Puma - Nike - Adidas

Nowadays, the market of shoes is getting more competitive in terms of sales as there are a lot of substitutes goods that are keep on being produced. Consumer’s expectation increases as well and people nowadays have different taste and point of view in terms of design and they are following the trend to keep themselves up to date. Therefore, the firms are getting more competitive with each other as every firm having substitutes well. There are different type of shoes’ brand in the globe market such as Nike and Adidas. Both Nike and Adidas are Sportswear Company that serves throughout the world. So, what brand do you think it suits your taste and preference? What type of shoes will you prefer to wear? I believe that everyone has their special sensation and option on which brand and type. As for me, I prefer Nike because the design of the shoes is pretty as well as it is a comfortable to be put on.

In economic point of view, there are few determinants that indicate this. The taste of the customer will have an impact on the demand whereby the increases in customer taste will increases its demand curve. Different societies use different brand because of these differences in taste and preferences. For example, markets for Nike product in United State and Europe are generally recognized as clear leader whereas other preferences are not frequently found in many other markets (Fanaroff, 2013). Next, numbers of buyers is also one of the reasons that affect the demand. The numbers of buyers increase due to celebrities such as Tiger Woods who is also wearing shoes from Nike and the demand for consumer increases as they also want to get what those celebrities are wearing (Kay, 2013). As the numbers of buyers of Nike products increases, the demand will automatically increase. The graph below shows that the demand curve shifts right (from D1 to D2) and the quantity increase (from Q1 to Q2) because consumer start to like the design of the shoes as the design of shoes getting better and nicer. In addition, a taste of a consumer can cause a change in demand.  However, number of buyers decreases because there are a lot of other substitute goods which start to compete with Nike shoes and this is when the demand curve will shift to the left (from D1 to D3) and the quantity for Nike shoes decreases (from Q1 to Q3).

Besides, in order to produce more products as to fulfill the demand of customers, Nike shifted their supply factory to Indonesia due to a lower cost of production in Indonesia. However, the reason why Nike located their supply factory in Indonesia instead of other country such as China is because 5 years back, China is entering a period of wage inflation and wages increases very fast (Minggao, 2011). In this case, a lot of investors start to pay attention on China’s inflation rate and one of the investors is from Nike Company (Minggao, 2011). However, the cost that they are paying for the materials for production is lower as well. In addition, the resource prices and the cost of production of a good decreases result in an increase in numbers of supplying the goods.  As for taxes and subsidies, there will be a government in every country. In this case, Nike reduces the taxes and subsidies by decreasing in supplying. By reducing the supply, the elasticity of demand will decrease as well due to there are still other substitutes in Indonesia such as Puma and Adidas.  Consumer can just get any of the substitute’s goods like Puma instead of Nike. As for the graph below explains that when the supply curve shift right (from S1 to S2) and the quantity also increase which shift to the right as well (Q1 to Q2) are because of the price of resources decrease. When price of resources decreases, the cost of production of a good will eventually decreases and this will result in an increase in supply. However, when tax and subsidies increases as Nike company need to supply more, the cost of production of a good will increase and this will lead to a decrease in supply. This is when the supply curve will shift to the left (from S1 to S3) and quantity will decrease and shift to the left (from Q1 to Q3).

. As I have said previously, Nike is a substitute good because it can be replaced with Puma and Adidas. So, the graph below shows that when P1 move to P2, the quantity demanded will decrease because the price increases and consumer can just go to any other substitute goods.  

Therefore, a substitute effect existed as it is caused by a rise in a price that generates a consumer to buy more of slightly lower price of the good as consumer always has the right to choose what they want. Besides, substitution effect is always a negative thing for the seller as consumers always switch from purchasing a higher price product to lower price ones. This is also because they try to maintain their living standard in spite of rising prices. Moreover, substitution effect is not restrained only to consumer goods but also exhibit in many different areas such as number of supply and taste. Therefore, even there is no Nike shoes shop in that area that they live, they can choose Adidas etc.

After all, the factors above are used to explain the behavior of monopolistic competition. Moreover, monopolistic competition is also defined as a type of competition within an industry where all firms produce attractive, profit maximers and have some market power which means none are price takers (Investopedia, 2013). Monopolistic competition is explained as a large number of firms which is selling a product that is slightly different. The firms compete with each other about things such as price and quality. It is also can be defined as easy to open up a monopolistic business as the cost to set up the business is low and other firms in the same industry are not able to block people from entering.  Besides, Nike Company doesn’t have a price set that given by government because they have the right to set the price themselves and this will lead to firms will face a downward sloping demand curve. In addition, due to the low entry of barriers that exist, economic profits are unsustainable in the long run. Economic profits are not able to be earned in the long due to low entry of barriers and entry eliminates profit. Next, due to the price-making power, neither allocative nor productive efficiency will be achieved in the long run. As in economic terms, these are one of the determinants of monopolistic competition.

 Nike is defined as monopolistic competition because the product is a substitute good and they control the price. In addition, Nike and other competitors such as Adidas and Puma compete with each other by organizing their marketing program through all aspects of Integrated marketing communication and leveraged their brand image through contracts with athletes, sponsorships/partnerships with teams and players of international repute in the field of football, athletics, golf, cycling, sailing etc (Shah, Nazir and Zaman, 2013). It is available to get more information from (Shah, Nazir and Zaman, 2013). According to the graph below, it shows that Nike Company can produce more just like perfect competition but they refuse to do so because as consumer start to be loyal to their brand then the company will be able to control the consumer indirectly. In the long run, when Nike Company makes profit, this cause other firms to enter the industry. According to the law of demand, there is an inverse relationship between price and quantity demanded. As the number of products increases, the demand for the products will fall and this will cause a lower profits. Therefore, when a firm is making losses, then the firm will automatically exit the market. When a firm exits from market, this will allow other firms to earn more profits as there will be less choice of products for consumer to choose. In addition, the demand curve for firm will shift to the right which the profit is decreasing. As free entry and exit continues, Nike and other substitute’s good will earn zero profit accurately. However, monopolies will earn profits in the long run. Moreover, Nike will still produce where the marginal cost and revenue are equal. In this case, the demand curve will shift to other firms and increase the competition. Lastly, the firm will stop selling the goods above the average cost.

 

References

Fanaroff, H. (2013) Nike VS Adidas Footwear Industry. iesabroad2013 [blog]. 7 February. Available from: http://iesabroad2013.blogspot.com/2013/02/nike-vs-adidas-footwear-industry.html [Accessed 28 May 2013].

Kay, E. (2013) Tiger Woods exposes hairy gams as golf clothier pleads: Let ‘em wear shorts. Sbnation [online].13 May. Available from: http://www.sbnation.com/golf/2013/5/13/4326914/tiger-woods-pga-tour-players-championship-2013-shorts [Accessed 29 May 2013].

Minggao, S. (2011) In China, Fear Not Wage Inflation's Impact. Cai Xin [online]. 26 April. Available from: http://english.caixin.com/2011-04-26/100252511.html [Accessed 28 May 2013].

Investopedia (2013) Monopolistic Competition. Available from: http://www.investopedia.com/terms/m/monopolisticmarket.asp [Accessed 31 May 2013].

Shah, S,F,H, Nazir, T and Zaman, K. (2013) International Brand Analysis of Nike, Adidas and Puma: A Decade of Glory. Available from: http://www.academia.edu/2573963/INTERNATIONAL_BRAND_ANALYSIS_OF_NIKE_ADIDAS_AND_PUMA_A_DECADE_OF_GLORY [Accessed 31 May 2013].