Management Economics of Samsung: Demand, Market Equilibrium, and Price Elasticity

This document explores the management economics of Samsung, specifically focusing on the demand, market equilibrium, and price elasticity of its smartphone product line. It provides a brief overview of Samsung Electronics' business profile and history, as well as an analysis of factors influencing price elasticity of demand. The document also discusses the effects of substitutes, complements, consumer income, consumer preferences, and consumer expectations on the demand for Samsung Galaxy Note 20. Additionally, it examines the pricing policy of Samsung in response to market conditions.

MANAGEMENT
ECONOMICS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Description of business................................................................................................................3
Demand and market equilibrium.................................................................................................5
Price elasticity and demand.........................................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management economics refers to the application of micro and macro economical theories
and concepts like Demand and price elastic and Market equilibrium to solve practical problems
in the managerial levels and helps in decision-making. The project will highlight the
management economics of a specific company, Samsung. Samsung electronics is a multinational
electronics company headquartered in Suwon, South Korea which is a part of the Samsung
multinational conglomerate. It deals in handsets, tablets, LCDs, ACs, Washing Machines,
refrigerators and other electronic items. The project will focus upon the Smartphone product line
of the company. The project will highlight the business profile of Samsung Electronics with a
brief of company history, markets, product lines etc. The demand and market equilibrium will be
evaluated to access the effects on the chosen product. All the factors that influence the price
elasticity of demand will be analysed including substitution effect, income effects etc, to
determine a pricing policy for the company.
MAIN BODY
Description of business
Samsung is a multinational conglomerate and is founded and headquartered in Seoul,
South Korea. It was founded by Lee Byung-Chul in 1938 and was listed as a trading company.
Lee focussed upon redeveloping the country after the war through industrialisation. The
company diversified into areas like textiles, food processing, retail, securities and insurance.
During 1960s, Samsung entered into the electronics industry. The 1970s and 80s were focussed
on rapid expansion in the technology business with products like Samsung data systems. As of
1990, Samsung group has focussed highly upon globalisation of electronics and activities,
specifically its mobile phones and semiconductors which are now its main source of revenue.
During 2000s, Samsung developed smartphone range, galaxy range in particular which gained
popularity over the decade as they topped the best smartphones lists. Samsung has the 6th highest
worldwide brand value as of 2017 (Hartley, 2017).
Currently, Samsung electronics operates globally and has a sales network, assembly
facilities and plants in 74 countries with employee strength being 290,000 people. By revenue, it
is a leading manufacturer of consumer electronics and second largest technology company in
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terms of revenue and high market capitalisation. The company is a major manufacturer of
batteries, camera modules, image sensors, displays etc. and world’s leading producer of handsets
including smart phones and mobile phones (Rahaman, 2020).
Figure 1: Top smartphone brands in UK
Source: Pavel Naiya, 2019, Counterpoint consumer lens study
Samsung is a popular choice among UK customers as it provides a wide range of
smartphone collections across different budgets. The UK smartphone market is driven by various
operator channels where Samsung and Apple dominate the market. Although competition is
intensifying with Google ad Huawei in the premium segment (Djatmiko and Pradana, 2016). The
choice of Samsung for the project was influenced by its brand equity and wide price range and
product segments and also because the company is a clear leader in the industry and the most
preferred brand choice. Future spending reasons and intentions of the consumers can determine a
lot about the marketing needs and product development. Samsung’s strong brand portfolio in this
mid-tier price range has captured the minds of British consumers. The main product selected is
of the premium segment of Galaxy range of smartphones- Samsung Galaxy Note 20. The further
project would focus upon the premium smartphone range of the company and elaborate the
market equilibrium and demand and price elasticity accordingly.
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Demand and market equilibrium
1. Price of substitutes
Substitute of product refer to the product and the services in the market which are as
same as similar to another product, it is a good which can be used in a place of another. The
substitute of the product by Samsung Galaxy note 20 are the iPad, smart watches etc. The
demand of the substitute product is increasing and as well it is dividing the market in the
segments as people are choosing according to their preferences. A person who like to do working
on a big display will surely go for the iPad and Tabs, and the use of the smart watches in the
market is changing the culture of mobile industry as watches are easy to carry and are giving all
the services which phones give and is giving a huge competition to the mobile products.
Substitute product affect the company product in decreasing of rates which affect the business of
Samsung in the market as to get a stable market they need to understand the situation of the
market and need to change the strategies accordingly. The galaxy note is a premium quality
phone product and the iPad are affecting the demand as few tabs and iPad are much cheaper than
the galaxy notes 20 and because of this the demand gets affect (Djatmiko,2016).
2. Price of complements
Complements for galaxy note 20 are the EarPods and the wireless charges which give the
product extra benefits in the market to the substitute products and the competitor. Wireless
charge is one of the complement product and service given by the Samsung to its customer and it
help in the customer to use the wireless features for the product they are putting money.
Providing new technologies also increase in the prices as he accessories always gets costly and
are new in the market with new innovation required a good money. The demand of the product
increase in the market as the product of the company is supporting all these accessories with all
new technologies to attract the customers and the galaxy note give pen in the handset which help
the new designers in utilise the cell phone in a designer pad. Such complements help the
company product in the high demand to its competitor and help the company in thew better result
by their product in the UK market where people are more towards the technologies and
advancement.
3. Consumer Income
The decreasing in the consumer income due to the covid-19 recession is a huge
disadvantage to the product as it is very hard for the people to buy such premium phone which
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required a lot of money. Even the EMI option on the credit card is available but still the
recession is hitting the customer so hard that it is bit tough for the customer to buy the product
with that much amount. The recession caused a lot of people job loss due to the covid-19
situation and this is affecting the market of the company and it heavily increasing the lack of sale
of the product. The less of the income and job loss is decreasing the product demand very much
and is helping the competitor with low range product and is affecting the business goal of the
Samsung (Barillas,2018).
4. Consumer Taste & preferences
The consumer taste and preference in the UK is all about innovation and new
technologies, people in UK are always attracted towards new trends and their choice towards the
product are according to the quality company provide. The galaxy note 20 is a perfect balance of
high quality with new technologies and is one of the most liked product in the UK market as the
company is providing all the different ways of service and product service to its customer and are
totally customer oriented and providing rewards and cashback to make the customer stick to the
brand. If customer gets offers and choices then they definitely go for those product and brand
who offer the customer with new vouchers and they prefer the brands only. Competitor are
providing a good competition but the additional features of galaxy note which is the note pen is
giving the advantage to the product in getting the audience (Nagle,2018).
5. Consumer expectation of price
The expectation of the customer in the market for the price of the product before the launch
is 870 pounds, which the company released the product in 849 pounds which is accepted and
liked by most of the customer. As the situation is of the pandemic and the covid-19 situation is
affecting the market of the company, in this case company is focusing more to decrease the price
of the product and trying to make strategies to convert more of the customer within a short time
to maintain the business objective and goals of the company. Company is taking no risk with its
premium product galaxy note 20 and trying hard to make it a market favourite and giving
different scheme to the customer and are focusing in providing discounts to its customer.
6. Demographic
The number of the customer for the product by the brand in UK are in a huge number as
the company provide different varieties and choices for the customer. The Demographic factor of
the company shows that the galaxy note is a product which cover most of the demographic
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factors of the customer in market as the product is so versatile with its features that the
demographic change can easily adapt the product. As one of the top brand in the mobile and
accessories market throughout the world helps the Samsung in getting more of the trust as it’s a
long run for the company over the years in giving the best of the services its gives the customer
loyalty towards the customer and have a good trust on the company product and technologies
(Barazzetti,2017). The main focus of Samsung is in the age between the 22 to 38 as this age suits
the best to the product galaxy note 20, and the price of the product range between the 750 to 850
pounds with different segments in the product.
Price elasticity and demand
Substitution Effects
Substitution effect refers to the decreases in the amount of sales of a product which can
be attributed to the choices and preferences of customers wo are ready to switch to cheaper
alternatives when there is a rise in price levels. This can lead to a loss of market share of the
product and for the company. However, the substitution effect is a strong reflection of the
frugality or thriftiness of consumers, that is, when the consumers tend to be more economical in
order to select the products. If a brand increases its cost price, certain consumers can select a
cheaper alternative. Generally, when the price of the product increases and consumer’s income
remains constant, the substitution effect kicks in (Logar and Brouwer, 2018).
When considering the Premium segment smartphones, i.e. Samsung Galaxy Note 20, substitution
effect can take place if the initial cost of the product, which is around £849 seem higher to the
consumers then they can then shift to lower segment of phones, switch to another brand in
similar category & similar features but lower price range or purchase a substitute product like
tablet instead. Therefore, the demand is highly elastic.
Income elasticity of demand
A luxury good is a type of product for which demand can increase more proportionately
when income level increases. This rise in income can cause a higher percentage increase of
demand and the elasticity of income or YED is greater than 1. In case of Samsung premium
handsets, the Samsung galaxy Note series is considered as a luxury good. A necessity good is the
product which is of basic human necessity including water, housing and electricity, although the
term is subjective and can include things like internet and mobile phones. Considering mobile
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phones as necessity good, the low-price range segment of Samsung smartphones can be
considered essential with many competitors (Berry and et.al., 2018).
Income Elasticity of demand refers to the rate of responsiveness in demand when there is
a change in buyer’s income. It is the ratio of change in quantity upon change in income, and can
be denoted by the formula: YED = (Net percentage change in demand)/((Net percentage change
in income)
Figure 2: Income Elasticity of demand
Source: Tejvan Pettinger, 2019, Economicshelp.org
To understand the demand elasticity, we can assume that the luxury good undertaken is
Samsung Galaxy Note (Dhingra, 2020). When income of consumers rises by 10% that is from an
assumed income of £500 to £550, the demand will rise by 100/800 that is 12.5 % YED, equalling
to 1.125 income elasticity of demand. The YED for the product is greater than 1. This describes
the fact that demand for Samsung Galaxy Note series is highly elastic and more responsive
towards the change in income. In simple terms, it means that if the income level of consumer
rises, they can spend on the smartphone and the demand will rise. But if the income level of
consumers decreases, they would not purchase this luxury smartphone and instead look for
Normal goods like mid-tier price ranged smartphones.
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Income effects
The income effect refers to the change in demand for goods caused by a change in the
income, specifically, real income of consumers that results in a change in the consumer’s
purchase behaviour. This change can be the outcome of rise or decrease in wages and salaries
etc. or due to the rise in the disposable income when the expenditure is freed up due to the
decrease or increase in the prices of the product where the money is being spent upon.
The changes in real income can be the outcome of change in nominal income, currency
fluctuations or price changes (Hafilah, Chaer and Usman, 2019). Supposedly, a consumer spends
a larger value of his or her income on purchasing a luxury item, i.e. Samsung galaxy Note
smartphone but the decrease in salary or wages would result in less expenditure on luxury items
and more on necessity goods and normal goods. The decrease in the disposable income of the
consumer can reduce the demand of the Samsung Galaxy Note smartphone directly. But if the
price of the necessity goods increase, it can also lower the disposable income and the consumer
can spend more on those goods which would affect the demand on the smartphone indirectly.
Pricing Policy
Figure 3: Sales data of Samsung
Source: Felix Richter, 2018, Statista
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The pricing policy helps in determining the revenue of the company and is one of the
most difficult decision-making areas. It requires deep understanding of the competition,
consumer behaviour, market trends etc. Samsung faces an intense competition in the UK market
from Apple, HTC, Google, Huawei etc. In order to deal with the competition in the premium
segment mobile phone ranges, Samsung should adopt competitive pricing.
Contemporary premium models Pricing
Samsung Galaxy Note 20 £ 849
iPhone 11 Pro £ 924
Although the market share of Samsung is continually increasing in the mobile vendor market of
UK, its sales are impacted by the battery and hardware issues of Samsung Galaxy Note series
due to which in the yearly sales dropped in 2nd quarter of FY 2018. The dropped sales impacted
the revenue of the company. Samsung has to improve its marketing policies and focus upon
product development. When it comes to prices, the major competitor in the premium smartphone
segment is Apple and a competitive pricing policy can help Samsung in getting a competitive
edge (Ashokan, Zenarosa and He, 2018).
CONCLUSION
From the above report it can be concluded that Samsung is a leading electronics company
worldwide and in the UK. The company leads in the mobile vendor market of UK and customers
have high preference from Samsung handsets. The Demand and market equilibrium of the
product Samsung Galaxy Note 20 suggests that substitute products can include iPad, Tablets and
smartwatches. The effects of price of complements like accessories, Consumer income like EMI
options, consumer tastes and preferences as well as demographic factors impacts the market and
demand equilibrium for premium smartphone segment of Samsung. The substitution and income
effects evaluation led to the outcome that Samsung Galaxy Note smartphone series come under
luxury goods and have high income elasticity of demand. The pricing policy that Samsung can
adopt is competitive pricing policy.
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REFERENCES
Books and Journals
Ashokan, R., Zenarosa, G.L. and He, X., 2018. Diffusion model for the adoption of smartphone
brands under competitive pricing. Int. J. Trade Econ. Finan, 9(3), pp.96-99.
Barazzetti, L., Previtali, M. and Roncoroni, F., 2017. 3D modelling with the Samsung Gear 360.
In 2017 TC II and CIPA-3D Virtual Reconstruction and Visualization of Complex
Architectures (Vol. 42, No. 2W3, pp. 85-90). International Society for Photogrammetry
and Remote Sensing.
Barillas, F. and Shanken, J., 2018. Comparing asset pricing models. The Journal of
Finance. 73(2). pp.715-754.
Berry, K., and et.al., 2018. The allocation of time and risk of Lyme: a case of ecosystem service
income and substitution effects. Environmental and Resource Economics, 70(3), pp.631-
650.
Dhingra, I.C., 2020. Unit-2 Demand and Elasticity of Demand. IGNOU.
Djatmiko, T. and Pradana, R., 2016. Brand image and product price; Its impact for Samsung
smartphone purchasing decision. Procedia-Social and Behavioral Sciences. 219. pp.221-
227.
Djatmiko, T. and Pradana, R., 2016. Brand image and product price; Its impact for Samsung
smartphone purchasing decision. Procedia-Social and Behavioral Sciences, 219, pp.221-
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Hafilah, E., Chaer, V. and Usman, O., 2019. The Effect of Brand Ambassador, Brand Image,
Product Quality, and Price on Purchase Decisions Samsung Smartphones. Brand Image,
Product Quality, and Price on Purchase Decisions Samsung Smartphones (January 11,
2019).
Hartley, S., 2017. The case of the exploding Samsung phones. Busidate, 25(1), p.9.
Logar, I. and Brouwer, R., 2018. Substitution effects and spatial preference heterogeneity in
single-and multiple-site choice experiments. Land Economics, 94(2), pp.302-322.
Nagle, T.T. and Muller, G., 2018. The strategy and tactics of pricing. Routledge.
Rahaman, M., 2020. Strategic Brand Planning of Samsung Mobile.
Online
Income elasticity of demand, Tejvan Pettinger, 2019, Economicshelp.org Available through:
<https://www.economicshelp.org/wp-content/uploads/2011/10/normal-luxury-good.jpg >
Sales data of Samsung, Felix Richter, 2018 Available through:
<https://www.statista.com/chart/14587/samsung-sales-growth/>
Top smartphone brands in UK, Counterpoint consumer lens study, Pavel Naiya, 2019, Available
through :< https://www.counterpointresearch.com/>
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