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Consumer Behaviour

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IBS Case Studies

IBS
Mumbai
Date: 12/07/2012

Time: 23:47:12

ME0006

IBS Case Developm ent Center

Do Soaring Price and Mounting Demand in Indian Gold
Market Speak of a Paradox?
This case study was written by Hepsi S warna under the direction of Akshaya Kumar Jena, IBS CDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was written from published sources.

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Do Soaring Price and Mounting Demand in Indian Gold
Market Speak of a Paradox?
Demand for gold is a w ides pread obs ervable fac t ac ros s the w orld. How ever, the major demand for

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Demand for gold is a w ides pread obs ervable fac t ac ros s the w orld. How ever, the major demand for gold c omes from five c ountries , namely India, Italy, T urkey, US and China. Among thes e c ountries , w hic h ac c ount for 55% of the total gold demand, India’s s hare alone c omes to around 25%.
Cultural and religious traditions involving w earing of jew ellery play a major role in influenc ing Indian gold demand. Around 75% of the w orld demand for gold is jew ellery-bas ed and the res t 25% is inves tment bas ed. Speaking about India’s fondnes s for gold, Lord J ohn Maynard Keynes is alleged to have remarked, “India’s gold c ons umption reflec ts the ‘ruinous love of a barbaric relic ’. ”[1]
In India, there is a huge mis matc h betw een demand for and s upply of gold. Hutti Gold Mine
Company loc ated in Karnataka is the only c ompany in India, w hic h produc es gold by mining and proc es s ing the gold ore. It produc es around 3 tonnes of gold per year. Another s ourc e of s upply of gold in India has been c oming from rec yc led jew ellery/s c rap jew ellery. In 2006, it w as reported that,
“Over the pas t five years , Indians have rec yc led an average of 105 tonnes of gold per annum. ”[2]
T o meet the bulk of the demand, India imports gold. India imports around “700 tonnes of gold a year”. [3]
In Oc tober 2008, demand for gold inc reas ed. While this inc reas e in demand for gold w as attributed to the falling gold pric e from $900 to $712 per oz. [4], s ome w ere of the view that it is bec aus e of the fes tivity of Diw ali[5], w hic h requires people to purc has e gold ornaments w ithout taking pric e s ituation into ac c ount. How ever, the w eaknes s of the latter argument w as s how n up by c iting the ins tanc e of the s ame Diw ali fes tival of2007 w hen the pric e regis tered a ris e and s urged above $800 per oz. mark and the demand for gold jew ellery dec reas ed. T he very high pric e is alleged to have dampened the demand for gold, es pec ially in the jew ellery s ec tor. Experts , how ever, pointed to real es tate and the Bombay Stoc k Exc hange as better inves tment havens for Indians in Oc tober 2007 to s w itc h their funds to - aw ay from gold bullion. How ever, bac k in 2005, as the gold pric es w ent up demand als o w ent up. making the analys ts c omment that the demand c urve for gold in India is
‘inverted’. [6] T he higher the gold pric e ris es in rupee terms , the s tronger bec omes the c onvic tion of
Indians that gold is the bes t means of pres erving and enhanc ing one’s w ealth. T his c onvic tion s tarted manifes ting its elf again tow ards the las t quarter of2008 w hen the US-originated w orldw ide rec es s ion drove inves tors to park their funds in the s afe haven of gold, thus keeping the inves tment demand for gold high. But the jew ellery demand for gold s aw huge dip in India due to the pric e inc reas e. India’s demand for gold is met through imports and rec ent gold import figures highlight the demand des truc tion that has taken plac e. Imports of gold are reported to have fallen by 83% in
Dec ember 2008 and by 91% in J anuary 2009. [7] India is reported to have imported zero gold in
February 2009; imports during Marc h 2009 has als o been zero.
T he relations hip betw een gold pric e and Indian gold demand s eems to be negative during s ome years and pos itive in s ome other years (Exhibit I).

T he pric e of gold and the quantity demanded of gold in India for the above time s eries w hen plotted agains t eac h other in a tabular form, give ris e to a s traightforw ard demand s c hedule (Exhibit II). T he graphic al trans lation of it gives ris e to demand c urve. While the periods 1992-1993, 1996 99 and
19
2000-2003 s how up the negative relations hip betw een pric e of gold and the quantity s upplied of it, the periods 1991-1992, 1993-1996 and 2003-2005 reveal a pos itive relations hip.

Exhibit II
Year

Demand Schedule of Gold (1999- 2005)
Price of Gold (INR)
Quantity of Gold Demanded (Tonnes)

1991
1992
1993
1994
1995
1996
1997
1998
1999

8,518
9,629
11,481
12,222
12,962
13,333
12,222
12,000
12,222

271
371
314
428
514
556
771
871
813

2000
2001

12,592
13,703

813
800

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2001

13,703

800

2002

15,925

628

2003

17,777

600

2004

19,259

685

2005

20,370

813

Co mp iled b y th e a u th o rs fro m “Th e Ro le o f Go ld in In d ia ”, h ttp ://www.g o ld .o rg /a ssets/file/rs_ a rch ive/ th e_ ro le_ o f_ g o ld _ in _ in d ia .p d f, S ep temb er 2 0 0 6 , p a g e 2

T he apparent pos itive relations hip betw een pric e of gold and its demand is often due to the pres enc e of the non-pric e fac tors (Exhibit III). In 2004, it w as reported that, “Indians are enjoying a rapid ac c eleration in inc ome grow th, w hic h is s upporting dis c retionary s pending on c ons umer goods , inc luding gold. ”[8] T he demand for gold inc reas ed during that time even in the fac e of ris ing gold pric e bec aus e as more and more w orkers moved from low inc ome to middle and high-inc ome groups , their demand for gold als o inc reas ed. A World Gold Counc il s tudy in 2006 c onduc ted ac ros s s ix key gold markets , inc luding India, revealed that, “gold has bec ome a more relevant and des irable produc t to a greater number of w omen”[9], thanks to inc reas ing ec onomic independenc e of w omen in developing c ountries .

Exhibit III
1.

Non- price Determinants of Demand
Income of the customer

2.
3.
4.
5.

Price of related goods
Consumers’ taste and preference
Population
Expected future prices of the good.

Prep a red b y th e a u th o rs

In order to dis integrate the various fac tors influenc ing the quantity demanded, the ec onomis ts have employed the tec hnique of s how ing the pric e fac tor alone and its influenc e on quantity demanded by means of a demand c urve. T he influenc e of non-pric e fac tors s uc h as inc ome on the quantity demanded is s how n by a s hift of the w hole demand c urve its elf. Bes ides inc ome, other non-pric e fac tors inc lude pric es of related goods , s ize of the population, c ons umer tas tes and preferenc es , expec tations about future c onditions , etc .
In February 2009, it w as reported that platinum w as nearly half the pric e it w as in 2008. When the gold pric es w ere s teeply c limbing and the pric e of platinum w as falling during the firs t 2 months of
2009, Indians s tarted s ubs tituting platinum for gold due to near parity of pric es betw een gold and platinum. Vijay J ain, c hief exec utive of leading jew ellery c hain Orra, opines , “there is a new -found love for platinum among Indian buyers bec aus e the prec ious metal has los t around 30% of its value in c omparis on to gold”. [10] He further s ays , “A 10-gm platinum ring is now pric ed around INR
22, 000 as agains t INR 35, 000 a year-ago. ”[11] T he high gold pric e ac c ompanied w ith dec lining platinum pric e made Indians dump gold and embrac e platinum as reflec ted by the inc reas e in the market s hare of platinum from previous 15%-40% as on J anuary 2009. [12] T he s ize of the population in India being s o large, demand for gold in India als o s ums up to a huge quantity. Ris ing rate of population grow th c alls for inc reas ing demand for gold. T as tes and preferenc es repres ent a variety of c ultural, religious and his toric al influenc es . India’s demand for gold has its roots in c ultural and religious traditions . In India, gold is s een as a s ymbol of s tatus and it als o plays a major role in a girl’s w edding. Fes tivals like Diw ali and Aks haya T ritiya[13] are regarded as aus pic ious oc c as ions to buy gold. T hus , demand for gold is as s oc iated w ith c ultural and religious beliefs in
India. Another fac tor that affec ts the demand for a good is the expec tations about future. T he c ontinued expec tation about ris ing trend in gold pric es has s w ayed the inves tors into purc has ing more of gold even if its pric e is on the ris e. In February 2009, as gold c ros s ed INR 15, 000 mark, inves tors inc reas ed their demand for gold, as they expec ted the gold pric es to go up to INR 20, 000.
T he unc ertain ec onomic c onditions res ulting from the global rec es s ion in 2008 has als o made inves tors s w itc h their funds from dis tres s ed financ ial as s ets to ever- alluring gold. T his inc reas ed inves tment demand for gold has s ent the gold pric es s oaring. And the higher the gold pric e, the higher w ill be the inves tment demand for gold s inc e it c reates s tronger expec tations of c ontinuing optimis tic trend, es pec ially w hen bus ines s s c enario all around is pes s imis tic . But s ome analys ts c ounter argue that the w orld’s demand for gold being no more money bas ed but majorly jew ellery bas ed, high gold pric e w ill eventually lead to des truc tion ofjew ellery demand and overall gold demand. [14] Seventy Five perc ent of the w orld’s demand for gold is for making jew ellery w hile now here in the w orld the monetary s ys tem is bas ed on gold.
T he s imultaneous exertion of various forc es on the quantity demanded of gold often mas ks the lone influenc e of the pric e of gold. But a dis aggregated c areful analys is w ould reveal the ac tual relations hip betw een pric e and quantity demanded of a good. Whether this relations hip is pos itive or invers e depends upon the c ombined s trength of the s ubs titution effec t and inc ome effec t of the pric e c hange of gold.

[1] Kan n an R. an d Dh al Sarat, “In d ia’s d eman d fo r g o ld : s o me is s u es fo r eco n o mic d ev elo p men t an d macro eco n o mic p o licy ”, h ttp :// fin d articles .co m/p /articles /mi_ m1TSD/is _ 1_ 7/ai_ n 28026379/, Ju n e
2008
[2] Demp s ter Natalie, “Th e Ro le o f Go ld in In d ia”,

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[2] Demp s ter Natalie, “Th e Ro le o f Go ld in In d ia”, h ttp ://www.g o ld .o rg /as s ets /file/rs _ arch iv e/th e_ ro le_ o f_ g o ld _ in _ in d ia.p d f, Sep temb er 2006, p ag e 6
[3] “In d ia 2008-09 p latin u m co n s u mp tio n s een at 932 kg ”, h ttp ://in .reu ters .co m/article/b u s in es s News /id INIn d ia-34148820080620, Ju n e 20th 2008
[4] “Go ld Deman d Tren d s Fu ll y ear”, h ttp ://www.g o ld .o rg /as s ets /file/p u b _ arch iv e/p d f/GDT_ Q4_ 2008.p d f,
Feb ru ary 2009, p ag e 11
[5] Diwali is an In d ian fes tiv al, celeb rated in th e mo n th o f Octo b er o r No v emb er an d b u y in g g o ld is co n s id ered au s p icio u s o n th at d ay
[6] Hamilto n A d am, “Glo b al Go ld Hig h s ”, h ttp ://www.zealllc.co m/2005/g lo g o ld .h tm, Octo b er 14th 2005
[7] M eh ra Ch an d , “Is in v es tin g in g o ld ris ky ?”, h ttp ://www.red iff.co m/cms /p rin t.js p ? d o cp ath =//mo n ey /2009/mar/16g u es t-is -in v es tin g -in - g o ld -ris ky .h tm, M arch 16th 2009
[8] “Th e Ro le o f Go ld in In d ia”, o p .cit., p ag e 5
[9] “Th e Ro le o f Go ld in In d ia”, o p .cit., p ag e 5
[10] “In d ian b u y ers d u mp g o ld , emb race p latin u m”, h ttp ://www.co mmo d ity o n lin e.co m/n ews /In d ian -b u y ers d u mp -g o ld -emb race- p latin u m-15342-3-1.h tml, Feb ru ary 19th 2009
[11] Ib id .
[12] “Platin u m-Go ld p rice d ifferen tial almo s t zero ”, h ttp ://www.co mmo d ity o n lin e.co m/n ews /Platin u m-Go ld p rice-d ifferen tial- almo s t-zero -15558-3-1.h tml, Feb ru ary 27th 2009
[13] A ks h ay a Tritiy a is an In d ian fes tiv al, celeb rated in th e mo n th o f A p ril o r M ay . Bu y in g an d wearin g g o ld is co n s id ered au s p icio u s o n th at d ay .
[14] “Is in v es tin g in g o ld ris ky ?”, o p .cit.

E x it

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...In: Miscellaneous Consumer Behaviour CONSUMER BEHAVIOUR • It is the study of how people buy, what they buy, when they buy and why they buy. • It attempts to understand the buyer decision processes/buyer decision making process, both individually and in groups. • It also tries to assess influences on the consumer from groups such as family, friends, reference groups, and society in general. • The theory of consumer behavior in managerial economics depends on a) Budget • constrained by income and the price of the goods, • The budget constraint specifies the combination of goods the consumer can afford to buy. b) Preferences • Economists use the concept of utility to describe preferences. • There are some assumptions of consumer behavior theory like :- a) rational behavior b) clear cut preferences • Consumer behaviour can be explained using two main approaches: 1. Marginal Utility Theory (The Cardinalist Approach); and 2. Indifference curve Analysis (The Ordinalist Approach) 1. MARGINAL UTILITY THEORY (THE CARDINALIST APPROACH) • developed by Alfred Marshall who introduced an imaginary unit called the util as a means of measuring utility. • 1 util = 1 unit of money. • Utility is additive. • This approach was termed cardinal since cardinal numbers could be used to measure utility. • Each consumer chooses quantity demanded of all goods and services in order to maximize his/her utility or want satisfying power, given the limits imposed by available income...

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Consumer Behaviour

...AMITY SCHOOL OF DISTANCE LEARNING, ASoDL Consumer Behaviour ADL – 45 Assignment – A Five Analytical Questions Marks – 10 1. a) What is the interrelationship between the consumer behaviour discipline and the marketing concept? b) How can the study of consumer behaviour assist marketers in segmenting markets and positioning products? 2. Contrast the major characteristics of the following personality theories: a) Freudian theory, b) Jungian theory, c) Neo-Freudian theory, and d) Trait theory. In your answer, illustrate how each theory is applied to the understanding of consumer’s behaviour. 3. a) Discuss the differences between the absolute threshold and the differential threshold. b) What is consumer reality? 4. How is perceptual mapping used in consumer research? Why marketers are sometimes forced to reposition their product or services? Illustrate your answer with examples. 5. Distinguish between beliefs, values, and customs. Illustrate how the clothing a person wears at different times or for different occasions is influenced by customs. Assignment – B Three Analytical Questions Marks – 10 1 A marketer of health foods is attempting to segment its market on the basis of consumer self image. Describe the four types of consumer self-image and discuss which one(s) would be most effective for the stated purpose. 2 Which theory of learning (i.e., classical conditioning instrumental conditioning or cognitive learning)...

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Consumer Behaviour

...Before discussing about consumer behaviour let us understand who is a consumer? A consumer is a person or group of people that are the final users of products and or services generated within a social system. A consumer may be a person or group, such as a household. The concept of a consumer may vary significantly by context. In simple terms any individual who purchases goods and services available in the market for his/her end-use to satisfy wants is called a consumer. Example- Mr. A purchases pen from market and Mrs. X got her dress dry-cleaned from a shop, in this case Mr. A and Mrs. X both are the consumers as Mr. A is purchasing a good for final use and Mrs. X a final user of the service available in the market. A rational consumer is a consumer who seeks to maximise utility or satisfaction in spending his income. Now let us study about consumer behaviour. Consumer behaviour is the behaviour of individuals when buying goods and services for their own use or for private consumption. The consumer has to decide on how much of each of the different goods he would like to consume and the choice of the consumer depends on the alternatives that are available to him and on his tastes and preferences regarding those alternatives. Accordingly, the economists study the two aspects of consumer behaviour. First, on what basis a rational consumer allocates the limited income between different goods and services the consumer desires. Of course, the objective behind the allocation...

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