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OPTICAL INDUSTRY &
ITS STRUCTURE
Miss Rosmin Iqbal HussainBOptom (UKM), CMBA (UNIMAS)
QUIZ1. WHY IS THERE STILL A LOT OF OPPORTUNITY IN
OPTOM BIZNES ENVIRONMENT?2. WHAT ARE THE SERVICES YOU CAN OFFER? LIST3. WHAT ARE THE BUSINESS ENVIRONMENT SCAN?4. WHAT IS SWOT ANALYSIS? LIST EXAMPLES RELATED
UNDER EACH.5. WHAT DOES INTERNAL ENVIRONMENT FACTORS
COMPRISE OF? LIST6. WHAT DOES EXTERNAL ENVIRONMENT FACTORS
COMPRISE? LIST7. WHAT IS TOWS MATRIX & WAT ARE ITS USAGE? 8. WHAT ARE PORTER’S 5 FORCES? LIST9. WHAT IS COMPETITIVE ADVANTAGE?
THE OPTICAL INDUSTRY Various eye care professionals:
Ophthalmologist: medically qualified & have appropriate specialist qualifications to allow for diagnosis, alleviation of diseases of the eye, + surgery. Rarely conduct PCC eye examination or dispensing
Ophthalmic medical practitioners: medically qualified, have appropriate specialist diplomas to enable them to diagnose & alleviate eye diseases, conduct PCC eye examination, Rx optical appliances. Rarely dispense / supply glasses
THE OPTICAL INDUSTRY… cont
Optometrists: Qualified to conduct eye examinationsExamine eyes for signs of disease and
abnormalitiesRefer / issue notification to GP / specialistIssue Rx for optical appliancesFit & supply CL & other optical appliances
Dispensing Opticians: qualified to supply glasses, and if suitably qualified supply CL
Orthoptists: qualified to assess & manage defects of eye co-ordination & binocularity
STRUCTURE & PLAYERS IN OPTICAL INDUSTRY
Imported glass blanks
Manufacturer of glass blanks
glass lens manufacturer
plastic lens manufacturer
frame manufacturer
frame importer
Imported finished/Semi-finished lens
Prescription house and / or wholesalers
In-house glazing
Non-registeredopticians
Registered Dispensing opticians
Other retaildistributors
Ophthalmic medicalpractitioners
Hospital eye service Optometrist
Patient
OPTICAL MARKETPLACE Four main sectors within the optical
marketplace:
1. Manufacturing glass/frame2. Wholesalers & importers3. Optical practitioners (optometrist & dispensing
opticians)4. The contact lens industry
MARKETS
MARKET Market definition:
A market is any place where the sellers of a particular good or service can meet with the buyers of that goods and service where there is a potential for a transaction to take place. The buyers must have something they can offer in exchange for there to be a potential transaction
Elasticity: The degree to which a price change for an item
results from a unit change in supply (called supply elasticity) or a unit change in demand (called demand elasticity). opposite of inelastic
Elastic: highly adaptable, changing price/demand/supply
Inelastic: price/demand/supply unaffected/least affected
THE CIRCULAR FLOW
Copyright © 2004 South-Western
Spending
Goods andservicesbought
Revenue
Goodsand servicessold
Labor, land,and capital
Income
= Flow of inputs and outputs
= Flow of dollars
Factors ofproduction
Wages, rent,and profit
FIRMS•Produce and sellgoods and services
•Hire and use factorsof production
•Buy and consumegoods and services
•Own and sell factorsof production
HOUSEHOLDS
•Households sell•Firms buy
MARKETSFOR
FACTORS OF PRODUCTION
•Firms sell•Households buy
MARKETSFOR
GOODS AND SERVICES
MARKETS: INTRO The circular-flow diagram is a visual model of the
economy that shows how dollars flow through markets among households and firms
Firms Produce and sell goods and services Hire and use factors of production
Households Buy and consume goods and services Own and sell factors of production
Markets for Goods and Services Firms sell Households buy
Markets for Factors of Production Households sell Firms buy
THE CIRCULAR-FLOW DIAGRAM
Factors of Production Inputs used to produce goods and
services Land, labor, capital, entrepreneurship
Factors are compensated by income Land – rents Labor – wages Capital – interest Entrepreneurship -- profits
MARKET STRUCTURE
MARKET STRUCTURE
Perfect Competition1. A very large number of buyers and sellers2. Homogeneous product (standardized)3. Free entry and exit (no barriers)4. No collusion among the firms5. Complete knowledge of all market information6. Brand competition often involves advertising
campaigns and promotional expenditures to stress often minor distinctions among products
Monopolistic Competition1. Many Firms and Many Buyers2. Easy Entry & Exit3. PRODUCT DIFFERENTIATION ! ! !Differentiation occurs when consumers
perceive that a product differs from its competition on any physical or nonphysical characteristic, including price
Oligopoly1. Few firms2. The products may be differentiated or
standardized3.There is a noticeable degree of interdependence
among the firms
4. Heterogeneous or Homogeneous Products 5. Many outcomes are possible in oligopolies,
ranging from acting nearly competitively to acting like a monopoly
Monopoly1. One firm2. A perfectly differentiated product (low cross price
elasticities with other products)3. Substantial barriers to entry, such as absolute cost
advantages, consumer loyalty, scale economies, large capital requirements, or legal barriers to entry
Sources of Power for a Monopolist Legal restrictions -- copyrights & patents. Control of critical resources creates market power. Government-authorized franchises, such as provided to cable TV
companies. Economies of size allow larger firms to produce at lower cost than smaller
firms. Brand loyalty and extensive advertising makes entry highly expensive. Increasing returns in network-based businesses - compatibilities increase
market penetration.
OLIGOPOLY
OLIGOPOLY
A market dominated by a few large firms - imperfect competition
How concentrated is an industry? Consider the market share of four largest
firmsSome highly concentrated industries
(in the world or in a country): Mobile phones, paper industry, cigarettes,
batteries, breweries, airplane industry, oil industry
The essence of an oligopolistic industry is the need for each firm to consider how its own actions affect the decisions of its relatively few competitors
Oligopoly may be characterized by Collusion or by Non-co-operation / competition
FIRMS INTERDEPENDENCE
Due to interdependence between firms, oligopolistic firms will base actions base on: Pricing Output Research Advertising & marketing
On what they believe the response of other firms will be
COLLUSION
Collusion An explicit or implicit agreement between
existing firms to avoid or limit competition with one another
Cartel Is a situation in which formal agreements
between firms are legally permitted Eg: OPEC
OLIGOPOLIES & INCENTIVES TO COLLUDE
When there are just a few firms, profits are enhanced if all reduce output / fix price
But each firm has incentives to “cheat” by selling more / changing price
Collusion is difficult if: There are many firms in the industry The product is not standardized Demand and cost conditions are
changing rapidly There are no barriers to entry Firms have surplus capacity
COLLUSION VS COMPETITION
Sometimes collusion will succeed Sometimes forces of competition win out
over collective action When will Collusion tend to succeed?
Determinants of successful collusion, for industries with only a few firms
Factors Likely to affect Collusion
1. Number and Size Distribution of Sellers. Collusion is more successful with few firms or if there exists a dominant firm.
2. Product Heterogeneity. Collusion is more successful with products that are standardized or homogeneous
3. Cost Structures. Collusion is more successful when the costs are similar for all of the firms in the oligopoly.
4. Size and Frequency of Orders. Collusion is more successful with small, frequent orders.
5. Secrecy and Retaliation. Collusion is more successful when it is difficult to give secret price concessions.
PRICE LEADERSHIP
Barometric: One (or a few firms) sets the price
One firm is unusually aware of changes in cost or demand conditions
The barometer firm senses changes first, or is the first to ANNOUNCE changes in its price list
Find barometric price leader when the conditions unsuitable to collusion & firm has good forecasting abilities or good management
Barometric Price Leader Dominant Firm Price Leader
TACIT COLLUSION: PRICE LEADERSHIP
Dominant firm price leadership Dominant firm sets the price for the
industry, but lets followers sell all they want at that price
Dominant firm will provide rest of the market demand (40% market share Normally)
Followers, like in perfect competition, accept the price as given
WHAT SHOULD YOU DO?
Be aware which is the Barometric Firm / Dominant Firm & follow it closely!
PRICE & QUANTITY WARS IN OLIGOPOLY Price cuts (volume increase) lead to
everyone following To avoid losing market share That firm will not gain market share as all others
will follow pursuit It will simply keep the market share and increase
sales volume only according to market share Increase volume in its current customer baseHowever, price drops significantly since all firms
increase volume so the firm will gain little revenue Highly inelastic
Price increases (cut volume), no one follows Firm will lose its market share Price it receives does not increase much
since other firms will not respond by cutting back volume
Highly elastic
Prices are more likely to be more rigid when: There are more numbers of firms
More firms are more competitive The more homogenous the product
More homogenous products act more competitive
Collusion leads firms to fix prices. The rigid prices seen in oligopolies are signs of collusion
OLIGOPOLY MARKET GAME THEORY & STRATEGIES
OLIGOPOLISTIC RIVALRY & GAME THEORY Game Theory used to describe situations
where individuals or organizations have conflicting objectives Examples: Pricing of a few firms, Advertising
plans for a few firms, Output decisions of an oligopoly
Strategy - is a course of action The PAYOFF is the outcome of the strategy Listing of PAYOFFS appear in a payoff matrix
PRISONOR’S DILEMMA Noncooperative Solution
both confess: {C, C} Cooperative Solution
both do not confess {NC,NC} Off-diagonal represent a Double
Cross
suspect 2
suspect 1 NC
C
NC C
1 yr 15 yrs
0 yrs 6 yrs
1 yr 0 yrs
15 yrs 6 yrs
GAME THEORY Mathematical game theory developed to
analyze situations what the benefits players (firms) receive depend on the actions of the other players
Mathematical game theory will lead to predictions about: Firms competing in prices vs quantity When collusion agreements are likely to exist Why firms differentiate products Strategies to deter entry
STRUCTURE OF GAME Three elements of any game that must be
specified to know the expected outcome1. Players2. Strategies available to players (actions that
can be taken)3. Payoffs earned by players that depend on the
choices of every players
For a game to exist, this information is necessary even if only available in a probabilistic sense (i.e., you don’t know for certain what the payoff is)
Two-Person, Non-Zero Sum Games
Often the payoffs vary depending on the strategy choices
Famous Example:
The Prisoner’s Dilemma
Two suspects are caught & held separately
Confess or Not Confess: a one period
game
Noncooperative Solution both confess: {C, C}
Cooperative Solution both do not confess {NC,NC}
Off-diagonal represent a Double Cross
suspect 2
suspect 1 NC
C
NC C
1 yr 15 yrs
0 yrs 6 yrs
1 yr 0 yrs
15 yrs 6 yrs
What is the dominant strategy?
Two Person, Zero Sum Game
Each player knows his and opponent’s alternatives
Preferences of all players are known
Single period game Sum of payoffs are
zero Like a Poker Game
An Equilibrium--none of the participants can improve their payoff
ASSUMPTIONS PLAYER 2
PLAYER 1
CL
Frame
CL Frame
100, 100 150, 50
150, 150 50, 25
Player 1 is the first number ineach pair. We will get to {150,150}which is an Equilibrium
EXAMPLE 2
EXAMPLE 2 SOLUTION
Player 2 Dominant Strategy: CL
Player 1 has no dominant strategy & will follow by what Player 2 chooses
Do you think collusion is possible in this example? Why?
NASH EQUILIBRIUM Clear that Player 2: run CL special as it is its
dominant strategy What should Player 1 do?
The answer is also clear, if Player 1 understands Player 2 ‘s payoffs.
Clearly, Player 2 will run CL special, so it only makes sense for Player 1 to run Frames special. WHY??
So the EQUILIBRIUM is Player 1: Frames, Player 2: CL
Equilibrium or anticipated strategies are those strategies for which every player, given the choice of strategies of the other players, cannot increase his payoffs (chooses the maximum he can increase in that situation)
PLAYER 2
PLAYER 1
CL
Frame
CL Frame
100, 100 150, 50
150, 150 50, 25
Player 1 is the first number ineach pair. We will get to {150,150}which is an Equilibrium
RULES IN CHOOSING STRATEGY
Rule 1: If you have a dominant strategy, use it.Dominated strategy - a strategy is said to be
dominated if there exists some other strategy that always has a higher payoff (or equal payoff) regardless of the components strategies
Rule 2: Eliminate all dominated strategies Idea is simple - if it is never the case that a strategy is
the best response to some strategy of your opponent, then you would never want to use it. Thus, you should eliminate it
EXAMPLE 3PLAYER 2Kroger
CL
Frame
CL Frame Solution
125, 125 200, 175 25, 25
100, 200 150, 150 25, 175
Player 1 is the first number ineach pair.
25, 25 175, 25 5, 5Solution
**Solution similar to Frame is also dominated for Player 2
PLAYER 1Meijer
SOLUTION EXAMPLE 3 Meijer runs Frames, Kroger runs CL Meijer runs CL, Kroger runs Frames
What is the DOMINANT STRATEGY?? Which is the Dominated Strategy?? What is the Nash Equilibrium?
BUT Kroger knows that if it runs Frames, Meijer will run CL
Meijer losses out!Will Meijer run Frames??What will Meijer run then??
NO!!!! Given these two anticipated responses,
only reasonable for Meijer ALWAYS to run CL!! (DOMINANT STRATEGY)
Where Kroger will also run CL
Knowing how your opponent will respond precludes the necessity of determining the opponent’s response
Where is the Nash Equilibrium then??
Nash Equilibrium is at CL
CL 125, 125
Rule 3: After eliminating dominated strategies & not having dominant strategies, choose as your strategy the equilibrium strategy
OBJECTIVES & RESULTS The following conclusion about firm
strategies & market outcome occurs:1. The interdependence of firms & how the
equilibrium of the firm depends on the strategy of other firms & number of firms
2. The elasticity of demand is related to the number of competitors. So that even with identical profits firms may have a downward-sloping demand curve
3. Non-cooperative strategy can yield profits, but less than in monopoly conditions
OBJECTIVES & RESULTS…cont
4. In a single-period game, firms would want to compete in quantity & not in price
• Firms make decisions about output & let price be determined by market clearance
5. If firms do compete in price, it is to their advantage to differentiate products. Even with differentiated products, quantity competition is more profitable
OBJECTIVES & RESULTS…cont
6. A collusive agreement with price competition is price leadership, in which a dominant firm sets price and others follow
7. If we consider competition over time, price can exceed marginal cost, with price competition if firms make it clear that they will punish cheaters on the agreement
• These long-term arrangements are only possible if competitors don’t know when the competition (game) stops
8. Leadership is only effective if firm is committed to the policy and/or has the ability to retaliate
CONCLUSIONS Lesson 1: Avoid price competition Lesson 2: If quantity competition is not possible,
differentiate your product to avoid direct price competition… or differ Quality
or… differ services rendered
Lesson 3: Committing to your sales / production goals before competitors will increase
your market share & force competitors to
cut quantity to maintain price
CONCLUSIONS 2 Obtaining credibility
Leadership requires credibility in actions & decisions It is critical that the followers believe that the leader will
not change her decision regardless of the followers actions
All strategic moves suffer from credibility— If it is not in your interest to carry out a strategic move
(unconditional move, threat, or promise), then your opponents will look forward and reason back to realize that you have no incentive to follow through
— If your strategic move is not a credible commitment, then it will ineffective in altering your opponents’ behavior by changing their expectations about your responses to their actions
Are you engaging in tactical bluffing? If the opposition decides you are, then your efforts to
convince otherwise will be in vain
How to obtain credibility?1. Establish & use a reputation
Pride in our word, our promises, is taught as an end in itself, but it also improve the credibility of our daily commitments
Sometimes destroying your reputation can create the possibility for a commitment
It may be rational to be irrational!
2. Write contractsAgreeing to punishment if you fail to follow through will
make your commitments credible
3. Cut off communication Can make a decision truly irreversible
4. Burn bridges behind youFiguratively burning one’s bridges with a particular
group may increase one’s credibility with other groups
5. Leave the outcome to chance A threat no stronger than necessary to deter the rival
6. Move in small steps Establishment of trust? Convert a once-off into a
repeated game, in which reputation is important7. Develop credibility through TEAMWORK
Pride and self-respect are lost when commitments are broken
8. Employ mandated Negotiating Agents One’s bargaining situation can be improved if one
has an agent to negotiate on one’s behalf
CONCLUSION 3Three underlying principles:
I. To change the payoffs of the game (Items 1, 2, 6 above) — to make it in your interest to follow through on your commitment:
— turn a threat TO a warning,— turn a promise TO an assurance.
II. To limit your ability to back out of a commitment (3, 4, 5, 6) — three possibilities: deny yourself any opportunity to back down,
— by cutting yourself off from the situation,or— by destroying any avenues of retreat, Or even— by removing yourself from the decision makingposition and leaving the outcome to chance
III. To use others to help you maintain commitment (7, 8) — a team may achieve credibility more easily than an individual