Sameer Mathur
(Dissertation Essay I)

Abstract

Emerging markets like China and India are becoming dominant in the global economy. Such markets have a majority of poor, cash-constrained consumers, living on less than $5 a day. Emerging markets like China and India are becoming dominant in the global economy. Such markets have a majority of poor, cash-constrained consumers, living on less than $3 a day. This paper studies the implications of global firms selling high quality products in relatively smaller package sizes in such emerging markets.
            We develop a model to compare the package sizing and pricing decisions of two competing high- and low- quality firms in an emerging market, with a benchmark, developed market. In the model, the emerging market has two segments of consumers - a cash-constrained segment, which can afford the low quality product, but cannot afford the high quality product and an unconstrained segment which can afford both products. In contrast, the benchmark, developed market has only unconstrained consumers. In the emerging market, the firms’ decision-making is in three stages. First, the high-quality firm decides to either exclusively sell to the unconstrained segment, or alternately, lower its price and sell to both segments. Second, both firms set their package sizes and finally, their prices. 
            The purpose of the analysis is to compare the firm’s pricing and package sizing decisions in the presence of cash-constrained consumers, with their decisions in the absence of cash-constrained consumers. The analysis suggests that in the case when the high-quality firm lowers its price and sells to both segments in the emerging market, it also reduces its package size. More interestingly, the low-quality firm leaves its package size unchanged and raises its price in the emerging market, relative to the developed market. In the second case, when the high-quality firm exclusively sells to the unconstrained segment in the emerging market, each firm leaves its package size unchanged and raises its price, relative to the developed market. The main contribution of this paper is to show that low-quality products sell for higher prices in the presence of cash-constrained consumers in emerging markets, as compared to their prices in a benchmark market without cash-constrained consumers. Importantly, this is true, regardless of whether the high quality firm chooses to exclusively sell to unconstrained consumers or chooses to sell to unconstrained and cash-constrained consumers by setting a smaller package size. Moreover, in both cases, consumer surplus is lower and the low-quality firm earns a higher profit. These results have important managerial implications for package sizing and pricing decisions in emerging markets.
 
Keywords: International Marketing, Package Sizing, Emerging Markets, Game Theory, Competitive Strategy