Tata’s Nano: a Small Car with Large Consumer Surplus

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Tata Motors, set up in 1945 to manufacture locomotives, is India’s largest automobile company. It launched Nano in Mumbai on March 23rd 2009. TATA NANO received huge response during its launch from people who dreamt of owning a four wheeler who could hitherto afford a motorcycle. The number of bookings registered during the prescribed period of 17 days from April 9th 2009 to April 25th 2009 more than doubled the initial production capacity. It was poised to revolutionize the face of automotive industry. Not only many two-wheeler users would switch to four wheels, but also the companies that are planning to launch a budget family car have to relook and recast their cost-pricing structure. In spite of all these there is no dearth of cynics who conjure up a scary scene of traffic congestion and environmental hazards that the little Nano is greatly capable of perpetrating by promoting mass private transport.

Critical issues:
1. Utility and Choice: In India, millions often convey on motorbikes and scooters with their entire families, perched precariously, often with luggage. This common observation – inducing heartfelt sensibility and pragmatic business sense that there is a crying need for a people’s car – prompted Ratan Tata to take initiative in manufacturing one. Initially people went crazy in their quest for the conquest of Nano to satisfy their want for a convenient, safe and all-weather affordable personal family transport. So much was the mania for Nano that for the first time in its history, Tata Motors had to gladly charge an application fee (INR 300). Considering Tata Nano to be a much sought after product, it is expected that it will operate in the zone of the positive marginal utility zone (Please refer to figure 1 ), where sale of a new additional unit will generate proportionately larger change in total utility. Thereby the e surge in sales was an expectation from the company .Initial response from potential customers reaffirmed this point. Fig1 : Ref: http://2disbetterthan3d.wordpress.com/2008/02/10/law-ofdiminishing- marginal-utility-and-its-application-to-our-daily-consumption/ 1. 2. Supply and Demand: The law of demand holds true in

case of Tata Nano, which states that consumers buy more
of a good when its price decreases and less when its price
increases. Introducing Tata Nano at a reasonably low price
caused an increase in demand. Tata is recognized for its
high quality service in India and hence the trust in the Tata brand also caused more consumers to buy the product
before the product was launched.
2. 3. Marginal Utility and Law of Diminishing Marginal
Utility: The overwhelming response from the people has
re-established that marginal utility will be positive for this car. The price is segmented across various sectors (according to the desire of luxury) and slightly higher price will not allow it to become like a non valuable product and therefore it will not be pushed to a limit where excess quantity will cause a negative marginal utility as shown in Figure 2. Fig 2

3. Consumer Surplus : Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually do pay. The cost reducing innovation Tata Nano caused a lower price and an increase in the quantity demand in the market. As a result, there was an increase in consumer surplus. The lowest car model in terms of cost,( Maruti 800) was Rs 1,99,000 and TATA NANO was introduced in the market at a price of 1,34,000. Consumer surplus is a deciding factor in purchasing a product. What the consumers would be willing to pay over and above what they are actually asked to pay marks this surplus. The masses have been mesmerized by the low offer price of Nano, which has incredibly not gone low on style quotient thanks to Tata’s highly innovative cost-cutting approach.

The quantity push must not cross this critical point
Fig 3 Ref:...
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