DEMAND FOR CONSUMER DURABLE GOODS OF INDIA

Project submitted to

MS. ERITRIYA ROY

(Faculty: ECONOMIC)

Project submitted by

VIKAS GHRITLAHRE

(ECONOMIC, major)

Semester I

Roll no.168

HIDAYATULLAH NATIONAL LAW UNIVERSITYRAIPUR, C.G

TABLE OF CONTENT

1. ACKNOWLEDGEMENT……………………………………………..

2. RESEARCH METHODOLOY………………………………………..

3. INTRODUCTION……………………………………………………..

4. OBJECTIVE……………………………………………………………

5. DEFINING DURABLE GOODS……………………………………....

6. CONSUMER DURABLE ITEM……………………………………….

7. DETERMINANTS OF DEMAND FOR CONSUMER DURABLE ITEMS

8. SALES FORECASTING OF CUSTOMER DURABLE ITEM………..

9. PERISHABLE AND DURABLE GOODS…………………………….

10. MARKET CHANGE IN FORCE………………………………………

ACKNOWLEDGEMENT

We express our sincere thanks to MS.ERITRIYA ROY, our Grand Project guide to have given us the opportunity to work on such a challenging project. We also thank our institute (HNLU) HIDAYATULLAH NATIONAL LAW UNVERSITY for providing us all the necessary resources required in our study. Again we would like to earnestly thank those all people who give us their valuable time for us in questionnaire survey. All the interaction with them was really a good experience and added some valuable knowledge and experience. Last but not the least I would also like to thank our friends who took time off to share insights about their experiences this helped us immensely to understand the psyche of the consumer. We just hope that the recommendations and suggestions presented by us are considered seriously. On the onset, we would like to take this opportunity to express our gratitude to all those great minds and hearts that have touched this project in the path of its success.

RESEARCH METHODOLOGY

The methodology adopted in this research work is based on SECONDARY sources of

information like books, journals, etc. The present research work contains a critical analysis and a

detailed study of the topic – MARKET DEMAND OF DURABLE GOODS IN INDIA

This research work contains elaborated theoretical research, an overall study of the topic and in

depth and in depth web browsing.

INTRODUCTION

As we know that Indian market is one of the biggest markets in the world economy. Indian

economy effect the world economy. The income of the consumer is the main cause of the

demand of the market. Man in today’s world is very rational he chooses best for his own which

means that the product best suited to him will be consumed by him.

A durable good or a hard good is a good that does not quickly wear out, or more specifically, one

that yields utility over time rather than being completely consumed in one use. Items like bricks

or jewelery could be considered perfectly durable goods, because they should theoretically never

wear out. Highly durable goods such as refrigerators, cars, or mobile phones usually continue to

be useful for three or more years of use, so durable goods are typically characterized by long

periods between successive purchases.

In purchases of durable goods, such as automobile and furniture, we generally do not observe

repeat purchases of the same product by the same customer, the overall purchase frequency islow

and inter-purchase interval is long. As such, to investigate consumer demand, many retailers rely

on reports that are based on aggregated purchase numbers rather than item-level or customer-

level analysis. Estimates given in these reports only serve as a general guideline in learning about

customer demand and do not provide sufficient details for marketing activities. They do not

incorporate heterogeneous customer preferences and price sensitivity. Neither do they take into

account the correlations that the customers may attribute to be between the items. In this paper

we seek to estimate demand for durable goods using a cross sectional data set with an empirical

model and a field experiment on price. Our analysis is both on individual item and customer

level. Our specific application in this study, apparel products from a catalog, falls somewhere

between, in terms of purchasing frequency, perishable and durable goods in the traditional sense.

However, since it shares the same property with the durable goods in the sense that we do not

have a history of repeat purchases of the same item, we are classifying it with the durable goods.

Objectives in estimating demand for durable goods: pricing, customer targeting and

Cross-selling.

OBJECTIVES

The research was aimed at studying the purchase pattern of consumers for consumer durable.

To study the factors affecting purchase of consumer durables

To study brand preference of consumers for consumer durable goods

To study brand preference of consumers towards organized & unorganized outlet for the consumer durable goods.

To study the criteria of consumers regarding Purchase of consumer durable goods. To know about the consumer durable goods available in India.

To analyze the demand of consumer durable goods in India.

DEFINING DRUABLE GOODS

In economics, a durable good or a hard good is a good that does not quickly wear out, or more

specifically, one that yields utility over time rather than being completely consumed in one use.

Items like bricks or jewelery could be considered perfectly durable goods, because they should

theoretically never wear out. Highly durable goods such as refrigerators, cars, or mobile phones

usually continue to be useful for three or more years of use, so durable goods are typically

characterized by long periods between successive purchases.

Examples of consumer durable goods include cars, household goods (home appliances,

Consumer electronics, furniture, etc.), sports equipment, and toys.

Nondurable goods or soft goods (consumables) are the opposite of durable goods. They may be

defined either as goods that are immediately consumed in one use or ones that have a lifespan of

less than 3 years.

Examples of nondurable goods include fast-moving consumer goods such as cosmetics and

cleaning products, food, fuel, office supplies, packaging and containers, paper and paper

products, personal products, rubber, plastics, textiles, clothing and footwear.

While durable goods can usually be rented as well as bought, nondurable goods can generally not

be rented. While buying Durable goods comes under the category of Investment demand of

Goods, buying Non-Durables comes under the category of Consumption demand of

Goodsconsumer preferences for new durable goods and estimates the model using aggregate data

on the digital camcorder industry. A dynamic model is necessary to capture the fact that

consumers choose not only what to buy but when to buy. Rapidly falling prices and improving

features have been among the most visible phenomena in a large number of new consumer

durable goods markets, such as computers, digital camcorders and DVD players. For instance,

between 2000 and 2006, average digital camcorder prices dropped from $930 to $380 while

average pixel counts rose from 580,000 to 1.08 million. The rapidly evolving nature of these

industries suggests that modeling dynamics might be empirically very important in estimating

consumer preferences. Our model allows for product differentiation, persistent consumer

heterogeneity, endogeneity of prices and endogenous repeat purchases over time. Berry,

Levinsohn & Pakes (1995), henceforth BLP, and the literature that follows have shown that

incorporating consumer heterogeneity into differentiated product demand systems is important in

obtaining realistic predictions. Much of our model is essentially the same as BLP: our model is

designed for aggregate data (but can incorporate consumer-level data when available); there is an

unobserved product characteristic that affects equilibrium prices; consumers make a discrete

choice from a set of products in a multinomial log it framework; and consumers have random

coefficients over observable product characteristics. Our model departs from BLP in that

products are durable and consumers are rational forward-looking agents who have the optionto

purchase a product in the future instead of, or in addition to, purchasing one now. As our model

is dynamic, we need to specify consumer perceptions over future states of the world. We focus

on a major simplifying assumption: that consumers perceive that the evolution of the value of

purchase will follow a simple one-dimensional Markov process. In this sense, consumers use a

reduced-form approximation of the supply side evolution to make predictions about the value of

future purchases. We also examine a number of alternative specifications for perceptions,

including multi-dimensional processes and perfect foresight.

Over the last 15 years, a substantial literature has used static BLP-style models to

investigate questions of policy interest. This literature has analyzed questions that

include (but are by no means limited to) horizontal merger policy (see Nevo, 2000a),

trade policy (see Berry, Levisohn & Pakes, 1999) and the value of new goods (see

Petrin, 2002). Many of these papers investigate industries, such as automobiles, for

which goods are durable. Our paper provides a framework to incorporate dynamics in

BLP-style models and hence may be useful in deriving better estimates for these and

related questions.

Indeed, recent work is using and extending our methods to examine scrapping subsidies for

automobiles (Schiraldi,2007), markups for digital cameras (Zhao, 2008), switching costs

between cable and satel- 2lite television (Shcherbakov, 2008) and switching costs in consumer

banking (Ho, 2008), among other research questions.

We use our results to examine the evolution of consumer value from the digital camcorder

industry by calculating a cost of living index (COLI) for this sector. COLIs measure

compensating variations, the dollar taxes or transfers necessary to hold welfare constant at the

base level over time. Government computed COLIs have important implications for wage

growth at many firms, government transfer programs and a variety of other government policies.

The BLS is particularly concerned about the development of accurate COLIs for consumer

electronics and camcorders in particular (see Shepler, 001). Systematic entry and exit of

camcorders based on their characteristics may create biases (see Pakes, 2003, and cites therein).

Further biases occur when consumers act dynamically. If consumers acts rational dynamic agents

and we instead assume myopic behavior, we may overstate the welfare gains ater on, by

assuming more high-value consumers than actually exist (see Aizcorbe, 2005). Because we use

primarily aggregate data, we develop a relatively parsimonious specification which results in the

parameters that we estimate being essentially the same as in static BLP-style models: the mean

and variance of consumer preferences for product characteristics. As in these models, our

identification of key parameters such as price elasticities and random coefficients comes from

the impact of different choice sets on purchase probabilities using the assumption that the choice

sets are exogenous. Our dynamic model adds to identification by making use of substitution

patterns across time periods as well as within time periods and by capturing the endogenous

changes in demand over time as consumer holdings evolve

CONSUMER DURABLE ITEMS

The Consumer Durables industry consists of durable goods and appliances for domestic use such

as televisions, refrigerators, air conditioners and washing machines. Instruments such as cell

phones and kitchen appliances like microwave ovens are also included in this category. The

sector has been witnessing significant growth in recent years, helped by several drivers such as

the emerging retail boom, real estate and housing demand, greater disposable income and an

overall increase in the level of affluence of a significant section of the population. The industry is

represented by major international and local players such as BPL, Videocon, Voltas, Blue Star,

MIRC Electronics, Titan, Whirlpool, etc.

Consumer Durable Items Introduction: This paper starts with basic definition of consumer

durable item and then followed by demand parameters of customer durable items like air

conditioner and forecasting techniques employed in deducing the demand for it. Sequentially,

determinants of the purchase of a consumer durable item by a household unit , are discussed in

the second part. India in its 62 years of journey seen manifold increase in the income of its

denizens (Rs.38,084 as on 2009) and this has led to paradigm shift in the purchasing behaviour

of the people here. There is a discernible shift in the consumer’s preference in favour of higher

end, technologically superior branded products, the favour demand being spurred by increasing

consumer awareness and preference for new models. This shift is also because of the increase in

manufacture of branded products and narrowing down of pric price between branded and non-

branded goods. Competition has forced the companies to offer efficient after sales branded

service and support and this, in turn, has swayed customer preference for branded products. Post

liberalization there has been inundation of goods transcending the borders and the customer tion

has a wider choice; breaking the shackles of the consumers regarding limitations of choices.

Indian consumer durables market used to be dominated by a few domestic players like Godrej,

Allwyn, Kelvinator, and Voltas. like But post-liberalization many foreign companies have

entered into India, dethroning the Indian players and liberalization dominating the market. The

major categories in the market are CTVs, refrigerators, air air-conditioners and washing

machines. Air conditioner is categorized as miscellaneous items in white goods. Other major

subdivisions are Refrigerator equipment, Stoves and washing equipments.

DETERMINANTS OF DEMAND FOR CONSUMER DURABLE ITEMS

The demand for consumer electronics has been rising with the increase in disposable income

coupled with more and more consumers falling under the double income families. The growing

Indian middle class is an attraction for companies who are out there to woo them. Availability of

newer variants of a product: Consumers are spoilt for choice when it comes to choosing

products. Newer variants of a product will help a company in getting the attention of consumers

who look for innovation in products. Product pricing: The consumer durables industry is highly

price sensitive, making price the determining factor in increasing volumes, at least for lower

range consumers. For middle and upper range consumers, it is the brand name, technology and

product features that are important. Availability of financing schemes: Availability of credit and

the structure of the loan determine the affordability of the product. Sale of a particular product is

determined by the cost of credit as much as the flexibility of the scheme. Rise in the share of

organized retail: Rise in organized retail will set the growth pace of the Indian consumer

durables industry. According to a working paper released by the Indian Council for Research on

International Economic Relations (ICRIER), organized retail which constituted a mere four

percent of the retail sector in FY07 is likely to grow at 45-50% per annum and quadruple its

share in the total retail pie 16% by 2011-2012. The share will grow with bigger players entering

the market. Innovative advertising and brand promotion: Sales promotion measures such as

discounts, free gifts and exchange offers help a company in distinguishing itself from others.

Festive season sales: Demand for colour TVs usually pick up during the festive seasons. As a

result most companies come out with offers during this period to cash in on the festive mood.

This period will continue to be the growth driver for consumer durable companies.

SALES FORECASTING OF CUSTOMER DURABLE ITEM

Consumer Durable Items SALES FORECASTING OF CUSTOMER DURABLE ITEM Sales

forecasting starts with referring to the previous year sales performance of that particular factor.

One point to remember when sales forecasting is that if you plan to work with a bank for

financing, you will want to do multiple estimates so as to have more confidence in the sales

forecast. Sales Forecasting Method For your type of business, what is the average sales volume

per square foot for similar stores in similar locations and similar size? This isn't the final answer

for adequate sales forecasting, since a new business won't hit that target for perhaps a year. But

this approach is far more scientific than a general 2 percent figure based on household incomes.

Sales Forecasting Method #2 For your specific location, how many households needing your

goods live within say, one mile? How much will they spend on these items annually, and what

percentage of their spending will you get, compared to competitors? Do the same for within five

miles (with lower sales forecast figures). (Use distances that make sense for your location.) Sales

Forecasting Method #3 If you offer say, three types of goods plus two types of extra cost

services, estimate sales revenues for each of the five product/service lines. Make an estimate of

where you think you'll be in six months (such as "we should be selling five of these items a day,

plus three of these, plus two of these.") and calculate the gross sales per day. Then multiply by

30 for the month. USE & ABUSE OF FORECASTING The sales forecasting done for Air-

conditioner like durable material may be done with utmost sincerity but the factor responsible for

the current year may not be responsible for the subsequent years. The sales factor emphasis due

to increase in money flow this year may also be shifted due to hot summer in the next year. Air-

conditioners sales have a dependency factor of Monsoon also. Forecasting next year’s monsoon

to precise level may not be possible at this very instant. The demand also includes the climate

prevailing in the earth. Every year through global warming there is an increase in temperature by

½ to 1 degree. This may also stimulate the demand of the product. Though we use statistics /

software products in forecasting the sales there are some glitches in measuring some of the

factors.

PERISHABLE AND DURABLE GOODS

In economics, the meaning of these terms is different. Here perishable goods refer to those

goods which can be consumed only once. In other words, these goods are themselves consumed

while in the case of durable goods, their services alone are consumed. Thus, perishable goods

include all services (e.g. services of teachers and doctors), food items, raw materials, coal, and

electricity, while durable goods include plant and machinery, buildings, furniture, automobiles,

refrigerators and fans.

The distinction is significant, for durable products pose more complicated problems for demand

analysis than do non durables. Sales of non-durables are made largely to meet current demand

which depends on current conditions. In contrast, sales of durable goods go partly to satisfy new

demand and partly to replace old items.

Autonomous and Derived Demand:

The goods whose demand is not tied with demand for some other goods are said to have

autonomous demand, while the rest have derived demand. Thus, the demands for all

producers’ goods are derived demands, for they are needed in order to obtain consumers or

producers goods. So is the demand from money which is needed not for its own sake but for its

purchasing power, which can buy goods and services.

Thus, the distinction between autonomous and derived demand is more of a degree than of a

kind. Sometimes a distinction is also drawn between direct and indirect demand, and that

distinction is close to the difference between autonomous and derived demand respectively.

Goods that are demanded for their own sake have direct demand while goods that are needed in

order to obtain some other goods possess indirect demand. In this sense, all consumer goods

have direct demands while producer’s goods, including money, have indirect demand.

MARKET CHANGE IN FORCE

A careful analysis of the Indian market reveals the dramatic changes that occurred since 1990s

Resulting in manifold increase in the purchase of consumer durable products. The various

changes that transformed the Indian market for consumer goods in the last one decade (1991-

2001)are presented below:

1. A shift from sellers market to buyers’ market- characterized by intense competition, variety,

and consumer insistence for value for money leading to the redefinition of necessities and

luxuries.

2. Changing consumption pattern – Indian markets have transformed both in terms of

Sophistication and variety, resulting in a substantial change in the disposition of the customers

Towards quality, price, delivery and service leading to new processes.

3. Sheltered market to competitive market – the entry of Multinational Corporations (MNC’s)

With global network, acknowledged superior technology, product quality and money power to

Backup their marketing efforts offered a severe jolt to the Indian companies.

4. Expanding service sector – which at present accounts for about 52 per cent of gross domestic

product. They are production, business, government and other service sectors like education,

healthcare, hotels, insurance, banking, consulting company, travel and tourism, emerged as

important areas where significant action is taking place.

5. Emergence of distinct market segments – urban, rural, youth, children, working women etc

6. Changes in the media scene - from single channel to cable network with multiple channels,

larger coverage, multimedia mix, greater spending and emphasis on market research and

media planning, have become the order of the day.

7. Changes in the distribution channels – Innovative distribution channels like convenience

Shops, departmental stores, discount stores, super markets, mail-order retailing, and video

shopping, internet shopping and multilevel marketing, have begun to change the face of

distribution format.

8. E - Business and Commerce – in addition to e-mail, e-entertainment and e-database, a wider

range of services using networking- e-shopping, e-commerce, web-enabled operations and

data ware-housing are now available and quite interestingly are gaining acceptance.

As a result of all these changes, the role and functions of marketing have undergone a

metamorphic change in recent years. Many new concepts and patterns of thought have emerged.

That apart, changes have also taken place in the consumer buying habits and spending behavior.

Consumers have become more knowledgeable, more adventurous and more demanding,

Compelling, in a way, redefinition of marketing strategies and orientations of companies. Since

present day consumers are more concerned for value, brand image and performance than ever

before, consumer satisfaction is viewed as an integral part of total quality package in terms of

form utility, place utility, time utility and possession utility. In the light of the shift enumerated

thus for, it is evident that sound understanding of the consumer profile is an urgent need for the

marketers. The traditional attitude of many business firms to sell what is easy for them to

produce rather than to produce what the consumers want has to be changed. The marketers

should take fresh initiatives focused on effective market analysis and research. Gone are the days

where price alone used to play a significant role. Of late, product differentiation, customization,

pre-sale and after sales service, quality, delivery schedules and other factors also play an

important role besides price. Effective marketing not only creates new and bigger markets, but

also enables the firms to reduce cost, to enhance the demand and eventually to achieve

economies of scale. It is, therefore, essential that marketers keep a constant watch on the

marketing horizon to spot the new challenges thrown up by the staggering pace of technological

developments and various changes in the marketing environment and to convert them into highly

profitable marketing opportunities.

CONCLUSION

This project develops new methods to estimate the dynamics of consumer preferences for new

durable goods. Our model allows for rational expectations about future product attributes,

heterogeneous consumers with persistent heterogeneity over time, endogeneity of price, and the

ability for consumers to upgrade to new durable goods as features improve. Our model is of use

in measuring the welfare impact of new durable goods industries and in evaluating dynamic price

elasticities for these industries, among other economic questions. We estimate our model using a

panel data set of prices, quantities and periods; 2) surprising price drops might affect welfare

changes much more than anticipated ones; and 3) future income adjustments based on a COLI

affect welfare today. See Reis (2005) and Bajari, Benkard & Krainer (2005) for different

approaches. If we measured flow utility using the entire price rather than the amortization

scheme, we would find that average flow utility was less than the outside good utility throughout

our sample since payments from new purchasers swamp flow from those who hold the product.

Although theoretically consistent, we found this unappealing. We also computed a COLI using

the static BLP estimates. It was much larger than the other indices, and peaked at $6.92. It did

appear reasonable. characteristics for the digital camcorder industry. Our estimates of consumer

preferences that account for dynamics are generally sensible. A variety of robustness measures

show that the major simplifying assumptions about the dynamics in the model are broadly

consistent with the data. In contrast, a static analysis performed with the same data yields less

realistic results. We find substantial heterogeneity in the overall utility from digital camcorders.

Our results also show that much of the reason why the initial market share for digital camcorders

was not higher was because consumers were rationally expecting that the market would later

yield cheaper and better players. We find that industry elasticity of demand is 2.55 for transitory

price shocks and 1.23 for permanent price shocks, with significantly larger permanent elasticities

for individual products. Last, we find that the digital camcorder industry is worth an average of

$1.27 more per household per month in 2006 than in 2000 and that standard COLIs would

overstate the gain in welfare due to the “new buyer problem.” We believe that our results show

that dynamic estimation of consumer preferences for durable goods industries is both feasible

and important for analyzing industries with new goods. We see several avenues of future

research, including evaluating firm decision problems in the presence of consumer and firm

dynamics.

BIBILOGRAPHY

BOOK REFERRED-

1. T.R. JAIN & V.K. OHRI OF MICROECONOMICS AND MACROECONOMICS.2. INDIAN ECONOMY

WEBSITES

1. http://www.ibef.org/download/Consumer_Durables_10708.pdf2. http://en.wikipedia.org/wiki/Fast_moving_consumer_goods3. www.executiveaccess.co.in/consumer_service.php.