Economic recession can be caused by widespread of drop in spending and investments, poor micro-economic policies, such as poor control of financial institutions such as banks, and other lender institutions as well as other economic variables
During economic recession, many business profitability declines and other bankrupt due to lack markets for their products and services, many customers have inadequate money to buy these products and services.
Economic recession also affect stock markets, where by share of the companies drops sharply and reduce confidence to investors
Government revenues decline due to economic recession, hence government fails to provide social services and other future plans.
Economic recession in one country can also affect others, in sense that recession has magnitude, many multinational companies operate more than one country, and hence impact in one county can have multiplier effects in other countries, many FDIs also will be affected
E.g. economic recession which was hit USA in 2008/2009 which was contributed to united states housing bubble and subprime mortgage crisis, was affected not only in America but almost all over the world, many business affected with this recession, stock markets such as NYSE,LSTE, and other banks were bankrupted such as warner brothers. [ii]
Impact of Economic Recession High rate of unemployment, recession can contribute to high rate of unemployment in sense that may company reduce number of staff in order to strive; in recession it leads to other problems, such as people who lack jobs may engage in criminals in order to survive.
Recession may lead people to lack disposable income; and other fails to repay their loans hence many families are affected.
Decline in productivity, where by many business profits falls, other firmââ‚¬â„¢s bankruptcy, hence and affect the whole financial system.
Recession has negative impact due to decline of growth domestic produces (GDP) where by its affect economic as well social life.
Many new businesses collapse, and hence fails to repay their loans banks.
Recession can led to decline in living standard due to the fact people depend on wage and salaries, this can have negative impact on stability of families and individuals health and well-being
Multinational Corporation (MNC) or transnational corporation, is an enterprise that manages production or delivered service in more than one country, multination cooperation has been achieved due to advancement in information technologies as well globalization,
British is one of country which have many multination companies such British petroleum Vodafone, Virgin, Rynair as which operate within and outside the country, they are interested to operate in emerging economies such as India, china, Africa and Brazil
British companies usually engaged in international business Acquire new markets, British multinational usually going international in order to search new markets for their products and services, many large firms flock to china, India, brazil and Africa due to growing of consumer purchasing power.
Increasing sales, firms expand international so as to increase its market share hence being able to compete.
Acquiring resources, large firms decided to go globally because to find resources so as to continue producing and ensure production cost can be controlled hence to able to pass benefit to customers.
Cheap labor, due to growing of stiff competition in the markets, large firms fight to reduce production cost in order to earn profit, this led companies looking overseas areas where cheap labor is available.
Global Strategies, many firms consider engaged in international business as strategies in order to survive in a stiff competition
Growing consumer pressure, tastes and preferences of consumer has changed dynamic, income increase; consumer can be able to purchase luxurious products and services, growing income to emerging economies influence many firms to set their operation and respond to these markets
The external environment is an essential element for the business to operate international due to the fact business do depend on external environment because and changes can have multiplier effect toward business, if the country policies towards economy are good and there is peace and security business will prosper as well as economy
PESLTEL for British Multinational Enterprises are; Political British MNE they are highly interested to operate in where there high democracy and freedom of speech, and where there is a less government intervention towards business unless itââ‚¬â„¢s breaking the abiding laws.
Multinational Enterprise, interested operates in a country which there is peace and security, and that countries have diplomatic relation with other countries.
Tax policy is well structured and can be predicted, this give opportunity for business to incorporate into their business, in a country where taxation policy is highly uncertainty many British MNE are not interested to invest in these countries
Multinational enterprises interested to know all regulatory bodies governing trade, local and international business such competition laws, employment laws, Business ownership laws, health and safety laws, foreign and local trade regulatory, fair competition bodies as well as environment protection laws main objectives is to make sure the business running smooth.
Economic British Multination enterprises are interested in invest in a country where a GDP is heading toward good direction, this is good conducive environment for growth of business
Also British MNE prefer to engage in international business in a countries which their economies are growing and their citizen has disposable income in sense that this will provide market as well as access to raw material.
British MNE prefer to invest in countries which have national comparative advantage, such as huge population as well as huge market, good climatically condition availability of natural resources such gas, oil and minerals.
British MNE also interested to invest in a country which has efficient money supply low interest rate
British MNE are highly consider types of economic system, preferred capitalism where by supply and demand is controlled by markets
Multinational Enterprises interested to operate in countries which are not prone to recession and depression, due to the fact these affect companies profitability..
Technological factor Advancement in Information and telecommunication technologies (ICT) and innovation contribute for multination enterprises to participate in international business, technologies such as internet, teleconferencing, where company headquarters can have two ways communication with scattered branches around the world.
Transport Innovation, development of maritime technology and existence of many airline companies, contribute MNE to engage in international business
Transportation innovation, Development of maritime technology and existence of many airline companies in transportation system lead easier to fly around the world at competitive fares and conduct business.
Many international companies inject huge sum of capital in research and development to come up with a newer, better and innovative products due to increase of competition among international companies as well growing of consumer pressure due to increase in of income
Social factors Multinational enterprises interested to operate in country which there is large population, hence be a market of the products and services provided by these multinational companies, many multinational companies interested to operate in china, India and most of African countries due to large population.
Due to powerful economies of western countries and globalization, social culture and life style affects other societies, such as Africans and Asian societies adopt a western culture, and hence create opportunity for MNE to engage in international business
Ansoff Matrix Model Source; tuitor2u.net
Ansoff Matrix Model is one strategic tools objectives, and most well-known framework for deciding upon strategies for growth, the firms which attempts to grow depend on wither its market to a new or existing products or in a new or existing markets
Market Penetration is when a firm decides to market existing products to its customer, the aim is to maintain or increase market share to the existing products to customers and increase usage of existing customers
Strategies such as, competitive pricing strategy, advertising, sales promotion and also personal selling as well as aggressive promotional campaign and led market to be unattractive for competitors.
Market Development, Is when firm decide to sell its existing product into new market, firm can implement this strategy by, by moving into new geographical areas such as exporting to a new country, new product dimension or packaging, new distribution channel or different pricing strategies which can attract new customer.
Products Development, is the growth strategy where by firm introduce new products into existing markets, strategies such as upgrading which can appeal to existing markets
Diversification, is the growth strategy where by firms decide to market new products to a new markets, diversification can relate or unrelated depending with company policies.
Strategies to execute in recession period In period of Economic Recession many multinational enterprises should review their growth strategies, due recession which affect the prosperity their business,
By using Ansoff Matrix Model as strategic tools for growth, Multinational Enterprise can adopt this in survive.
The first strategy should be execute for multinational companies in a recession period is cut operation cost and reaming with core business in order to survive
The appropriate strategy, which Multinational Enterprise can execute, is by market development strategy, where by firm can decide to shut down their operations in countries which affected with recession due to the fact recession affect purchasing power, hence people fails to buys products and services, firms can decide to operate in countries which economy is growing.
Other Strategies which can be adopted by the Multinational enterprises is diversification strategy where by firms can decide to market new products to a new markets, a Multination company can decide to diversity their business and start new business e.g. electricity firm can decide to enter into hotel business but there is lot of risk to be considered before making decision to diversify
Multinational Enterprises can decide to diversify their operation into new emerging market, and which are not affected with recession, countries such as china, India and Brazil.
Globalization is the broadening set of interdependent relationships among people from different parts of a worlds thatââ‚¬â„¢s to be divided into nations, the growth of globalization has accelerated due to advancement in information and telecommunication technologies such as internet, teleconferencing, Enterprise resource planning (ERPs),Knowledge management (KM), Customer relationship Management (CRM).
I do agree that the benefit of new technologies will off-set the in investment in R
Price Elasticity Of Demand And Price Discrimination Economics Essay
Since its deregulation and liberalization, the airline industry has become more concentrated and one of the most competitive industry in the present world. The most distinctive aspect about the industry today is the high level of variations in the prices charged with respect to factors like dates, time, class etc, the differential pricing strategy adopted and the way airlines actually use them to drive home competitive advantage. This essay aims to throw light on the reason behind the large variations in the airlines fares around the world and how airlines achieve the same.
Airline Pricing Pricing is continually viewed as one of the most critical part of any business; pricing, in a way, makes or breaks a business. In this era of high technology penetration, and increased competition, the emphasis laid on charging the right customers with the right price has become increasingly high. This is pretty obvious since pricing helps companies enhance and capitalize on competitive advantage (Stern, 1989). Airline industry is signified by a concentrated market and heavy competition between the players; it is also the one defined by huge fixed and operating costs. To add on to the above, the product that is sold is also perishable; hence in order to ensure and sustain profits in the competitive environment having a very efficient pricing strategy is a must. Also in this present age of increasing differences in the way the customers perceive a product offering and the differences in the levels of buying powers of the consumers, succeeding in the industry using the traditional ‘set the prices at the marginal costs’ will generally not recoup sufficient revenue to cover the large fixed costs and sunk costs involved within the industry (Varian, 1996). The above is the clinching point behind the need for price discrimination and price dispersion across the industry. To achieve an efficient means of doing this, the airlines use a mixture of Yield Management, Rationing and Price discrimination by carefully segmenting its customer base using the principle of price elasticity of demand.
Price Elasticity of Demand and Price Discrimination Price elasticity of demand is defined as the responsiveness of the quantity demanded of a good or service to a change in its price (Earl, 2005). It is the foundation on which the entire pricing system of the airline industry is based upon. For designing an efficient and an effective pricing strategy of a business, knowing the price elasticity of demand of the market inside out becomes mandatory for all the industries. Price elasticity of demand for a good is directly related to the possibilities of substitution for that good (Brons, 2002). A relatively large number of substitutes will imply high price elasticity whereas the lack of it will force the demand to become inelastic.
In economic terms, the purpose of price discrimination is to capture the market’s consumer surplus. This surplus arises because, in a market with a single clearing price, some customers (the very low price elasticity segment) would have been prepared to pay more than the single market price. Price discrimination transfers some of this surplus from the consumer to the producer/marketer.
It can be proved mathematically, that a firm facing a downward sloping demand curve that is convex to the origin will always obtain higher revenues under price discrimination than under a single price strategy. This can also be shown diagramatically.
Sales revenue without and with Price Discrimination
Sales revenue without and with Price Discrimination
In the top diagram, a single price (P) is available to all customers. The amount of revenue is represented by area P,A,Q,O. The consumer surplus is the area above line segment P,A but below the demand curve (D).
With price discrimination, (the bottom diagram), the demand curve is divided into two segments (D1 and D2). A higher price (P1) is charged to the low elasticity segment, and a lower price (P2) is charged to the high elasticity segment. The total revenue from the first segment is equal to the area P1,B,Q1,O. The total revenue from the second segment is equal to the area E,C,Q2,Q1. The sum of these areas will always be greater than the area without discrimination assuming the demand curve resembles a rectangular hyperbola with unitary elasticity. The more prices that are introduced, the greater the sum of the revenue areas, and the more of the consumer surplus is captured by the producer.
Note that the above requires both first and second degree price discrimination: the right segment corresponds partly to different people than the left segment, partly to the same people, willing to buy more if the product is cheaper.
It is very useful for the price discriminator to determine the optimum prices in each market segment. This is done in the next diagram where each segment is considered as a separate market with its own demand curve. As usual, the profit maximizing output (Qt) is determined by the intersection of the marginal cost curve (MC) with the marginal revenue curve for the total market (MRt).
Multiple Market Price Determination
Multiple Market Price Determination
The firm decides what amount of the total output to sell in each market. This is determined from the marginal revenue curves in each market. The intersection of the total market price with the marginal revenue curves in each market yields optimum outputs of Qa and Qb. From the demand curve in each market we can determine the profit maximizing prices of Pa and Pb.
Airline industry is one in which both elastic and inelastic demand patterns co-exist and it is the reason why the core tickets are cheaper compared with the add-ons like Taxes, charge for extra baggage’s etc. A business passenger with the least price sensitivity, high time dependence, who books the tickets days or hours before the flight is a perfect example for the inelasticity in the market. The surplus earned or generated by the airline from this inelasticity actually balances the diminishing revenues and discounts suffered in serving the elastic leisure travellers with a high sensitivity on price and relatively elastic schedules there by helping the firms to sustain its profitability. Similarly, another principle which helps the industry in sustaining its profits is the segmentation of the market, into price sensitive and the non price sensitive segments and having a segment based pricing strategy – Third Degree price discrimination. Airline industry segments their markets according to class of travellers, like Luxury or first, Business Class and economy class, purpose of travel, like business or leisure etc and also on the amount of demand for a particular root. Using these segmentations helps them to efficiently get an insight into the consumers’ willingness to pay and maximize the extraction of consumer surplus from each one of them.
Yield Management Yield management, also known as revenue management, is a process of understanding, anticipating and influencing consumer behaviour in order to maximize revenue or profits from a fixed, perishable resource. Since the airline industry satisfies the three main basic necessities i.e. fixed and perishable resources and the differences in the customers willingness to pay, yield management is one of the most extensively used concept in the industry. It also leads to an efficient way of operation and forms the basis for the price discrimination decisions taken by the firm. With regards to yield management, airlines attempt to segment the demand in the market by offering different combinations of price levels and restriction bundles or fare products designed to appear differently to consumers with different levels of willingness to pay (Botimer, 1999). Based on the level of willingness to pay airlines impose restrictions (fences) on the lower fares to prevent other segment consumers from buying tickets at a discount. Seat allocations according to the above are achieved by the usage of complex yield management systems which uses a nested asset control mechanism to carry out the same. Another source of fare differentiation is Rationing. Segmentation and rationing exploit the difference in the willingness of the customer to pay through different channels at different times with different levels of effort. (Kambli, 2001). In other words rationing can be explained as the phenomena where the supply at the lower price is limited and distributed among the customers. With rationing the airlines use fares to allocate their supply of limited seats among consumers. This is how airlines manage the seemingly difficult price variations and resource allocations efficiently and effectively and remain competitive in the industry.
Equilibrium Point: This is the point where the organisation has no loss or gain. Airlines can work out through the demand and supply curves and can identify the break-even point where the organisation suffers no loss, nor does it have any gain. After assessing this value, Airlines can decide
Figure Equilibrium price curve ( Earl and Wakeley, 2005)
how many seats could be allotted under concessional price and how many could can be sold under the business class category. Say, the break-even point is at 50% of the entire tickets, where Airlines can run without making a loss even if the rest of the tickets are not sold. In this case, Airlines can decide to sell a small percentage of the 50% at a discounted price. The remaining % of the tickets could be left for selling under the business class category. This would give a good margin of profit for the organisation.
Complications and Extensions. There are a wide variety of complications we face when implementing a yield management system.
When implementing a yield management system we always use historical demand to predict future demand. In an actual application, we may use more elaborate models to generate demand forecasts that take into account a variety of predictable events, such as the day of the week, seasonality, and special events such as holidays. Another natural problem that arises during demand forecasting is censored data, i.e.,company often does not record demand from customers who were denied a reservation.
Variation and Mobility of Capacity:
One of the major drawbacks of the yield management systems is the assumption that all units of capacity are same. Airlines usually offer coach and first classes.
Customers in a Fare Class Are nor All Alike:
A business traveler on an airplane flight may book a ticket on just one leg or may be continuing on multiple legs. Not selling a ticket to the latter passenger means that revenue from all flight legs will be lost.
In each of these cases, the total revenue generated by the customer should be incorporated into the yield management calculation, not just the revenue generated by a single flight leg. There are additional complications when code-sharing partners (distinct air lines that offer connecting flights among one another) operate these flight legs. If code-sharing occurs, then each of the partners must have an incentive to take into consideration the other partners’ revenue streams.
Conclusion Sustained profitability, occupies the top spot in any industry’s vision statement. It is the one, which drives companies in search of new techniques and methods to ensure they end up on the green, year on year. The above combined with industry’s urge to succeed in the highly competitive environment and effort to package their offerings in an attractive way to the consumers’, forms the key solution for the ever eluding puzzle of variations in airline pricing.