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Submitted by:

IMT Ghaziabad

Report on demand elasticity of automobiles in the


Indian market
TABLE OF CONTENTS
1.0 INTRODUCTION...2
2.0 LITERATURE REVIEW...3
2.1 Demand Elasticity .....................................................3
2.2 Income Elasticity ............................................3
2.3 Cross Elasticity ...........................................3
3.0 AUTOMOBILE SEGMENT: TYPE OF MARKET.....4
3.1 Few Large Players .........................................4
3.2 High Barrier for Entry and Exit ...........................4
3.3 Interdependence .........................................4
3.4 Non Price Competition ....................................4
3.5 Group Behaviour .........................................4
4.0 AUTOMOBILE SEGMENT: DEMAND CHARACTERISTICS.....5
5.0 AUTOMOBILE SEGMENT: DEMAND ELASTICITY...............8
5.1 Price elaticity of demand .................................8
5.2 Income elasticity of demand ...........................9
5.3 Cross elasticity of demand ................................12
6.0 CONCLUSION.........................................................12
APPENDIX.......................................................13

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Report on demand elasticity of automobiles in the


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1.Introduction
The automobile industry is one of Indias most vibrant and growing industries.
This industry accounts for 22 per cent of the country's manufacturing gross
domestic product (GDP). The auto sector is one of the biggest job creators,
both directly and indirectly. It is estimated that every job created in an auto
company leads to three to five indirect ancillary jobs.
India's domestic market and its growth potential have been a big attraction for
many global automakers. India is presently the world's third largest exporter
of two-wheelers after China and Japan. According to a report by Standard
Chartered Bank, India is likely to overtake Thailand in global auto-export
market share by the year 2020.
The next few years are projected to show solid but cautious growth due to
improved affordability, rising incomes and untapped markets. With the
governments backing, and trends in the international scenario such as the
decline in prices of natural rubber, the Indian automobile industry is slated to
witness some major growth.

Market share of Indian automobile

Passenger vehicle production in India


industry by volume

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Report on demand elasticity of automobiles in the


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2.

Literature Review
2.1 Demand Elasticity: In economics, the demand elasticity refers to how
sensitive the demand for a good is to changes in other economic variables.
Demand elasticity is important because it helps firms model the potential
change in demand due to changes in price of the good, the effect of changes
in prices of other goods and many other important market factors. A firm
grasp of demand elasticity helps to guide firms toward more optimal
competitive behavior. Elasticities greater than one are called "elastic,"
elasticities less than one are "inelastic," and elasticities equal to one are "unit
elastic."
Demand Elasticity = % Change in Quantity Demanded / % Change in Price
2.2 Income Elasticity: A measure of the relationship between a change in the
quantity demanded for a particular good and a change in real income. Income
elasticity of demand is an economics term that refers to the sensitivity of the
quantity demanded for a certain product in response to a change in consumer
incomes. The formula for calculating income elasticity of demand is:
Income Elasticity of Demand = % change in quantity demanded / % change in
income
2.3 Cross Elasticity: An economic concept that measures the responsiveness in
the quantity demand of one good when a change in price takes place in
another good. The measure is calculated by taking the percentage change in
the quantity demanded of one good, divided by the percentage change in
price of the substitute good:
Cross Elasticity,

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Report on demand elasticity of automobiles in the


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Report on demand elasticity of automobiles in the


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3.

Automobile Sector : Type of Market


Indian Automobile sector is an oligopolistic market with several players with
highly differentiated products. The barriers of Entery and Exit are high, therby
restricting entry of new players owing to large cost of setup. At the same time
the players exiting the market faces a huge loss, if it is not able to find a
suitable buyer for its assets.
The Market is characterized by :
3.1 Few Large Players: Until liberazitation, the Indian automobile sector was
largely a monolply market with Maruti Suzuki accounting for over 80% car
sales. However, post reform the Indian automobile sector has many local and
national players competing with each other in passenger car segement viz.
Tata motors, Mahindra & mahindra, Toyota, Renault, Nissan, Ford, General
Motors etc and luxary car segment viz. BMW, Porsche, Jaguar, Mercedes etc.
3.2 High Barrier for Entry and Exit: Only a few new players could foray into this
sector owing to huge cost related to setup of plant and Machinery. Research
and development is also a huge cost as each competitor has to innovate new
designs to gain an edge over their competitor. Firms under oligopoly are
interdependent.
3.3 Interdependence: Interdependence means that actions of one firm affect the
actions of other firms. A firm considers the action and reaction of the rival
firms while determining its price and output levels. A change in output or price
by one firm evokes reaction from other firms operating in the market.
3.4 Non Price Competition: firms are in a position to influence the prices.
However, they try to avoid price competition for the fear of price war. They
follow the policy of price rigidity.
3.5 Group Behaviour: The firms competing in the Automobile segment behave as
a group. One company follows the path which the market leader is following.
This prevents competiotion and Customers are left with no choice but to
choose among the few options in the particular car segment.

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Report on demand elasticity of automobiles in the


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4.Automobile Sector : Demand Charactericstics


The demand for automobiles in India is largely cyclical in nature and
dependent upon economic growth and per capita income. Seasonality is also
a vital factor.

Automobile Domestic Sales Trends

(Number
of Vehicles)

2008-09 2009-10
2010-11
2011-12
2012-13
2013-14
Category
Passenger 15,52,703 19,51,333 25,01,542 26,29,839
26,65,015
25,03,685
Vehicles
Commercial 3,84,194 5,32,721
6,84,905
8,09,499
7,93,211
6,32,738
Vehicles
5,26,024
5,13,281
5,38,290
4,79,634
Three Wheelers 3,49,727 4,40,392
74,37,619
93,70,951
1,17,68,910
1,34,09,150
1,37,97,185
1,48,05,481
Two Wheelers
Grand Total 97,24,243 1,22,95,397 1,54,81,381 1,73,61,769 1,77,93,701 1,84,21,538

Domestic Sales Trend (Source : SIAM, Society of Indian Automobile


Manufacturers)
The demand curve for Automobile sector is Kinked. The kinkeddemand
theory of oligopoly illustrates the high degree ofinterdependence that exists
among the firms that make up an oligopoly. The market demand curve that
each oligopolist faces is determined by the output and price decisions of the
other firms in the oligopoly.

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Report on demand elasticity of automobiles in the


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The oligopolist's market demand curve becomes more elastic at prices


above P because at these higher prices consumers are more likely to switch
to the lowerpriced products provided by the other oligopolists in the market.
Consequently, the demand for the oligopolist's output falls off more quickly at
prices above P; in other words, the demand for the oligopolist's output
becomes more elastic.
If the oligopolist reduces its price below P, it is assumed that its competitors
will follow suit and reduce their prices as well. The oligopolist's market
demand curve becomes less elastic at prices below P because the other
oligopolists in the market have also reduced their prices. When oligopolists
follow each others pricing decisions, consumer demand for each oligopolist's
product will become less elastic (or less sensitive) to changes in price
because each oligopolist is matching the price changes of its competitors.
For Example, lets take a look at the offering by 3 major players in the
premium Hatchback car segment.

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Volkswagen Polo

Hyundai i20 [20122014]

Maruti Suzuki Swift


[2010-2011]

Comfortline 1.2L (P)

Sportz 1.2

VDi ABS BS-IV

Price: 5.57 lakhs

Price: 5.79 lakhs

Price: 5.56 lakhs

Ex-showroom, New Delhi

Ex-showroom, New Delhi

Ex-showroom, New Delhi

On-Road Price

On-Road Price

On-Road Price

Above mentioned models are comparable yet differentiated in terms of luxary


features. This segment is targeted to the soaring middle class of country. It
can be noticed that despite being a differentiated product the prices of all the
three cars are almost same.
None of the manufacturer can afford to increase the price of its model
because Customer will move to the next available make and model which is
offering the same value and benefits at lower cost. As a result the segment
sees price rigidity with none of the manufacturers risking a reduced sales or a
price war by incresing or decreasing the price of its model.

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Report on demand elasticity of automobiles in the


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5.Automobile Sector : Demand Elasticity


5.1 Price elaticity of demand: As mentioned above the Automotive segment is an
Oligopolistic market with a kinked demand curve and hence the demand is
very price elastic in short term but inelastic in long term as all the players
adjust their prices a price P which is competitive with other firms in the
market.
Being an oligoolistic market there is price rigidity and firms refrain from
making drastic changes to the price of the cars (in a particular segment).
This is the reason why, all major firm like Maruti Suzuki, Tata motors,
Hyundai, Ford offer cars is a particlar segment like Hatch back, Sedan etc at
a price which is comparable to their competitors.
The demand of cars in India over the last 5 years is consistent despite the
increasing Price. This could be contributed to the fact the demand for
Automobiles is largely goverened by need rather than price. Adding to that,
every firm has a no. of cars in its offer suiting an individuals pocket.

Car Sales in India (2010-2014)

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Report on demand elasticity of automobiles in the


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5.2 Income elasticity of demand: The demand in Automobile industry industry is
largely driven by the economic conditions and the per capita income.
In year Sales growth in 2011 slowed to just 4.3%, compared with a stellar
31% in the previous 12 months, according to data issued by the Society of
Indian Automobile Manufacturers, or SIAM. Potential customers kept their
cash firmly in the wallet as a series of fuel price increases, surging loan
rates--the Reserve Bank of India has increased rates 13 times since March
2010--and the rising cost of living forced them to put off car purchases.
In the year 2012 -13 dragged down by slow economic growth and a demand
slump, passenger car sales in the country fell by 6.7 per cent in the year
ended March 2013, the first such decline in a decade. Factors such as high
vehicle finance rates, in the range of 10.5 to 15 per cent, high inflation and
high fuel prices, especially petrol, impacted car sales.

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Report on demand elasticity of automobiles in the


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Mean Car Sales (2010-14)

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Report on demand elasticity of automobiles in the


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GDP of India (2010-14)

25000

20000

15000
Swift
10000

Polo
i20

5000

(Car Sales for 2014 Maruti Swift, Fiat Polo, Hyundai i20)

While the last month of every year generally witnesses dealerships handing
out discounts, benefits and special schemes, trying to push out the crop of
current model year cars, December 2014 was markedly different. While the
buyer benefits were still on offer, incentives didn't seem to be the decisive
factor in drawing customers to the showrooms. With news of the government
discontinuing excise duty sops filtering in and some carmakers even
announcing expected price hikes in the range of 4-6 percent from January,
dealerships saw a rush of buyers.
It is evident that Customers are more driven by Economic policies, Interest
rates, Income and other economic factors as compared to the price of Car.

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Report on demand elasticity of automobiles in the


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5.3 Cross elasticity of demand: The demand in Automobile is highly affected by


the fuel price (Petrol/Diesel).
Cheaper fuel brings down running costs. Lower running costs imply low cost
of ownership. Lower cost of ownership drives sales. Cars become more
affordable to run. Also, cheaper fuel implies other commodities are cheaper
and disposable income increases.
The changing economics of oil narrowing price gap between diesel and
petrol has resulted in a shift again towards petrol cars. The industry had
moved from what was originally just a petrol industry to being a dieseldominated one from around November 2012 and now, with the deregulation
of diesel pricing, it seems to be moving back towards a more balanced mix of
petrol and diesel cars.

6.Conclusion:
The demand for Automobiles in India is :

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Inelastic or Less Elastic to Price


Elastic to Income
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Report on demand elasticity of automobiles in the


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Elastic to change in price of fuel.

Appendix:
http://www.thehindu.com/sunday-anchor/low-fuel-prices-may-help-autosector-drive-up-sales/article6668317.ece
http://www.infomine.com/investment/metal-prices/crude-oil/5-year/
http://www.team-bhp.com/forum/indian-car-scene/156360-september-2014indian-car-sales-figures-analysis.html
http://www.ibef.org/industry/india-automobiles.aspx

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