 for all the years. Second, the trends in J are somewhat mixed. It was steadily decreasing for Escorts. However, it was increasing for BEML. Posner’s conjecture, about competition eroding transient market power over time, was not observed on any consistent basis. Third, J may increase if T1 is used to improve the market valuation of products. Note that an increase in T2 choices may be purely due to the requirements to moderate

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external finance rather than improve the market shares of firms. Further, consumers may not emphasize market conditions related to external finance while evaluating the value of the products of the firm. In sum, firms in the Machinery industry utilize strategies of Type I to signal the value of their products to the consumers. Firms may utilize Type II strategies either to improve the market share and/or tide over problems related to financial markets. Transient market power may be persistent irrespective of the market share of the firm. Firms tend to take advantage of transient market power if the costs of doing so are manageable. Figure 7.3: Machinery – Mazda and Shakti Pumps 6

5

4

3

2

1

0

Legend: Blue T1 Mazda, Orange T2 Mazda, Grey T1 Shakti Pumps, and Yellow T2

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151

Figure 7.4: Machinery – Escorts and BEML T1 T2 6

5

4

3

2

1

0

Legend: Blue Escorts T1, Orange Escorts T2, Grey BEML T1, and Yellow BEML T2

7.2.4. Steel Observe that the J values are positive and the IS takes a value zero throughout the time under study. That is, firms in this industry attempt only transient market power w.r.to rivals in the market while consolidating their position vis-à-vis consumers on the market. Light and durable materials have become competitors for these products. Hence, the demand for these products is mostly affected by firms producing alternative substitutable products belonging to another industry. A substitution away from metallic products accounts for the reduction in their demand. However, the Metals group either did not experience significant cost increases or the firms could adjust prices so as not to depend on increased borrowing from financial markets.

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In the earlier years, until 2007, Tata Steel depended on maintaining net fixed assets, controlling cash on hand/current liabilities, and taxes/total income. After 2008 they had to depend on cumulative retained profits to sustain net fixed assets and selling expenses/sales to maintain their brand image over the long haul. Their efforts were mostly to convince the consumers of their products, to gain their loyalty, and maintain their market power in the long run. The debt-equity ratio and external financing were not significant. Almost all the efficient strategies of the firm relate to what can be made more efficient within the firm. There is no evidence that the firm is making attempts to influence the external market conditions. On the other hand, based on a consistently low market share, Ashiana had to manage its activities primarily based on its internal strengths. Thus, it resorted to retained earnings that, when accumulated over time, were utilized to finance net fixed assets. Similarly, the firm was efficient in managing its operating expenses. It experienced a steady increase in costs from 2005 but it could keep its debt-equity ratio at efficient levels. The firm is operating in a competitive market and utilized internal resources efficiently to maintain its position w.r.to consumers on the market. It was expected that a firm with a larger s has resources to sustain more nonprice strategies. Hence, J is expected to increase. However, the evidence is mixed. In other words, some firms are guided by the fact that a large s does not require them to utilize more non-price choices. Similarly, firms with a larger s do have a larger J and utilize these strategies to project the value of their products. The major non-price strategies pertain to inventories, working capital, selling expenses, and current ratio. T1 > T2 is generally valid. However, six firms turned out to be exceptions: Balasore Alloys, Carnation Industries, Hisar Metals, Shetron Ltd., and Uttam Galva. Though JSW Steel was in this category for the Metals group the role reversed when Steel alone was considered. T2 > T1 can only be an indication of the desire to improve market shares. Kalyani Steels managed the current ratio, working capital/sales, and taxes/total income efficiently for many years until 2010. Refer to Fig.7.5. It maintained an efficient fraction of retained profit/sales and managed to finance fixed assets by cumulative retained profits. The firm sparingly utilized selling expenses to promote its products. There is no clear evidence that they utilized non-price strategies to provide information to consumers about the value of their products. The process did not result in their achieving an adequate market share to enable them to exhibit any short-run advantage.

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Consider the time-series results for Tata Steel and JSW Steel. Both these firms have the largest v. Though leaders in market share Tata Steel lagged behind JSW Steel after 2010. The trends in J over time indicated a steady decline for JSW Steel while it increased over time for Tata Steel. Tata Steel was aggressively utilizing several Type I strategies to protect the value of its products to maintain an otherwise decreasing market share. On the other hand, Anil Special Steels and Monnet Ispat, though having lower market shares, utilized Type II strategies to achieve an improvement. Figure 7.5: Metals – Steel – Kalyani and Panchmahal 6

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Figure 7.6: Metals – Steel – Tata Steel and JSW Steel – T1 T2 6

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Legend: Blue Tata Steel T1, Orange Tata Steel T2, Grey JSW Steel T1, and Yellow JSW Steel T2 In general, the strategies of firms in this industry were mostly utilized to convey the value of their products to the consumers (Type I) and Type II to improve their market share. All the firms in this industry experienced a reduction in demand due to new and lighter materials replacing steel. Tata Steel had to resort to greater use of Type II strategies to stabilize its dwindling market share. The reduction in J for JSW Steel, despite an increase in its market share over time, can also be explained along these lines.

7.2.5. Paper Consider the results for the cross-section of firms. See Fig.7.7. Most firms prefer T1 > T2 to signal the value of their products to consumers. The exceptions are Cosboard, Rajeshwaranand, and Tamilnadu Newsprint. The

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Paper industry experienced competitive pressure from digital technologies. As such, it was expected that they would consider staying ahead of rivals in addition to signaling the value of products to consumers. That is, IS > J is expected. However, this was not the case. The results, relating to the crosssection of firms, indicate that their preference is to obtain whatever transient market power they can. The disadvantages related to cost may be the reason for such a choice. Figure 7.7: Paper – T1 and T2 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1

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The time-series results indicate some contrasts. As evident from Fig.7.8, Ballarpur utilized T1 > T2 throughout. On the other hand, Tamilnadu Newsprint switched to T2 > T1 after 2010. Both firms consider signaling the value of their products to be significant in the market with decreasing demand. In other words, they prefer market advantages over the long run to hit-and-run transient market power improvements in the short run. Increasing competition necessitated Tamilnadu to choose market share

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advantages in recent years. That J > IS suggests that these changes are marginal and that they prefer consumer loyalty over obtaining market share advantages in their interaction with rival firms. It may be suggested that these firms prefer to maintain a stable market share and consumer loyalty. Figure 7.8: Paper – Tamilnadu and Ballarpur- T1 and T2 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Legend: Blue T1 Tamilnadu, Orange T2 Tamilnadu, Grey T1 Ballarpur, Yellow T2 Ballarpur

7.2.6. Motor Vehicles Industry Refer to Tables 6.6 – 6.12 of the previous chapter. T1 > T2 for these groups of firms. This result is analogous to the patterns of all other industries studied so far. However, every group of the Motor Vehicles industry provided results contrasting significantly with the other industries detailed above. First, competition for market shares among firms, leaving out major firms like Gabriel and Bharat Forge, in each of the groups is evident. The capital investments in this industry are rather large and had to be financed

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by external sources. Hence, the T2 choices, though fewer in number compared to T1, were important. Second, as noted earlier, firms with large market shares do not require the use of many non-price strategies while those with low s cannot afford many due to financial constraints. This result is valid for most sets in the Motor Vehicles industry. Third, selling expenses and export earnings are not necessarily oriented to improving market shares. Instead, the financial requirements account for the observed patterns. Fourth, J values do not exhibit any consistent convergence to I. Therefore, it should be noted that market competition does not reduce the transient market power. As noted in the context of Set 1, competition makes the s values similar but the use of non-price choices, to indicate the value of their products and improvements in market shares, persist. See Table 7.1. Motherson, which has the second-largest s, is competing for more market share and T2 > T1 after 2011. Auto Corp had J > 0 though s is low (Type I). Most firms attempt to maintain or improve the value of their products (Type I) and accept market shares that the market for their products offers. Generally, all firms in this industry concentrate on strengthening the internal procedures and strategies to establish their products in the long run. Strategies, purely directed to outside operations, were utilized periodically to maintain their market share. That is, the choice of Type I vs. Type II strategies will be expected to depend on s. This was not the case. The only consistent observation is that Type I strategies were used mainly to establish the value of the products. However, choices of Type II were not neglected. Until 2009 Ashok Leland concentrated on building markets for the firm (Type II). They shifted to Type I strategies only after 2009. Force Motors used both types of strategies consistently. However, they did give priority to Type I. Hindustan Motors was concerned with building market conditions outside the firm for the simple reason that new and better products were making it difficult to stabilize its market share. They emphasized the availability of internal finances for a few years. Mahindra & Mahindra emphasized the efficiency of internal operations most of the time to establish their brand image. However, they had to resort to external borrowing in the later years due to heavy investments required to stay competitive in the market. The strategies of Tata Motors were mostly oriented to maintaining the efficiency of their strategies. The firm paid little attention to markets given their dwindling influence against the competition. Bharat Forge has the largest market share in Set 4. Bharat Gears, Himtech Forge, RASL, and ZF Steering indicated large J though s is low. IS > J was recorded for Frontier Springs, Gabriel, and Force Motors. It was noted for Sundaram Fasteners after 2003.

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Table 7.1: Motor Vehicles Industry (T1 T2 Name Ashok Auto Corp Force Motors Frontier Springs Gabriel Mahindra Motherson

I .01403 .02777 .03940 .04364 .02621 .02426 .01163

IS .03755 .01592 -

J .00432 .02170 .01730 .01358 .01489 .01089 .00733

J’s 4,6,9,10,11,14 (2,4) 9 (0,1) 1,2,3,7,8,12,13 (5,2) 2,4,8,10,11,14 (3,3) 4,5,9 (2,1) 1,7,8,13 (3,1) 1,3,6,7,9,12,14 (4,3)

Most sets in the Motor Vehicle industry exhibit similar patterns. The only exception is set 3. The few firms in the market compete with the choice of non-price strategies of others and make IS positive. But they are acutely aware that their strategies should be efficient when taken in isolation. Hence, J > 0 though the priority is for comparisons across firms 39. Note that IS > J only for Frontier Springs and Gabriel as reflected in Table 7.8. Consider Figs. 7.9 and 7.12. Sundaram experienced high values of s and was able to compete with rivals to indicate the value of their products and maintain market power. This is reflected in T2 > T1 generally. The firm did not attempt transient market power as a priority. Jay Ushin also has T2 > T1 and made choices to obtain a larger market share. However, the value of v was considerably smaller to achieve an improvement. On the other hand, Jay Bharat was content with maintaining their market valuation by holding T1 > T2 and accepted the lower market share that could be achieved.

39

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Figure 7.9: Motor Vehicles – Jay Bharat and Sundaram – T1 and T2 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Legend: Blue Jay Bharat T1, Orange Jay Bharat T2, Grey Sundaram T1, and Yellow Sundaram T2

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Figure 7.10: Motor Vehicles – Gabriel and Bharat Forge T1 T2 6

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Figure 7.11: Motor Vehicles – Maruti and Amtek 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Legend: Blue line Maruti T1, Orange line Maruti T2, Grey line is Amtek T1, and Yellow line Amtek T2

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Figure 7.12: Jay Ushin 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Legend: Blue Jay Ushin T1, Orange Jay Ushin T2

In general, the following observations are pertinent: (a) Most firms depend on managerial processes within the firm to improve their performance. (b) Those that consider factors outside the firm depend mostly on controlling borrowings and the implied interest payments. (c) Most of the firms experienced larger debt and borrowings despite attempts to maintain net fixed assets. They had to control them so as not to lose their brand image among the consumers. (d) Exports have not been generally favorable and fluctuations over time impinged on inventories and resulted in borrowings. The common observation about different firms in an industry at a point in time, and over the years, is that the use of strategies (Type I or Type II) has been highly variable 40. The available data does not allow a comprehensive 40

Such stochastic variability, that is difficult to explain with the available data, may be purely due to firms trying to keep competitors at bay regarding their choices and/or their variation over time.

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examination of the reasons for such a choice. The inference offered in the above analysis is perforce piecemeal and incomplete.

7.3. Summary As noted in Chapter 6, some non-price strategies are a reaction to rivals. While analyzing these results it was noted that for some firms, in the Textile industry and Motor Vehicles Industry, the values of IS index of Chapter 6 were larger than the corresponding J values reported in this chapter. Some firms, that experience high cross elasticities of demand, consider comparing each of their non-price strategies with those of rivals as more important. In other words, though they consider optimization of their strategies sufficiently important, they would consider relating their strategies to those of rival firms to make sure that they are not undercut. Some firms may consider this behavior to be superior in contrast to seeking transient market power in competitive markets. It may be concluded that constant changes in product and other non-price strategies provide only unstable and transient market power and firms gain more by stabilizing or improving their v values in preference to striving for a high and stable market share. Firms with low but stable market shares over time concentrate on strategies that convince the consumers about the value of their products. In other words, each firm structuring its strategies to convince consumers of their value was deemed superior to seeking higher market shares while competing with rival firms. This process was in addition to the strategies directed towards the efficiency of the internal operations of the firm. Over time this gives every firm a stable demand and its resultant elasticity of demand. However, markets appear to remain chaotic and create stochastic dynamics to prompt firms to capture transient market power in addition to accepting the advantage that its products and managerial processes provide.

CHAPTER 8 CONCLUSION

8.1. Economic Theory Firms design products that cater to the heterogeneity of values that consumers seek. They also wish to stabilize the demand curve for their products while seeking transient advantages over rivals whenever possible. In essence, finding ways of distinguishing themselves from rivals and deriving market power is their primary objective. However, the markets, for firms operating in an industry characterized as a differentiated oligopoly, are turbulent. Thus, identifying a relatively stable demand curve, around which fluctuations may be sporadic and transient, is the essence of the differences in the strategic choices of firms. An economic theory that can integrate the random fluctuations around a stable trend was attempted. It is expected that firms wish to obtain a stable, though not necessarily high, market power even when they pursue different objectives. Some strategies of firms may be directed to identifying the value of products to consumers, a few may target market shares, and yet others may strive to achieve stability of their goals. As a result, it is necessary to acknowledge that several conflicting objectives may be directing managerial choices. However, in general, it is not possible to identify all the objectives that firms pursue in making their decisions. It is only possible to observe the consequences of their choices. The empirical evidence generally suggests that competition among rival firms will not enable a firm to adhere to the theoretically defined price-cost margins. The near absence of a stable market demand curve also necessitated altering the concept of the market volume w.r.to which pricecost margins can be defined. Further, several cases of industrial products are such that the demand for their products depends on the upstream products that complement their use. In such cases, substitution with products from another industry may determine the market power. This phenomenon will be observed if technological changes w.r.to the use of materials and standardization of subassemblies emerge. This was especially

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significant in the context of Metals, Paper, and other industries. The market power measure proposed in this study integrated not only the markets of rivals within a conventionally defined two-digit industry but also accounted for competitive products across different industries. In general, the definition of market power should integrate the effect of the market interface with consumers and those among competitive rivals. This generalization is one of the basic achievements of this study. Conventionally, economic theory attributed market power either to the elasticity of demand or market share considerations. On the other hand, the choice of non-price strategies accounts for the market power in the context of a differentiated oligopoly. It is not altogether clear if they operate through changes in either of the generally considered objectives. Instead, they seem to offer market power advantages over and above them. In general, this study postulates that firms tend to maximize their market power which subsumes considerations of profit and market shares. The concept of market power due to the value addition of products was introduced, as a necessary generalization of the notion of market demand, to operationalize such an integration. It was clear that firms attempt to stabilize their market demand curves as well as attend to the requirements of obtaining transient advantages whenever possible. Hence, it was necessary to separately define and estimate the market power attributable to these two components. Further, it was shown that Type I strategies that signify the choices of the firm as they relate to activities within the firm are more prominent compared to Type II strategies that are directed to the relationship of the firm with outside agents. Further, the interaction of a firm with rivals and financial institutions requires attention. The usual observation, that market forces eliminate the transient market power over time, was valid only in a few contexts. The determinants are (a) the cross elasticities of demand for products, (b) the emergence of a market leader and competitive fringe, (c) the uniformity in the elasticity of demand, (d) an increase in the number of firms with products of related industries emerging as competitors, and/or (e) the recognition by consumers that the actions of a firm to an increase in its market share are not commensurate with the requirements of revealing value to them. The elimination of transient market power can be expected in markets where products are close substitutes. However, even in such a case, firms may find it advantageous to keep the transient market power high. Much of the

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persistence depends on rival actions as well as the financial position of the firm. Indeed, greedily pursuing an increase in market power or profit maximization may not be possible in the long run. Firms may seek to maintain transient market power to improve the recall value to consumers. It may also be a purely defensive reaction. This tendency may be more pronounced in markets where the cross elasticities are high. Consumers generally do not pay attention to certain non-price overtures of firms because they do not provide them any information about the value of products. They may also tend to neglect strategies that attempt to lure them away from rival firms and their products. In effect, consumers may not find switching to be advantageous due to transaction costs. This provides one reason why firms do not give priority to comparing their strategies with those of rivals. They may do well to choose strategies that efficiently convey the value of their products to the consumers. Such strategies of firms vary dynamically, and it would be worthwhile to identify the changes, their consequences, and their efficiency. Such an exercise will offer guidelines to the management in improving their performance over time. However, a comprehensive statement of these relationships was not possible due to the paucity of relevant data. In sum, the economic theory related to industries characterized as a differentiated oligopoly should acknowledge the requirements of firms stabilizing their markets as well as creating and taking advantage of stochastic variations in demand and/or costs of production and distribution. Transient market power and its persistence over time have been highlighted.

8.2. Empirical Findings The empirical results indicate that competition among firms w.r.to market shares do not provide adequate information to consumers about the value of the firm’s products. At best, firms may be targeting transient market power based on market shares. Similarly, the comparisons may be purely defensive. Firms may find such comparisons far too expensive relative to the value addition that they provide the consumer. This possibility was reinforced by the observation that many consumers simply ignore a bulk of advertising and other promotional messages. The stochastic dynamic strategies of firms, considered in isolation from those of rivals, are designed either to convey the value of their products to consumers, to achieve stability of their demand, and/or to obtain transient market power. The study developed indices of market power that include

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the conventional Lerner measure and Herfindahl indices as special cases and considered maximization of market power as the dominant objective. Empirical results related to the market power of firms in several industries in India have been presented. Consumers’ preferences are not an immutable constant in any realistic setting. Leaving the market power entirely to the external market as revealed by consumer preferences and/or competing with rivals are two ends of a spectrum. Instead, choosing one or a few unique, and perhaps not so easy to imitate, strategies provide most firms the competitive advantage they desire. Firms develop their strategies to enable consumers to discover the value of their products. The attempt to turn market shares in their favor will attract retaliation by rivals and result in an unsustainable redistribution of market power. The dynamic variation in the strategies of firms is directed to indicating the value of products to the consumers rather than gain short-run market share advantages. These variations can be explained by the external market conditions and the changes in managerial practices. Some of these practices try to influence the market conditions while others emphasize the efficiency in the use of resources available to the firm. In either case, non-price choices have a prominent role in managerial choices. In general, firms compare their strategies with others that they choose to employ. The alternative of comparing them with those of rival firms may turn out to be impractical. However, they predominantly occur in industries where cross elasticity of demand is high. Changes in market shares cannot explain the fluctuations in IS and/or J over time. The changes in the non-price choices that brought about these fluctuations have a deeper explanation from the managerial viewpoint. However, the available data was insufficient to explain all the observed patterns. Adopting several strategies, either among its choices or relative to those of rivals, is not beneficial to the firm in its quest to obtain market power. The simple guideline for the management is to utilize one or a few strategies as distinguishable from the choices of others. However, a firm’s choice of a strategy depends on the objectives that the management is pursuing. In general, a strategy to maximize the market share may not be commensurate with profit maximization. Similarly, the obvious drawback is that rivals can discover it and imitate the same when a firm utilizes a single strategy. It

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should also be acknowledged that the procurement and supply chain management of Walmart appears to provide it an advantage that few others could imitate. Such choices may not be traceable in the quantitative analysis of the type envisaged in this study. In general, intuition and ingenuity remain the most important aspects of managerial choices.

8.3. Results Specific to Industries The empirical experiences concerning the different industries can be classified based on (a) high cross elasticities of demand, (b) decreasing market demand even when cross elasticities are low, (c) Ȟ > 1 and increases in sales, (d) Ȟ < 1 but autonomous increases in costs, and (e) high NFA and consequently borrowings. The attitudes of the management provide another dimension for classification. For example, firms do not have the resources to augment their market share when the price-cost margins are low. Similarly, firms with high price-cost margins may not be inclined to utilize the available resources to stabilize or improve the consumer valuation of products. Consequently, the number of classification schemes becomes large. They may overlap in the context of some firms. In general, some patterns have not been brought into the above analysis. Detailing some observed patterns without going into the identification and circumstances of specific firms would be instructive.

8.3.1. Textiles Pattern 1: Some firms have high cross elasticities of demand. IS > J for these firms. It is an indication that firms take rival choices into account while examining the efficiency of their strategies. Firms focus on strategies that increase the value of their products, as viewed by the consumers, even in such cases. They also focus on maintaining their market shares. The costs of their strategies and the financial requirements do not appear to deter them from adopting such strategies. Pattern 2: J > IS for some firms. In these cases, firms tend to choose efficient non-price choices. In general, two or more strategies may be adopted. There was a tendency for IS to converge to J in the context of Garware Technical Fibers signaling that it considers competition with rival firms as equally significant. Pattern 3: Some firms, such as Maharajashree, Super Spinning, and Vardhman Polytex, had values of C/S > 1. Their borrowings accounted for high costs though sales did not match the addition to fixed assets. In the

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context of Alok Industries, for example, autonomous increases in C were discernible. This created a downward spiral in market shares. This firm fully integrates consumer value into its decisions relative to competitors. Pattern 4: When Ȟ > 1, there was a limit on the increase in sales since adequate increases in NFA, technical change, and cost reductions were not possible.

8.3.2. Machinery Pattern 1: In general, the absence of standardization of products and accessories implied that the cross elasticities are low. As a result, J > IS for most of the firms. Pattern 2: An increase in sales after 2008 reduced the pressure on borrowings and improved v in the context of Bosch Ltd and Shilp Grauvers. Further, the values of m and n were close to each other suggesting that market shares were an adequate indicator of the value of their products. However, the elimination of transient market power was not due to market response. Siemens experienced an increase in the transient market power though it was in a similar situation. This is additional evidence that competition w.r.to the market shares per se cannot reduce transient market power. Pattern 3: Blue Star, IP Rings, Kilburn Engineering, and Walchandnagar Industries experienced diseconomies of scale and made it difficult for them to target larger market shares. The increases in NFA could not reduce their costs. Reductions in market power for Escorts and BEML were due to autonomous increases in costs.

8.3.3. Steel Pattern 1: The availability of lighter materials from related industries enabled consumers to substitute such products for steel. But J > IS unlike the case of Textiles. However, Tata Steel, JSW Steel, and SAIL exhibited convergence. That is, their strategic choices could overcome the effect of substitution. Pattern 2: Jindal Steel and Kalyani Steels experienced increases in sales and market shares. However, increases in NFA and operating expenses resulted in borrowings and an increase in costs disproportionate to the increase in sales.

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8.3.4. Paper Pattern 1: Some firms, such as Ballarpur, JK Paper, and West Coast Paper experienced significant reductions in demand (and increases in inventories) due to competition from digital technologies. This resulted in problems of production and distribution. Their inventory management created the need for greater operating expenses and borrowings. Similarly, they experienced increases in costs as well. Pattern 2: Tamilnadu Newsprint did not experience similar reductions in demand despite cost increases. This may be due to its localized markets.

8.3.5. Motor Vehicles Pattern 1: Mahindra and Mahindra experienced setbacks until 2008. They seem to have experienced disproportionate increases in costs due to their efforts to gain market share. Further, competitive pressure prevented them from pricing based on the Lerner measure. Consequently, the value of v has been declining. This cannot, however, be interpreted to convey an increase in the elasticity of demand for their products. Pattern 2: Amtek Auto and Gabriel have been maintaining steady market shares despite the cost increases that they experienced. However, competitive pressure cannot explain the decreases in v. By way of contrast, both Jay Bharat and Sundaram experienced a steady v and s. Pattern 3: Sets 1 through 4 have substitutable products. Hence, it is expected that there will be patterns analogous to those in the Textile Industry. However, this was not the case. In general, consumers appear to develop brand loyalty for the products of specific firms and enable them to maintain their market shares. Force Motors and Gabriel maintained steady market shares. For the years 2010 through 2017 the values of IS exceeded those of J. It indicates that brand loyalty, achieved through non-price choices, is more important compared to the increases in market shares. The transient market power advantages in the four-wheeler markets are lower than those exhibited by Gabriel due to fewer competitors in Set 3. As indicated by Frontier Springs and Gabriel in Set 3 these firms could manage their nonprice strategies to consolidate the value of their products to the consumer and had much less compulsion to maintain transient market power.

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8.4. Limitations The conceptualization of non-price strategies is open-ended. They can relate to product choice, organization of production and distribution, and financial arrangements. As such, some of them may be directed to the efficiency of operations of a firm while others may be directed to its interaction with other firms, input suppliers, marketing agents, and financial institutions. The range of choices that require attention is large. The data utilized in this study was from the profit and loss statements of firms. It provided only financial statistics. The production and internal organizational details of firms were not available. In general, the data for some necessary variables is hard to obtain on any consistent basis. Hence, the study may have missed some important non-price strategies. A broader question about the group of firms in a sample surfaced. It was necessary to consider the possibility that there will be specific clusters of firms within an industry that are competitive between themselves but would have negligible market power across a wider set of potential rivals. A twodigit classification of industries will create difficulties in isolating the market power of some firms. In general, an analysis of this nature makes it important to identify the correct subset of firms that are competitive within a group. It was possible to segregate firms based on the type of products in the case of the Motor Vehicle industry. In the Minerals industry, firms producing steel and steel products were identified. Each of the groups was examined separately. A group of 30 firms in the textile industry did not indicate any market power when taken together with the rest. This group exhibited patterns analogous to the larger group when they were analyzed independently. The distribution of market demand tends to be localized. It may happen for demographic and cultural reasons. It may also be a consequence of the logistic costs of catering to larger markets. As a result, firms may utilize subsidiaries and franchises to reduce costs while expanding their markets. To account for the changes in market power due to such arrangements is important. However, both data limitations and conceptual details precluded such attempts. There is a chance that some aspects of market power are not accounted for when clusters are considered. For example, in the Motor Vehicles case, a manufacturer of cars may need parts, accessories, etc. Such transactions may bestow market power on either of the firms. Similarly, a firm

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contracting to produce complementary products of some other firm may nevertheless provide some market power to the original firm. The concept of what constitutes a firm would need further study. Clusters of firms can be identified on purely statistical terms to improve the analysis. But it is more useful if the clusters can be determined on economic, geographic, or managerial considerations. The available data did not offer any guidelines for doing this. Essentially, the question of identifying clusters of competitive firms requires further examination before any practically usable conclusions can be arrived at. This is a fundamental limitation of all studies of this nature. There is a significant variation in the non-price strategies that provide market power advantages to a firm, and its competitors, over time. The data was insufficient to explain such variations. Note that the consumers may not assess the relative usefulness of all the products to them before making a final decision even if firms provide the necessary information about their products. In general, consumers tend to ignore some choices of the firm. Further analysis is necessary to identify this aspect of behavior and its implications for market power. Firms within small clusters have market power while they cannot manage to get the same in a large group of firms. It may also arise when only a limited set of non-price choices are utilized in the analysis. For instance, firms in the electronics industry may be consolidating their market power by implementing certain marketing strategies that have no bearing on financial statistics. In the final analysis, a specification of the relevant variables, the appropriate relationships between them, and the constraints in the process of making decisions determine the efficiency of the statistical and optimization techniques of analysis.

8.5. Looking Ahead The important directions for further research can be at least along the following dimensions. (1) In general, firms utilize non-price strategies towards objectives other than profit maximization or market shares. It would be worthwhile to direct attempts toward establishing a relationship between non-

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price choices of a firm, its profits, and the market share. Such an analysis would provide greater credibility to the proposition that maximizing market power, including transient advantages, should replace such objectives. (2) It would be useful to structure a market power index based on comparisons at different time points since it was found that firms tend to make comparisons across their own choices. (3) A more comprehensive analysis of the reasons for differences in the strategies across firms and that of a firm over time will be necessary to provide meaningful guidelines for managerial practices. The issue of choosing efficient strategies over time can be converted into a machine-learning algorithm if such information is available. (4) Throughout the study it was assumed that the observed market share will reflect both the consumer valuation of products and the competitive responses of rivals. It would be desirable if an ex-ante measure of the consumer valuation of products can be developed even if this is generally valid ex-post. (5) Cross-price elasticities have an important role in determining the relevant measure of market power. It would be useful if they can be estimated for at least identifiable competitive firms. (6) Appropriate clusters of firms for analysis have not been specified on any objective criterion. Developing further insights into this process would be useful. (7) It is important to find an operationally useful method of isolating potential rivals and identifying the appropriate weights to them in the firm’s quest to obtain transient market power. (8) Identifying the total market sales over which the market power index is defined is important. This can be approached logically if the clusters of rival firms can be defined objectively. Similarly, a usable definition of dominant strategies of firms is in order.

APPENDIX I THE DATA AND NON-PRICE STRATEGIES

The data for this study was from the Prowess of CMIE. The data generally pertains to the years 2001-2017. The data for the following industries had been examined in detail. 1.Textiles, 2. Machinery, 3. Metals and Minerals, 4. Paper Products, and 5. Motor Vehicles. Several broad criteria were followed in choosing the firms for the analysis. (a) Estimation of Ȟ for each firm necessitated a reasonable time series data on C and S. Hence, at least 12 years of data was necessary. The final sample generally contained data for the entire period 2001-2017. (b) The data for non-price strategies (defined below) was a significant constraint. Many firms in the big data provided by CMIE did not report the requisite data. They were eliminated. (c) After the initial cleanup of the data, it was noted that some data was either internally inconsistent or missing for some years. Further truncation was necessary. (d) The general shortcoming in the CMIE data was that many firms either did not provide any data or the data provided was incomplete and/or inconsistent. The analysis and the results have this limitation entirely due to the availability of data. After the initial analysis, it was observed that (a) about 30 firms in the Textile industry did not have any role in determining market power. However, it was felt that they may be related among themselves. Hence, an additional set 1 was formed using data only for these firms. (b) A group of firms producing steel could be identified in the Metals and Minerals industry. This group was also examined separately after the entire industry data was analyzed. (c) The Motor Vehicles industry offered a unique opportunity to form separate groups based on the nature of products. Hence, the following sets were constructed: Set 1 – Four Wheelers, Set 2 – Two and Three Wheelers, Set 3 – Automotive Ancillaries, Set 4 – Seats, Shock absorbers, etc., Set 5 – Electric and electronic parts, and Sets 6 and 7 were miscellaneous groups. The analysis for these groups has been conducted.

Transient Market Power of Firms

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The data regarding non-price strategies is limited to financial variables. Data regarding the following 14 non-price strategies has been chosen. Further, they have been classified into two types Type 1 – Strategies related to the internal operations of the firms, and Type 2 – strategies directed to market conditions external to the firms. The basic limitation is that they do not offer information regarding supply chain management that may be important in studies of this nature. The details of the non-price strategies chosen are as follows: Type I: 1. OPTP – Operating Expenses/Total expenses, 2. INSA – Inventory/Sales, 3. WCSA – Working Capital/Sales, 4. SESA – Selling Expenses/Sales, 5. RPSA – Retained Profit/Sales, 6. NASA – Net Fixed Assets/ Sales, 7. CRNA – Cumulative Retained Profit/ Net Fixed Assets, 8. CHCL – Cash on Hand/Current Liabilities. Type II: 9. EXSA – Exports/Sales, 10. DER – Debt/Equity, 11. INES – Interest Expenses/Sales, 12. TAIN – Taxes/Total Income, 13. CUR – Current ratio, and 14. BOSA – Borrowings/Sales The following premises constitute the basis of the classification. Improving production, the efficiency of internal organization, and strategies of selling their products signal the efforts of firms to increase the value of products and convey the information to the consumers. The financial data do not represent the demand from the firm for higher values of finances/sales etc. Instead, they represent the supply side and the ability of the firm to achieve the higher values ex-post as the need arises. Hence, a high debt-equity ratio is not a negative influence. This effect will be reflected in the reduction in vi and not necessarily in the decrease of market power attributable to other aspects if profits are reduced in the process. Similarly, the ability of firms to sustain larger values of Type II strategies provides them an increase in market share.

APPENDIX II SYMBOLS AND NOTATIONS

Si – Sales Revenue of firm i Ci – Cost of Goods Sold ʌi - Profit of firm i Xij – Value of non-price characteristic j of firm i S = ™i - summation over i = 1,2, …, n si = Si/S = market share of firm i sij = Xij/ X.j , where X.j = ™ Xij  j = 1, 2,…,N ™j – summation over j = 1,2,…,N si. = ™j sij tij = sij/ si. s.j = ™ sij ™k = summation over k  i = 1,2 ,…,n ™K = summation over k  j = 1, 2,,…, N

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