Friday, November 25, 2011

FDI in Retail: A Prototype Micro-Economic Model

GupianLand's Economy Prototype Model w.r.t FDI

Disclaimer:- The prototype model is a virtual scenario considering a set of ideal solutions only. A pure hypothesis or a random attempt of some thought experiments using what if analysis tools. Economy has got several random variables, and other possibilities cannot be denied. In this model some economic factors have been considered silent or constant.

Lets consider this scenario of GupianLand having regions namely Twitter and Facebook.

Twitter region has Distributor @JinnyBoi, Shop @Cjethmalani and one customer @TheMasakkali with a buying budget of 100 Rs.

Similarly Facebook Region has Distributor @Funjabi_Gabru, Shop @_stoic_ and customer @AbidiRuby.

Farmer @aseemrastogi2 is in Twitter region who supplies to @JinnyBoi
Farmer @TheAngrezJailer in Facebook region supplies to @funjabi Gabru

Hence, each region has respective demand of commodities worth Rs. 100

Before Week 1:-

Every week Masakkali goes shopping and shop Cjethmalani earns 10 Rupees of profit from the sales. This is his local income not considering his overheads and other expenses. This means Cjethmalani bought commodity worth Rs 90 from Distributor @JinnyBoi. Lets say that time @JinnyBoi also earned Rs. 10 of profit. This Means @JinnyBoi sold commodity in Rs. 80. aseemrastogi2 had invested Rs. 70 for that much of commodity. That Rs. 70 of FA is outside this micro economy. Similarly, earning of Customer Masakkali is sourced from outside this micro economy.

Micro economy of region FaceBook is exactly mirror image of region Twitter. (refer illustration)

As we know, in each region each Farmer, Distributer and shopkeeper are earning Rs. 10 each for every transaction made by customers worth Rs. 100.

GupianLand Government Allows FDI

Suddenly, the privacy of these two parallel micro economies functioning together is intruded by a third shop @ViralSSS , which is a bit far from both TheMasakkali and AbidiRuby. Obviously, TheMasakkali and AbidiRuby will give a damn to ViralSSS if he is selling that commodity at the same price i.e. Rs 100. He will have no income.

Shops @Cjethmalani and @_Stoic_ were earning Rs. 10 every week. Hence, that is the target earning for @ViralSSS.

Week 1:-

@ViralSSS will arrange funds from outside source to buy the stocks which can cater both TheMasakkali and AbidiRuby. @ViralSSS invested Rs. 180 to buy that stock from Funjabi_Gabru and JinnyBoi. Now he offered same commodities at Rs. 95 to both TheMasakkali and AbidiRuby. Now TheMasakkali and AbidiRuby have a benefit of Rs. 5 with this deal. So they managed to take extra efforts to reach out for buying at W. Hence, with the double turnover, @ViralSSS is managed to earn what shops @Cjethmalani and @_stoic_ used to earn every week.

This strategy by @ViralSSS, has effected @Cjethmalani and @_stoic_ very badly.

Also, TheMasakkali and AbidiRuby now have Rs. 5 extra to spend. @ViralSSS is a more prosperous guy, as he is backed by an unlimited source of money coming from some external source.

Week 2:-

Next time when TheMasakkali and AbidiRuby visited @ViralSSS, they got some new merchandise at the store. @ViralSSS communicated benefits of this merchandise. TheMasakkali and AbidiRuby bought that. So they did Rs. 105 of transaction since they had Rs. 10 extra saved from the commodities.

So by this time, @ViralSSS has not only made a double turnover but also achieved a profit almost equal to @Cjethmalani and @_stoic_. That Rs. 10 of value added merchandise is something which yields maximum profit. Since it has got the least acquisition cost but because of their unique nature they are sold at a premium.

 Week 3:-

Shops @Cjethmalani and @_stoic_ are now effected by the opportunity loss of two transactions. Now they need some counter strategy to tackle the new player @ViralSSS, who is prosperous than them and has done sufficient damage to the business. @Cjethmalani and @_stoic_ decide to sell their goods at Rs 95 as well so that they can match the cost benefit of @ViralSSS.

This week @Cjethmalani and @_stoic_ retained their respective customers but they have a profit of Rs. 5 only. They had tough 3 weeks.

Week 4:-

@ViralSSS is aggressive. He cannot tolerate TheMasakkali and AbidiRuby not going elsewhere. At this point of time @ViralSSS is having Rs 190 worth of unsold commodity and Rs. 10 worth of value added merchandise. Now W has to take a vital decision. If he will further reduce the sales price of commodity he will earn TheMasakkali and AbidiRuby, but this will have a bad impact on his business for long run. As everytime they will seek that pricing. This time @ViralSSS makes a limited period offer to provide that merchandise at a discounted price if commodities worth Rs. 95 are bought from him. This week TheMasakkali and AbidiRuby bought stuffs worth Rs. 98 from W. Since that merchandise was sold at Rs 3 instead of Rs. 5.

Week 5:-

Now these shops come to know about a new product in demand by TheMasakkali and AbidiRuby. This new product has become a part of TheMasakkali and AbidiRubys lifestyle. Now they are regular buyers of it. The increased purchasing power has enhanced their spending habits. Now, shops @Cjethmalani and @_stoic_ are also buyers of the same product which @ViralSSS sells. Another outside distributor @LegRJ of the product is now accessible to @Cjethmalani and @_stoic_ as well. Now @LegRJ sells the products to @Cjethmalani and @_stoic_. But their acquisition cost is higher than that of @ViralSSS. And they have to sell this product at more attractive price to TheMasakkali and AbidiRuby.

Now TheMasakkali and AbidiRuby are the free decision makers in this market. As they are the one who represents limited demand in a micro economy which suddenly experienced new players inducing new products and additional supplies.

Week 6:-

@ViralSSS is now facing implications of his strategy taken in Week 1. He has to maintain Rs. 200 worth of commodity inventory (excluding applicable promotion/discounts) to avoid opportunity loss at any point of time. Inventory carrying cost is now a burden on @ViralSSS shop. @Cjethmalani and @_stoic_ have advantage on this part, as their inventories levels are lower and they have adopted to the changed market scenario with lesser profits w.r.t those commodities. However, newer products introduced in market are compensating their respective losses. A perpetual innovations carried out at product level has given opportunity to these shops to explore newer avenues and to compensate their reduced margin for commodities.

In this market place @Cjethmalani ,@_stoic_ and @ViralSSS has to maintain stock levels so that they will have sufficient inventory to cater these customers. Now these customers have become very wise and they are random in their buying behaviors.

Week 7:-

Distributers @JinnyBoi and @funjabi_Gabru are now also have an advantageous position. Previously each distributer had one buyer. Now each distributer has got two buyers.

There is a net increase in the demand for the commodity. @JinnyBoi and @funjabi_Gabru are getting more prosperous. Now they are enjoying the benefits of an extra buyer in the micro economy. They do negotiate to figure out win-win deals. They do bulk buying to get quantity discounts. Distributors have double inventory turnover. Hence they are willing to provide discounts. This extra money is now carried forward to the farmers who have got his income significantly increased.

Week 8:-

Rs. 200 (initial face value of the commodity) of extra inventory is now a part of this micro economic eco-system. (This is the minimum amount of unsold extra inventory at any given point of time)

Also, the farmers have become prosperous as well because of they had to increase yield of their farm/resources to cater this demand. That investment (actually induced by @ViralSSS) has made these farmers a potential consumer as well. This means a positive implication of @ViralSSS coming into this eco system was introduction of new consumers.

These new consumers are buying those new series of products which were were introduced in the economy by @ViralSSS. Demand for new innovative products is increasing. With every drop in the Price of commodities, our primitive consumers have got more purchasing powers.

Week 9:-

Implications of developments observed in Week 8 are:-

1. Commodity prices are finally settled at a lower price level in the economy of two unit of commodity consumers.

2. Economy is now evolved as a product oriented economy having 4 potential product consumers (Primitive consumers and the now prosperous farmers having better purchasing powers)

Economy is now pumped with money from outside sources which is represented by the value of unsold inventory lying with shops @Cjethmalani ,@_stoic_ and @ViralSSS. But, the value addition features of the new products have given a better profit yield to these shops. Since, the extra amount of money invested has been well compensated by new consumers evolved and profit margins of new products and services perpetually being introduced to the system.

Week 10:-

What if in Week 7, the middle men i.e distributors had gone greedy. What if they did exploitation of the farmers by asking them to produce extra crops but not giving them their fair share? What if they had gone corrupt and decided to keep most of the extra income generated in Week #7 with themselves only?

What would have been the Week of economy? If such earnings by the Distributors goes out of circulation, Dealer is keeping that (black) money with himself. On the other hand poor shops are struggling hard to attract consumers. These three shops are fighting it hard to win the best pie of the limited market demand for commodity and products.

Unaware of this scenario, peasants worked hard to get additional yields over the illusion of high demand. There will be dead inventories everywhere with peasants, distributers and shops. Distributers are wealthy, the black money with them will be hedged for this loss. Poor peasants wouldn’t have buyers for their yield. Shops are overloaded with dead stock. Consumers can only consume as per their capacity. Shops will try to sell their commodities with minimum profit. Money saved with consumer might not be consumed for other products as they are also in abundance by now.

Also, let’s assume Government comes in rescue to bail out these entities. To do so, Government had to cut its expenses as well. Such austerity measure means our primitive consumers @TheMasakkali and @AbidyRubi have lesser income now. Hence, there will be a sudden drop in the demand for the commodities and the products. There will be bears crawling all around the system.

Peasants and consumers will have their worst phase. Peasants will have no work as there is no demand for their farm produce. Consumers will have lesser money to spend. Shop keepers will be just waiting for their returns on investment with that huge pile of inventory, which is now slow moving. Since that bail out, they are now functioning at a lower turnover (w.r.t era before @ViralSSS arrived)

The outsider @ViralSSS might decide to quit this economy. Failure of W will discourage others outsiders to pump money into this economy. It will take time for the economy to run like before.

And that black money will remain black and idle doing no good to anyone. Perhaps Distributors transferred that money into bullions and real estate. Such black money got absorbed into such investments and is out of circulation from the economy.

If there is a law stating conservation of money, then by principle, first Corruption (absorption of money) at one link in the chain has resulted in depreciation for every other entity.

Just Some Virtual Real and Ideal Thoughts

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