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