Optical industry & its structure

LPB

1. OPTICAL INDUSTRY
&
ITS STRUCTURE
Miss Rosmin Iqbal Hussain
BOptom (UKM), CMBA (UNIMAS)

2. QUIZ
1.WHY IS THERE STILL A LOT OF OPPORTUNITY IN
OPTOM BIZNES ENVIRONMENT?
2.WHAT ARE THE SERVICES YOU CAN OFFER? LIST
3.WHAT ARE THE BUSINESS ENVIRONMENT SCAN?
4.WHAT IS SWOT ANALYSIS? LIST EXAMPLES RELATED
UNDER EACH.
5.WHAT DOES INTERNAL ENVIRONMENT FACTORS
COMPRISE OF? LIST
6.WHAT DOES EXTERNAL ENVIRONMENT FACTORS
COMPRISE? LIST
7.WHAT IS TOWS MATRIX & WAT ARE ITS USAGE?
8.WHAT ARE PORTER’S 5 FORCES? LIST
9.WHAT IS COMPETITIVE ADVANTAGE?

3. 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

4. THE OPTICAL INDUSTRY… cont
Optometrists:
Qualified to conduct eye examinations
Examine eyes for signs of disease and
abnormalities
Refer / issue notification to GP / specialist
Issue Rx for optical appliances
Fit & 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

5. 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-registered
opticians
Registered
Dispensing opticians
Other retail
distributors
Ophthalmic medical
practitioners
Hospital eye service
Optometrist
Patient

6. OPTICAL MARKETPLACE
Four main sectors within the optical
marketplace:
nManufacturing glass/frame
nWholesalers & importers
nOptical practitioners (optometrist & dispensing
opticians)
nThe contact lens industry

7. MARKETS

8. 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

9. THE CIRCULAR FLOW
Copyright © 2004 South-Western
Spending
Goods and
services
bought
Revenue
Goods
and services
sold
Labor, land,
and capital
Income

= Flow of inputs

and outputs

= Flow of dollars
Factors of
production
Wages, rent,
and profit




FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production




•Buy and consume
goods and services
•Own and sell factors
of production
HOUSEHOLDS


•Households sell
•Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION


•Firms sell
•Households buy
MARKETS
FOR
GOODS AND SERVICES

10. 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

11. 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

12. MARKET STRUCTURE

13. MARKET STRUCTURE
Perfect Competition
1. A very large number of buyers and sellers
2. Homogeneous product (standardized)
3. Free entry and exit (no barriers)
4. No collusion among the firms
5. Complete knowledge of all market information
6. Brand competition often involves advertising
campaigns and promotional expenditures to
stress often minor distinctions among products

14. Monopolistic Competition
1. Many Firms and Many Buyers
2. Easy Entry & Exit
3. PRODUCT DIFFERENTIATION ! ! !
Differentiation occurs when consumers
perceive that a product differs from its
competition on any physical or nonphysical
characteristic, including price

15. Oligopoly
1. Few firms
2. The products may be differentiated or
standardized
3.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

16. Monopoly
1. One firm
2.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.

17. OLIGOPOLY

18. OLIGOPOLY
A market dominated by a few large
firms - imperfect competition
How concentrated is an industry?
Consider the market share of four largest
firms
Some highly concentrated industries
(in the world or in a country):
Mobile phones, paper industry, cigarettes,
batteries, breweries, airplane industry, oil
industry

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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.

26. 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

27. 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

28. WHAT SHOULD YOU DO?
Be aware which is the Barometric Firm
/ Dominant Firm & follow it closely!

29. 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 base
However, price drops significantly since all firms
increase volume so the firm will gain little revenue
Highly inelastic

30. 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

31. 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

32. OLIGOPOLY MARKET
GAME THEORY &
STRATEGIES

33. 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

34. 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 1NC
C
NC C
1 yr 15 yrs
0 yrs 6 yrs
1 yr 0 yrs
15 yrs 6 yrs

35. 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

36. STRUCTURE OF GAME
Three elements of any game that must be
specified to know the expected outcome
1.Players
2.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)

37. 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 1NC
C
NC C
1 yr 15 yrs
0 yrs 6 yrs
1 yr 0 yrs
15 yrs 6 yrs

38. What is the dominant strategy?

39. 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 in
each pair. We will get to {150,150}
which is an Equilibrium
EXAMPLE 2

40. 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?

41. 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)

42. PLAYER 2
PLAYER 1
CL
Frame
CL Frame
100, 100 150, 50
150, 150 50, 25
Player 1 is the first number in
each pair. We will get to {150,150}
which is an Equilibrium

43. 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

44. EXAMPLE 3
PLAYER 2
Kroger
CL
Frame
CL Frame Solution
125, 125 200, 175 25, 25
100, 200 150, 150 25, 175
Player 1 is the first number in
each pair.
25, 25 175, 25 5, 5Solution
**Solution similar to Frame
is also dominated for Player 2
PLAYER 1
Meijer

45. 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??

46. 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??

47. 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

48. 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

49. OBJECTIVES & RESULTS…cont
1.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
2.If firms do compete in price, it is to their
advantage to differentiate products.
Even with differentiated products,
quantity competition is more profitable

50. OBJECTIVES & RESULTS…cont
1.A collusive agreement with price competition is
price leadership, in which a dominant firm sets
price and others follow
2.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
3.Leadership is only effective if firm is committed
to the policy and/or has the ability to retaliate

51. 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

52. 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

53. 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 contracts
Agreeing 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 you
Figuratively burning one’s bridges with a particular
group may increase one’s credibility with other groups

54. 1.Leave the outcome to chance
A threat no stronger than necessary to deter the rival
2.Move in small steps
Establishment of trust? Convert a once-off into a
repeated game, in which reputation is important
3.Develop credibility through TEAMWORK
Pride and self-respect are lost when commitments
are broken
4.Employ mandated Negotiating Agents
One’s bargaining situation can be improved if one
has an agent to negotiate on one’s behalf

55. CONCLUSION 3
Three 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 making
position 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