Case Study — The Cosmetics Industry, Price Differences and Natural Mica
Case
Table 1: Cost of Beauty around the World in 2019
| Region | Asia-Pacific Region | North America Region | ||
|---|---|---|---|---|
| Countries | China | Malaysia | USA | Canada |
| Price of a foreign cosmetic product bundle (USD) | 427.00 | 263.32 | 244.43 | 240.06 |
Source: Retail In Asia, 15 January 2021.
Extract 1: Major Players in China’s Cosmetic Industry
Presently, cosmetics have become an indispensable feature of the modern lifestyle of individuals. In addition, growth in consciousness about external beauty along with an individual’s internal intellect has become one of the major driving factors for the use of cosmetics in the global market. The global cosmetics market size was valued at $380.2 billion in 2019, and is projected to reach $463.5 billion by 2027. Based on region, Asia-Pacific, followed by North America, contributed the highest share in 2019, holding more than one-third of the global cosmetics market, and will maintain its lead position by 2027.
Global cosmetic brands employ various strategies, such as new product launches, to increase their customer bases and expand their operating areas across various countries, with the aim of further gaining revenue and cost advantages. In China, foreign brands dominate the cosmetics market while domestic brands are catching up quickly. The competition among brands selling cosmetics in China is tightening as more domestic brands gain market share through rapid development of quality and innovation to match the dominant foreign brands. The Chinese government has played a role in the rise of the domestic cosmetics market. For foreign cosmetics brands that want to enter China’s market, it is necessary to apply for safety certifications. Furthermore, taxes on imported goods are continuously adjusted, and it is important for foreign brands to know taxation information, as this can affect costs and revenue significantly.
Adapted from Allied Market Research, February 2021, and Daxue Consulting, 3 January 2020.
Extract 2: The Ugly Face of Cosmetics
Mica is a naturally occurring silicate mineral dust often found in the mining grounds of India. The presence of Mica is especially prominent in cosmetics products, as it gives off a youthful and softer look when applied by reflecting light away from any wrinkles or lines in the skin. Since Mica is a natural mineral, it is safe to be used on the majority of skin types with little to no side effects. Therefore, it is well-loved by organic and natural beauty brands.
However, not all natural ingredients come from a sustainable supply chain, especially Mica. While the Mica industry is worth over billions, the eastern rural states of India, where Mica is commonly found, are suffering without a voice. The majority of the Mica industry is linked to child labour and illegal mines in the rural states of India where there is less growth, democracy, and development. A cycle of poverty has resulted in children, as young as four, resorting to mining Mica illegally in hazardous conditions for money, although it only pays 30 rupees (S$0.56) per day. Take the supply chain as a funnel: at every stage, any illegitimate activities or content is possibly filtered and concealed to continue the trade.
Now the next question is: is Mica safe for the environment? In general, mining is an invasive process that damages far more than the mining site itself. The creation of open pits induces soil erosion, the formation of sinkholes, and could potentially contaminate surface water, groundwater, and soil. The mining also leads to deforestation, with trees gradually cleared to develop more land for mining Mica. As such, this extends to a loss of biodiversity. For instance, residents in Bangakhla village observed a decrease in spotting elephants, wild boars, and rare birds in the village.
Beauty brands need to confront the true cost of their decisions. To ensure responsible sourcing practices, they might have to be legislated for, and organisations will need to build the cost of compliance into their value chains and improve transparency. While it is impossible to go Mica-free, synthetic Mica is said to offer the same or better benefits as natural Mica without harming the environment. Beauty brands, like Lush, have removed all traces of natural Mica from their supply chains over child labour concerns and switched over to synthetic Mica. In addition, L’Oréal has committed itself to source sustainable Mica in India.
Source: The Sustainability Project, 27 September 2020.
Extract 3: The Responsible Mica Initiative (RMI)
In 2019, India exported more than US$37 million (S$49 million) worth of Mica powder. The region and the Mica industry, however, do not have a mechanism to incentivise the adoption of workplace and labour standards or to prevent illegally mined Mica from entering the global Mica supply chain. There is a need for government enforcement of laws and regulations to provide enforceable oversight of the industry.
The Responsible Mica Initiative (RMI) is a global coalition for action — putting policy into practice — comprised of multiple organisations committed to establishing a fair, responsible and sustainable Mica supply chain in the states of Jharkhand and Bihar in India that will eliminate unacceptable working conditions and eradicate child labour by 2022. Its three pillars are: (1) Mica supply-chain mapping and workplace standards for Mica collection and processing; (2) community empowerment in villages that provide the Mica workforce, including education, nutrition, health care, and skills training to support alternative livelihoods such as farming; and (3) legal frameworks for the Mica sector, developed collaboratively with local businesses, government agencies, and sector experts.
Adapted from Channel News Asia, 22 May 2021.
Questions
(a)(i) Using Table 1, compare the price of a foreign cosmetic product bundle across the stated countries. [1]
(a)(ii) With reference to the given data, explain reasons why some economists believe that price discrimination is the reason behind the observed price differences, while others do not. [4]
(b) Using a relevant elasticity concept, explain how the imposition of import taxes on foreign cosmetics in China may affect the revenue of domestic cosmetic brands. [4]
(c) Explain the economic relationship between cosmetic products and natural Mica. [2]
Answers
(a)(i) Using Table 1, compare the price of a foreign cosmetic product bundle across the stated countries. [1] (compare)
The price of a foreign cosmetic product bundle is higher in the Asia-Pacific region (China $427.00, Malaysia $263.32) than in the North America region (USA $244.43, Canada $240.06).
Marking points: any valid difference — 1m.
(a)(ii) Explain reasons why some economists believe that price discrimination is the reason behind the observed price differences, while others do not. [4] (explain)
For price discrimination. Extract 1 reports that Asia-Pacific holds the highest share — more than one-third — of the global cosmetics market, driven by “growth in consciousness about external beauty”. This suggests cosmetics carry a greater degree of necessity in Asia-Pacific, so demand there is more price-inelastic. A profit-maximising producer that can separate the markets will charge a higher price where PED is more inelastic (China) and a lower price where PED is more elastic (North America) — third-degree price discrimination.
Against price discrimination. Extract 1 also notes the Chinese government imposes continually adjusted taxes on imported goods, including foreign cosmetics, raising producers’ cost of production. Profit-maximising firms then raise prices to protect their margins, producing higher prices in China for a reason unrelated to price discrimination.
Marking points: explain the difference in PED — 1m; link to how producers separate markets — 1m; explain the difference in cost — 1m; link to why the price difference need not reflect price discrimination — 1m.
(b) Using a relevant elasticity concept, explain how the imposition of import taxes on foreign cosmetics in China may affect the revenue of domestic cosmetic brands. [4] (explain)
Extract 1 states domestic brands are “catching up” with foreign brands, indicating that domestic and foreign cosmetics are substitutes, with a positive cross elasticity of demand. When import taxes raise the price of foreign cosmetics, Chinese consumers switch to the relatively cheaper domestic cosmetics, raising the demand for them. Demand shifts right from D₀ to D₁: equilibrium price rises from P₀ to P₁ and quantity from Q₀ to Q₁, so the total revenue of domestic brands rises from area P₀E₀Q₀ to the larger area P₁E₁Q₁.
Marking points: explain the substitute relationship via XED — 1m; explain how the import tax raises demand for domestic cosmetics — 1m; explain the rise in total revenue — 1m; diagram — 1m.
(c) Explain the economic relationship between cosmetic products and natural Mica. [2] (explain)
Natural Mica is a factor input used in producing cosmetic products. A rise in the global demand for, and output of, cosmetics therefore raises the derived demand for natural Mica.
Marking points: identify the relationship (factor input / derived demand) — 1m; explain it — 1m.