SEMESTER 1, ACADEMIC SESSION 2023/2024

SMG 1013 – MICROECONOMICS

TITLE :

NIKE

LECTURER’S NAME:

Dr. Asmah Binti Mohd Jaapar

PARTICIPANTS:

Anis Nurfazlina Binti Che Ramli ( 1232671 )

Nurin Irdina Binti Mohd Najib ( 1232667 )

Nurul Hazirah Binti Zakaria ( 1232655 )

Nurfatin Najwa Binti Shafie ( 1232656 )

Siti Maisarah Binti S.Affandi ( 1232661 )

 Table of content

1. Overview of the firm and its core activity..........................................................................3

2. Definition and general characteristics of the market structure....................................... 4
3. Production costs curve and revenue curve……………………………………………….5
4. The pricing strategy to maximise profit............................................................................. 6
5. Equilibrium conditions on the short-run and long-run.................................................... 8
6. Advantage and disadvantage.............................................................................................11
7. References………………………………………………………………………………...14
1. Overview of the firm and its core activity

NIKE, sometimes referred to as "the company" or simply "NIKE," is an international

market leader in the creation, promotion, and sale of athletic footwear, gear, accessories, and
clothing for a variety of sports and fitness activities. The firm operates in the following
regions: Asia, Africa, the Middle East, Europe, and the Americas. As of May 31, 2015, it
employed 62,600 individuals, and its primary headquarters is located in Beaverton, Oregon.

Nike's core business activities include the creation, advancement, promotion, and
international shipping of athletic footwear, apparel, accessories, equipment, and services. The
corporation sells its products through NIKE-owned retail stores as well as a number of
independent distributors and licensees in practically every nation on the planet. Additionally,
the business sells its products at nike.com on the internet. The company is divided into six
business groups based on geographical location: Japan, Central and Eastern Europe,
Developing Markets, Greater China, North America, and Western Europe. Each of these
geographical sectors primarily works on the design, marketing, licensing, and sales of athletic
footwear, apparel, and equipment.

Nike sells its goods in four categories: clothing, accessories, footwear, and other
items. The business produces and markets shoes designed for use in particular sports,
including football, basketball, running, and training. Along with other sports and leisure
activities including strolling, lacrosse, tennis, volleyball, wrestling, cricket, and outdoor
activities, children are also intended users of Nike footwear items. Furthermore, the company
creates and sells a wide range of items for recreational and informal usage. Nike offers
footwear for most sports and fitness activities. The company additionally sells clothing
bearing official logos from professional, and collegiate teams and leagues.

Under the Nike brand, the company provides a broad range of performance equipment
and accessories designed for sports. This includes golf clubs, backpacks, socks, balls for
sports, eyewear, timepieces, digital gadgets, bats, gloves, protective gear, and other sports
equipment. In addition, the company provides a variety of plastic items to other producers via
NIKE IHM, a fully-owned subsidiary. Among Nilke's fully-owned subsidiaries are Hurley
International and Converse. Under the brands Chuck Taylor, All-Star, One Star, Star Chevron,
Converse, and Jack Purcell, the company creates, sells, and grants licensing for casual
footwear, clothing, and accessories. Under the Hurley company, Hurley International creates
and sells a range of youth action sports and lifestyle clothing and accessories.

2. Definition and general characteristics of the market structure

The market structure called monopolistic competition occurs when several businesses
in each industry create comparable but unique goods. Every firm is autonomous and doesn't
depend on the actions of others, and none of them has a monopoly. It means that companies
engaged in monopolistic rivalry provide comparable goods with a few minor differences in
terms of features, branding, or appearance. This market structure is used by the well-known
sportswear and footwear producer Nike. Let's look at some monopolistic competitive
characteristics found in the Nike firm.

Firstly, one of its characteristics is that it has many competitors and many sellers. Its
abundance of competitors and suppliers is one of its traits. The reason for this is that several
businesses are vying for the same clientele. Nike-like goods are offered by many businesses
in the sportswear and footwear sectors. For example, Nike faced competition from various
companies in the global athletic footwear and apparel industry in January 2022. These rival
companies can include, among others, Adidas, Under Armor, Puma, and Reebok.

Next, via product differentiation, Nike stands itself apart through creative product
design, state-of-the-art technological integration, and effective marketing techniques.
Performance, comfort, and style are their main priorities, and they frequently work with
sportsmen and celebrities to develop distinctive and popular items. Furthermore, Nike's
dedication to social responsibility and sustainability helps to set their brand apart and attract
customers who respect moral behaviour.

Other than that, the company's entrance and exit are comparatively simple. Though
significant branding, marketing, and product development expenditures are needed to enter a
market, the sportswear and footwear sector has very low entry barriers when compared to
other industries. This implies that there will be more rivalry for Nike as new businesses may
enter the market with more ease.
3. Production cost curve and revenue curve

Graph 1

Graph 2
 Year Nike annual cost of goods sold (million of US $ )

2016 $ 17 405

2017 $ 19 038

2018 $ 20 441

2019 $ 21 643

2020 $ 21 162

2021 $ 24 576

2022 $ 25 231

2023 $ 28 925
Table 1

The above graph displays Nike's yearly cost of goods sold from 2016 to 2023 (in US
dollars, in millions).The cheap price of $17,405 is where it all began. Prior to 2018, the curve
was elastic.This indicates that there are fewer immediate alternatives to Nike goods. As a
result, consumers continue to purchase Nike goods for themselves.The graph then appears to
be flatter from 2018 to 2020.This is because to COVID-19, which makes people prioritise
their everyday survival before purchasing Nike goods.People are experiencing hardships
greatly at the present time.The graph then steepens from 2021 to 2023.Two things could be at
play here: either customers have discovered a close similar for Nike products, or the brand is
getting too expensive.

4. The pricing strategy to maximise profit

What is pricing strategy ? Pricing strategy is an approach in businesses to determine

what price they should charge for their products and services. It involves analysing the
market and customer demand, understanding customer needs, evaluating production costs,
and setting competitive prices that maximise profits. Pricing strategy is important because it
is one of the most crucial components in a business marketing and revenue strategies, as its
reflects what customers are willing to pay for goods and services. And for each company,
they have their own ways and strategies to maximise their profits.
 For Nike, the pricing strategy is divided into three parts. The first one is Nike’s value
based pricing strategy which is based on its products. Nike employs a value-based pricing
approach to determine its prices based on customer perceptions of the worth of the company’s
goods . Nike focuses on supplying high-quality items at the correct price to provide the
greatest customer experience, whilst other firms believe that selling things at the lowest
possible price would increase sales. This approach determines the maximum price customers
are willing to spend on the company’s items, such as sports gear, shoes, and the others
equipment. This pricing approach succeeded for Nike because buyers learned about the value
of its products, and the firm began to make profits and raise the prices of its stuff.

Secondly is Nike’s premium strategy. Nike use this strategy to raise the price of its
items above the cost of rivals depending on product quality. For example, limited Nike Air
Jordans retail price is $190 which is when they release a product with a higher price at a
certain time only because they know that people are willing to pay a high price for its
products due to the perceived value of the Nike brand. By charging a premium price, Nike
can maximise its profits and maintain its position as a leading sportswear company.

Thirdly is Nike’s leadership pricing strategy in which the company will set the price
for its products based on what competition is doing. Nike also pay a close attention to what
its competitors are charging for their products and then prices its products accordingly. This
strategy allows Nike to stay competitive and ensure that the prices are not out of the market.
For example, the release of Nike Air Max 270 shoes. At the first released, the retail price
was $180. After the initial demand decreased, Nike lowered the price to $150. This was in
response to competitors’ prices for similar products. For more details, if the price is too
expensive, buyers will not be able to buy and buyers will look for other products other than
Nike. So, we can see that instead of Nike offering a higher price but low demand, it is better
for them to sell at a lower price than the original price so that their company can remain
competitive with other competitors.
5. Equilibrium conditions on the short-run and long-run

According to short-run theory, short-run in economics has at least one input that will
be fixed and the others will be variable at some point. The time after a shock when variables
like wages , prices, output and employment have stabilised is known as the long run. They
are already in balance and have completely adjusted.

Demand curve is downward sloping, representing the relationship between price and
quantity demanded. Imagine if Nike raises the price, the quantity will decrease because
buyers will consider switching to another brand.Marginal revenue is steeper than demand due
to product differentiation and Nike’s brand power. It shows the additional revenue earned by
selling one more unit. For example, some consumers are willing to pay more for Nike Air
Jordans than for a generic sneaker but as Nike sells more Air Jordans, they will reach a point
where they need to attract price-sensitive customers who might choose other brands if the
price is too high. So, Nike has to lower the price slightly to entice these customers. This is
why marginal revenue declines faster than the overall demand for Nike shoes.Marginal cost
shows the cost of producing a pair of shoes. It can be a cost for labor or material costs. It
increases slightly with each quantity. Average total cost Captures the overall cost per shoe
including rent, marketing and fancy shaped factories.
ECONOMIC PROFIT

When price (P*) is above the Average Total cost (ATC)(P > ATC), the firm makes a positive
economic profit. Nike will produce a quantity (Q*) where marginal cost equals marginal
revenue. This is the magic point where they can maximise all their profit. At Q*, Nike sets
the price ( P*) that consumers are willing to pay for that quantity . This is represented by the
shaded area between the price line and the average total cost (ATC).

ECONOMIC LOSS
When price (P*) falls below the Average Total cost (ATC)(P < ATC), the firm incurs a loss.
Nike will produce a quantity (Q*) where marginal cost equals marginal revenue. This is the
magic point where they can minimise all their loss. At Q*, Nike sets the price ( P*) that
consumers are willing to pay for that quantity .This is represented by the shaded area below
the average total cost (ATC) and above the price line.

LONG - RUN

Monopolistic competition has a low barrier so new entrants can easily join the sneakers
market. Over time, competition intensifies, driving down prices and profit decreases.
Eventually , Nike might reach a long-run equilibrium where price settles at the minimum
ATC and economic profits disappear.
6. Advantage and disadvantage

The firm that we chose, Nike operates in a monopolistic competition market. In monopolistic
competition, there are lots of sellers that produce similar but not identical goods which gives
each firm some degree of market power. Hence, there are advantages and disadvantages to
this market structure.

One of the advantages of a monopolistic competition market in Nike firms is in terms

of product differentiation. Same as oligopoly, both of these market structures have the ability
to set their goods differently through branding, quality, style, or other characteristics. This
gives the firms an advantage over their rivals since it allows them to make a unique identity
and brand loyalty. Nike has successfully been recognized as one of the best brands for
sportswear which makes customers more loyal and able to charge higher prices for its items.
Other than that, the barriers to entry and exit in this market structure are low because the
startup costs that are needed by a firm are low. This makes newcomers enter this market
compared to the monopoly and oligopoly that have high barriers to entry.

Besides that, compared to the perfect competition that does not do advertisement
because of their homogeneous product, Nike does lots of marketing and advertising to
promote their unique goods. Examples of this include using celebrity endorsements, ads on
media social platforms, and having a catchy slogan which is “Just Do It” to raise the brand's
royalty and the perceived value of Nike products. Moreover, the nature of the market is
constantly and continuously evolving due to consumer preferences that change most of the
time. This led to innovation and new features that can attract more consumers and satisfy
them. Nike has collaborated with the Powerpuff Girls, a cartoon that in 2023 returns to
popularity by releasing shoes with its theme. Different from monopoly market structure that
is willing to adapt to the shifting consumer demands depends on the level of competition that
occurs and usually could be less motivated to change.

The disadvantage that occurs in Nike is having elastic demand for their differentiated
products. This happens due to consumers can easily switch to a substitute if the price of the
product increases and makes demand highly responsive to price changes. Due to this Nike
needs to compete with other companies. For instance, in December 2023, Nike and Adidas
both released a new product. For Nike is “Nike Kobe 6 Protro Reverse Grinch” costs around
$190 ( RM 891.37) while for Adidas, “Adidas Samba OG Talchum Pack” that costs around
 $135 ( RM 633.38). So, when comparing the prices of the two products, only a minority of
consumers would purchase the product from Nike, whereas the majority would pick Adidas
that are cheaper at that moment. In this case, the power over price control for monopolistic
competition is lower compared to monopoly.

Product Differentiation

Oligopoly Firm in this market also

Monopolistic Due to the product uses differentiated products
differentiation, Nike has because they can be
competition been recognized as one of different in terms of brand,
the best brands for style, and quality.
sportswear which makes
more customers loyal to
them.

Advantages of
Monopolistic
Barriers to enter and exit
Competition
Have low barriers Monopoly & Firms in this market have
Monopolistic
because the startup costs Oligopoly high barriers due to the
Competition needed are low and make high costs associated with
newcomers easily do it doing business.

Advertisement

Nike does lots of Perfect Firms in this market

Monopolistic
marketing and Competition structure do not do
Competition advertising to promote advertisement because of
their unique goods like their homogenous product.
celebrity endorsements,
ads on media social
platforms, and having a
catchy slogan which is
“Just Do It” to raise the
brand's royalty and the
perceived value of Nike
products.
 Shifting Of Consumer Preferences

Constantly and Monopoly

Monopolistic
continuously evolving
Competition due to consumer
preferences that led to
innovation and new
features that can attract
more consumers and
satisfy them like the
collaboration between
Nike and Powerpuff Girl
that returned popular in
2023.

Power over price control

Disadvantage Monopolistic Nike has elastic demand Monopoly Firms in Monopoly have
of for their differentiated high power over price
Competition product because easily to control because of firms
Monopolistic
Competition switch with others like are price makers and do not
“Adidas” if the price of have competition.
the product increases.
This makes the power
over price control is low.
7. References

1. https://www.macrotrends.net/stocks/charts/NKE/nike/cost-goods-sold
2. https://dealhub.io/glossary/pricing-strategy/
3. https://melbado.com/the-pricing-strategy-of-nike-and-why-it-is-so-effective/
4. Monopolistic Competition: Advantages and Disadvantages — Konsyse
5. The Nike Kobe 6 Protro Reverse Grinch PE Releases December 2023
(soleretriever.com)
6.