Factors Determining Demand, Marketing Approaches, And The Economic Perspective Of The Taxi Industry In Australia

The assignment aims to fulfill the following learning outcomes:
(1) Understand fundamental economic concepts and their application in business environments.
(2) Apply economic thinking to explain simple business events, decisions and actions.
(3) Communicate economic analyses, and provide relevant written recommendations for business and/or government policy decision-making.
 

Changing Tastes and Preferences of Consumers

As baby boomers ages, their tastes and preferences change. Goods that would be required earlier may not be required so. For example, as baby boomers age, their intake for alcohol many change and they ay not consumer alcohol in quantities that they would have consumed previously.  This could affect every area of the market. (Mankiw 2008) A change in tastes and consumers can work both ways. If the change in tastes and consumer reduces the demand for a brand or a product, then the demand curve would shift towards the left.

As the composition of the population changes, the demand for goods and services will change too. Thus, the demand in this case, has shifted due to a shift in population. The demand could be a shift in the use of brands or in the products demanded themselves.  For example, in Japan, adult diapers sell in greater quantities than baby diapers. (Pasick 2013) This boom in adult diapers has been brought about by a rapidly ageing population. This could be a reality in Australia too. Another example of demand being determined by population is the preferred size of daily products. It is possible that baby boomer were previously daily items in bulk because they lived with their families. However, as baby boomers age and their children no longer live with them, there would be a shift in the size of the products that they would buy. 

Out of the given approaches, I would go with the approach set by Nick Goddard and follow up with the research on Baby Boomers. This research could be original research conducted by the Company or the research that is already available. If the research is brand specific, then market research will have to be conducted. If a general idea of the tastes, preferences and demographics regarding consumers is required, then already available research would come in handy.

This is simply because, the research will not only provide a direction but also, an idea of the underlying causes behind the purchases of consumers. This may help account for cultural differences, age differences, gender related differences and more. (Salai and Kova? 2011)

 Every human is subject to inherent biases and is subject to their perceptions of the daily phenomenon. These biases can be responsible for taking wrong decisions, when decisions are taken without any research. (Hochma 2013)  Marketing costs are generally very high, hence, targeted marketing improves the efficiency of capital put in for the purpose of marketing.

Population Shifts

In the absence of research, marketing would be done on a trial and error basis. This would increase the costs for the firm as well as increase the chances of severe consequences such as the Company losing market share or more. Hence, the preferable approach to marketing would be to conduct market research or make use of the available market research. (Zenger 2015) 

The taxi industry in Australia can been described as an oligopolistic industry. This is because it is a highly regulated industry with high entry barriers. There are just two product offerings:  Silvertop Taxis and 13 cabs and while there may be any number of taxi drivers, the supply is limited by these two companies. A taxi driver in Australia must get a license and follow various regulations for the safety of passengers and drivers. This acted as a barrier to entry to the individuals with no financial support. (Moore 2017)

The rise of ride sharing apps has changed this structure and made it more competitive by creating a differentiated product.  Consumers who may need a taxi can order a ride via the app and the driver that is the closest to them will service the customer. In addition to this non-price form of competition,  cab hailing apps like Uber have also indulged in price competition to gain share of the share. (The Wharton School, University of Pennsylvania 2017)

A market wherein there are more than two producers or sellers but not many, is known an Oligopoly. An Oligopolistic structure, generally, arises when there are too many barriers to entry in an industry. These barriers could include a variety of factors such as high costs of startup, government regulations, geographical restrictions etc. (Mankiw 2008)

The price of taxis can be determined by a demand supply curve. The demand for taxis would, generally, be a downward sloping demand curve, where a decrease in a unit price may increase the demand for taxis as a mode of transport. The supply curve is upward sloping which means that given a increase in price, the supply of taxis will increase.

However, since this is an oligopoly, firms must try to achieve economies of scale, to reduce costs.

In the given diagram, it is depicted that firms with larger operations size, tend to have lower marginal cost floors. The marginal cost reduces as the output increases, up to a point and starts to increase again, once complete operational efficiency is achieved. However, these economies are difficult to achieve since the oligopolistic market is noe saturated.

Approaches to Marketing

Given that the demand  (the non Collusive oligopolist’s demand) for such Uber, and similar apps, would depend  on whether the taxi drivers (the competitors) match the curve D₂  D₂   and MR₂ MR₂    in the diagram below and change their pricing as the ride hailing companies changes pricing from the QP to a higher or lower point. Generally, the taxi drivers will ignore a pricing increase but will follow a price reduction. This will cause the demand for cab hailing apps to be kinked i.e  D₂ P D₁ and their Marginal Revenue will break at MR₂  MR_{1 .}Kinked demand curve DPD and the broken Marginal revenue curve MRMR may help explain the losses that plague the ride hailing apps. (The Wharton School, University of Pennsylvania 2017) Any shift in Marginal costs between MC₁ and MC₂   will cut the vertical (short dashed segment of the marginal revenue curve, no change in either price QP or Output Q will occur.  It is possible for taxi unions and the new firms to collude but that has not occurred yet.

iii) Cab hailing apps like Uber  that have innovated within the taxi industry have gained a footing in an oligopolistic industry. However, that may not necessarily imply that the innovation helps them sustain within the industry. The profitability of ride sharing companies is very low and the taxi drivers driving cabs for these firms have reported that they are not making higher profits. (Thompson 2018) However, the advent of the new technology has forced the ride hailing industry to become more competitive. However, this model may not be true of other countries such as India where the taxi unions are weak or non-existent. (Detsch 2015)

The Uber model is based on under cutting the local taxis. Hence, it loses on every sale. Additionally, the population density of Uber may not be enough to sustain it in the market. Hence, it would be a good idea to restrict the operations to high population density cities like Sydney and Melbourne where economies of scale to be achieved. This would drive down marginal costs and help achieve operational efficiency. The total volume of losses may decrease with this strategy and profitability will be achieved sooner, while other competitors would lose money.

Additionally, Uber can seek to improve its value predictability by allowing reservations much ahead of time and by allowing consumer to choose drivers. This will help build customer loyalty. (Vertes 2015) (Hegde 2014) 

Natural Gas is cheaper than coal which has led to demands that coal fired plants should be banned and natural gas should be used to make electricity (Make It Cheaper Pty Ltd 2011). This implies that coal and natural gas are substitutes. In order to understand whether natural gas can substitute coal, the cross elasticity of the two should be understood.

The Economic Perspective of a Business Case

Cross Price Elasticity is defined as the degree of responsiveness of a product or the change in demand of a product, given a change in the price of another product. (Eastin and Arbogast 2011) Cross Elasticity, usually, occurs for two or more goods that are substitutes for each other.  In the given example, the quantity of natural gas demanded, based on its own demand curve, is plotted on the X axis. The demand for coal is plotted on Y Axis.  An increase in the output of natural gas, will decrease the demand for coal because the two goods can be substituted for each other.

Cross Price Elasticity of coal and natural gas can be measured as:

Cross Price Elasticity = Change in Output of Coal/ Change in Output of Natural Gas

The area shaded in red in the above diagram is a pictorial representation of cross elasticity. 

Cross Price Elasticity based on a dimple demand and supply analysis. A real world estimate of the two goods is given by U.S. Energy Information Administration (2012).. The study estimated the coal/ gas corss-elascticities for vaious variteties of coal and natural gas. However, on an average it stood at 0.17* for all of USA. This study was conducted to study the cross elasticity of coal and natural gas in Power plants in the USA

1. b) Factors Affecting the estimates of the cross elasticity of coal and natural gas.

• The Cross Elasticity of demand was only considered for power plants in US and mostly for US based varieties of coal. The results may differ in different countries, on different varieties of coal and on different technologies.
• A variety of econometric estimates were used to first calculate the price of coal and natural gas and then the cross electricity analyses was conducted.  These analyses may have affected the calculations and it is possible that the estimates would be different if the analyses were different.

iii) The expectation was that the cross elasticity would be negative, since the natural gas would be expected to replace coal or vice versa. However, since the result is not negative, it can be assumed that coal and natural gas go hand in hand in a power station and cannot completely replace each other. However, the implications would be that natural gas has a greater demand than coal, since the result, 0.17 is less than unity. Thus, natural gas is a preferred fuel in a power plant in USA. This may be due to  a variety of reasons such as easier availability of natural gas as compared to coal, the prices of coal being comparatively higher, or the fact that natural gas is more environment friendly

There are some varieties of coal that had negative cross- elasticities, given the same calculations. As a manager, the choice will be between coal and natural gas. Since, Natural gas is demanded to a greater degree, it is possible that the price of natural gas would be more inflated (given a level of supply) while coal will be priced lower. As a manager, the implication of such results is that the trade –off will be between coal or the much preferred natural gas but not to the extent that it was expected. There is no perfect substitutability between coal and natural gas.   

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