The Impact of Price Decrease on Market Demand: A Case Study of Telecommunication Revolution in India

In the world of economics, the relationship between price and demand is a fundamental concept. The classic example of the telecommunication industry in India illustrates how a decrease in price can significantly increase market demand, leading to revolutionary changes in market dynamics.

Introduction to the Telecommunication Market in the Early Days

Initially, the telecommunication market was dominated by a few licensed companies operating in regions such as Mumbai and Maharashtra. The government implemented strict pricing policies, mandating that both the caller and the receiver pay a hefty rate of Rs. 16 per minute. Additionally, interconnect charges and line charges were imposed, making even a local call cost Rs. 96 plus additional charges. Within the same circle, landline calls were significantly cheaper at Rs. 3 per call for a duration of 3 minutes.

Emergence of Mukesh Ambani and His Universal Service

It was not until Mukesh Ambani, under his father's guidance, obtained a universal license that the telecommunication landscape in India began to change. Ambani transformed the license into a pseudo-Landline service that could perform all functions of a cellphone at the cost of a landline, charging a nominal fee for calls to any part of India. This groundbreaking move made cellphones accessible to a wider audience, particularly lesser-income segments of society.

Price Reduction and Market Expansion

Ambani's strategic pricing decision was to drop the cost of a call from Rs. 100 to Rs. 40, which significantly increased the affordability of cellphones. This was not just a price reduction; it was a strategic move that leveraged market dynamics to drive demand. The lower price point made cellphones a common possession, leading to a surge in call density and profitability for Ambani's enterprise.

Generalization of the Model

The success of Ambani's model was soon recognized and replicated on a global scale. C.K. Prahalad's influential book, Competing for the Future, popularized the idea that lower prices can translate into higher profits by increasing the market size. The concept that there is 'wealth' at the bottom of the pyramid, much like the hamburger model of McDonald's and the assembly line model of Ford, was embraced by businesses aiming to reach underserved markets.

Healthcare Innovations in India

The idea of providing essential services at affordable prices has extended beyond telecommunications into other sectors, such as healthcare. Dr. G. Venkataswamy, a retired ophthalmologist, pioneered the concept of providing free cataract operations to millions. By standardizing the procedure, Venkataswamy was able to perform lakhs of surgeries annually, with a third of the cost paid by those who could afford it. This model significantly reduced avoidable blindness, particularly the 80% of blindness that is preventable.

Pioneering Ideas from Tamil Nadu

These innovative ideas have their roots in Tamil Nadu. Similarly, the Green Revolution, which was initiated by M.S. Swaminathan, also underwent significant transformation in this southern state. Today, Mr. Sridhar Vembu, who is the Chairman of Zoho Corporation and a Padma Sri recipient, has taken his corporation to Tenkasi, Tamil Nadu, where he trains village farmers and residents to achieve a self-sufficient and sustainable rural environment.

Conclusion

The telecommunication revolution in India, spearheaded by Ambani and his peers, serves as a compelling example of how strategic pricing can drive market demand and lead to revolutionary changes. The impact of these innovations has spread globally, influencing various industries, including healthcare and agriculture. The bottom-of-the-pyramid approach, inspired by these pioneering ideas, continues to shape the socio-economic landscape of India and the world.