Orientation and standard product prices

Author：新安華砂輪　　Release date：2016/9/7 19:13:34

Product prices in the real business world is an extremely important and sensitive factor. If the mutual cooperation between the companies, along with the prices remain high, generally in line with an approach the companies the benefits of development, but in our abrasives industry why many companies have chosen to launch the "price war"? What chose "price war" is the reason and purpose? Which is what the law?
In my elementary school, people often fight on the playground. It is often difficult to predict when you want to fight: a boy might have said the other boy does not want to hear, double-talk and more concentrated smell of gunpowder, then hit up. Fortunately, such a dispute will usually subside soon, no one will be injured.
There will be the battle between the companies. Like I said before, mutual cooperation and together maintain prices at a high level, usually in the interest of each company. But the company sometimes it will launch a destructive price war. Although the campus fight as hard to predict, but sometimes, the battle between the companies still have to follow the law.
Price war economic "laws"
Predict the price war, a key factor is a concept that economists call "economies of scale" (Economiesofscale) of. To understand this term, we first need to have a firm understanding of the cost structure. The company's costs are divided into two categories: fixed costs and variable costs. Changes in the cost of production linked to how much production costs related to the change in the level. On the other hand, the fixed costs do not change with output. No matter how many production companies are required to pay part of the cost of this. For example, suppose you opened a blade factory, the cost of the metal powder used for each blade needs to belong to variable costs, and factory rent blade plant is fixed costs.
Economies of scale derived from the company to increase production when the cost of change in two ways in a particular time period. With the production increase, variable costs increase as a result, while fixed costs remain constant. This means that the production company, the lower the cost of each product: the same variable cost of each product, while fixed costs are assessed will be on more products to. So, sell factories saw blade, the more low rental costs per piece blade contains. Reduce the average cost of this production increase brought about is called economies of scale.
This prediction Battle What is the relationship? If a company has a very high fixed costs, and the yield is far below its potential capacity, its unit cost will be high - because only a small number of products in the shared fixed costs. This will make the company a great willingness to lower prices. Once the product prices, only to sell more (or from a competitor to snatch sales increase overall sales), but also reduce unit costs. This is good news. The bad news is that competitors have similar cost structures also want to reduce the price. The result is that the price war started, and each company's market share there will not be much change.
Price war "cost"
That is, when fixed costs accounted for the bulk of the total costs, low market demand, the company's actual production is much lower than its production capacity, price wars are more likely to hit. On the Chinese air conditioner manufacturing history, we have seen such a case. China has three companies dominate the industry: Gree, Midea and Haier. In October 2014 the National Day Golden Week, Gree air-conditioning significantly reduced prices, the United States and Haier quickly to keep up, resulting in some models of the air-conditioning up to 40% price cut.
Similar price wars have occurred in 2002-2004 too. In those years, even if the air conditioning is on the rise in material costs, but these top brand product prices fell by 20%. The final result is that air conditioning manufacturers from around 300 turned into a 10, those firms can not profit all closed.
These times have in common? In October 2014, due to the decline in new home sales, unusually cool summer, the air conditioning manufacturers for the production of excess capacity and distress. Similarly, from 2002 to 2004 it is due to the oversupply of the price war, resulting from market competition for companies. Low demand for these two periods, the company excess capacity, there is not enough product to amortize their fixed costs.
How high their fixed costs? I can only make a rough estimate based on publicly available information. According to the data since 2014, the United States and the operating margin was 8.8%, 75.1% in operating income to cover variable costs, 16.0% to cover fixed costs. Thus, we can calculate the beauty of "the scale of fines" (scalepenalty), namely reduced costs will result in an increase of the size of. For example, if the United States only 80% of production, the price remains the same, then the company's operating margins will be reduced to 4.8% (variable cost is still 75.1%, but fixed costs will increase revenues to 20.1 %). Here the relative importance of fixed costs, due to reduced production by 20 percent to cut almost half of the profits. Gree look at the financial situation, you will find similar "size penalty."
This shows that fixed costs do not you? Not necessarily. When the great demand when compared to higher variable cost ratio of those companies have high fixed costs of the company can put on more products allocated to them. If the new home sales increase, there was also the summer, then they will be on the air-conditioning manufacturers high fixed costs grateful.