ECO402 GDB Solution

“The producer of processed foods and related consumer goods often issue coupons that let consumers buy products at discounts. These coupons are distributed as a part of advertisement and they may appear in newspapers or magazines etc. For example a coupon for a particular breakfast cereal might be worth Rs. 15 towards the purchase of a box of the cereal. Sending out coupons allows the sellers to separate market segments with different degrees of consumer brand loyalty”.
What will be the effect of issuing coupons, on market competition and profit margin of a seller?

Solution:-

Market Competition will be tough and profit margin of a seller will decrease.

Explanation

As such coupons will increase the advertisement cost, selling cost, this will definitely increase the cost price of product, which means that the sellers who are not issuing such coupons will have low cost and will get more benefit due to low cost. Therefore, the sellers who are issuing such coupons can not increase their cost, but this act will increase their total revenue (Because of increase in number of customers/ number of sales). As they (who are issuing such coupons) will not increase their cost due to competition, their profit margin will decrease, but their product output will increase because of advertisement. This will cause the market competition tough/ strong among competitors/ sellers of the product.