Why Chinese parents prefer Lego to Barbie？
1. Introduction
According to the phenomena, in reality, Lego is more prevalent among Chinese parents than Barbie in the Chinese market. This is related to the importance that Chinese parents attach to their children’s education. Due to the in-depth research and application of Lego in education, the associated products it has developed are also top-rated. Therefore, based on this background, this article will carry out in-depth research on the characteristics, pricing, location, and development strategies of Lego in the Chinese market and make a more comprehensive analysis of the current status of Lego in the Chinese market.
2.Key Discussion
（1）About Question 1
a)
For Chinese parents, playing with Lego will bring positive externalities. Because, according to the investigation in the case, “last year, 98% of those surveyed by Lego said that playing was essential for their children’s well-being, even more than Americans and Danes.” (Rigoberto et al. 2018). Besides, the opportunity provided by playing at Lego is critical for the emotional, cognitive and social, development of the kids. For parents, the child’s well-being is crucial. And Lego enhances the well-being to their children, which will further affect the growth and development of their children, and ultimately affect the happiness of the entire society (Ming, 2007). Therefore, the social marginal benefits of Lego will be greater than the private marginal benefit. From the figure below, we can also see that, according to the relationship between the supply curve and the demand curve, Lego’s marginal private benefit is D1, and Lego’s social marginal benefit is D3. These two straight lines intersect with the supply curve at E1 and E3 respectively, and determine the equilibrium price and quantity.
The intersection of D1 and the supply curve determines the real equilibrium price (P market) and quantity (Q market) of the market. The intersection of D3 and the supply curve determines the equilibrium price (P efficient) and quantity (Q efficient) that should be achieved in reality but not attainable (Rigoberto et al. 2018). Therefore, we can see that when Lego has positive externalities, it reaches market equilibrium conditions, its production quantity is too small, and it is lower than its optimal production volume. Due to positive externalities such as parents having opportunity to play with their children and reminds them of their youthful stage.
Figure 1 the positive externality of Lego
Compared with Barbie (figure 2), Lego’s positive externalities for Chinese parents will be higher. Therefore, Barbie is considered to be flimsier dolls “arrogant” Barbie’s marginal social benefit curve (D2) will be lower than Lego’s (D3). Besides, the intersection of the marginal social benefit curve and the supply curve corresponding to Barbie will determine the new equilibrium price and quantity. The equilibrium digit will be significantly higher than the corresponding market value of Barbie.
Therefore, the number of Barbie’s real market is not enough. But the demand for Lego in the market will be higher than that of Barbie.
Figure 2 the positive externality of Barbie
b)
1) Education reality in china is that, Chinese parents attach great importance to the education of their children at all stages. As a matter of fact they provide different educational products to their children at different stages of learning. To them, externalities are ubiquitous, and differ with situations. It is true that there are positive externalities of education which is the market for education.
Besides, the more education an individual gets, the higher are the social benefits because highly educated individuals come out to be extremely enterprising this means that they bring back greater economic importance and value to the society (Rigoberto et al. 2018). However, parents will always ignore education other than the high scores, such as physical fitness training (physical quality education), cultivation of artistic sentiment, management of interpersonal relationships, and mastery of communication skills.
Chinese parents’ pursuit of educational is limited to books, while ignoring more important educational products. The increase in the amount of knowledge will bring positive externalities to the society, so this improves the level of knowledge and creativity of the entire society. On the other hand, excessive high-score in education and lack of quality education products will also bring negative externalities to society. This means that the children will be poor in physical fitness and lack social skills that may cause different degrees of friction and damage to society (Ming, Y. 2007).
2)
Not every negative externality should be taxed, and not every positive externality should be subsidized. This needs to be decided according to the specific circumstances prevailing in each economy and society. For China, further education is an important means for parents and families to escape poverty (Landers, 2008). Therefore, they have no reason to give up this kind of college education and develop more child survival skills. However, the government can also regulate it appropriately, for example, by promulgating policies to enforce the minimum education hours for survival skills to promote the overall improvement in education.
3) The government can decide whether tax or subsidize externalities after considering the actual effects of the chosen action. As we know, taxation and subsidies are important means to resolve negative and positive externalities. However, this is not the only means. Quotas, administrative controls, and honors are also a solution (Jennifer & Kruti, 2019). It is critical to first consider the principle of taxation in resolving externalities. The reason for taxation is to make the private marginal social cost of creators of negative externalities equal to its marginal private cost. In this way, the negative externalities causes are internalized so that it pays for the losses caused by the negative externalities.
When the economic agent realizes that they must pay the related costs actions, they will consciously modify their behavior. Therefore, if the government is confident that the negative external reduction effect of taxation can achieve the expected effect, that is, when the negative externality generator is extremely sensitive to the government’s taxation behavior, then the government will consider taxation. Secondly, consider the principle of tax allowance in solving positive externality. Tax allowance makes the externality provider to obtain marginal private benefits equal to its marginal social benefits(Jennifer & Kruti, 2019). When the positive externality provider can respond significantly to government measures, this will be extremely important.
（2）About Question 2
- a)
The first determinant is the degree and preference of Chinese consumers for Lego. In general, if consumers have a higher preference for Lego or a greater need for Lego, then the Lego’s price elasticity of demand in China will be less than 1, that is, inelastic (Seyedamirabbas et al. 2020). If Chinese consumers have very little preference for Lego, then the price elasticity of demand will be enormous. From the evidence in this case, we can see that the price elasticity of Chinese consumers’ demand for Lego will be less than one.
The second determining factor is the number of alternative products. If there are many Lego alternatives, then, when the price of Lego changes, consumers can easily switch to other products to buy, resulting in flexibility (Landers, 2008).
The third determining factor is the versatility of the use, the wider the use, the greater the flexibility and the lesser the use the narrower the flexibility. The fourth determinant is the time range, the longer the time, the greater the elasticity and vice versa. The fifth determinant is the Proportion of Income (Seyedamirabbas et al. 2020).. In general, the higher the proportion of commodity prices in income, the greater the price elasticity of demand. For Chinese customers, the number of alternatives is the most important determinant.
- b) The cross price elasticity of demand refers to the ratio of the change in the demand of one commodity to the price change of another commodity. Using positive and negative cross-price elasticities of demand, we can judge whether these two commodities are substitutes or complementary products. In China, Lego also has alternatives and complementary products (Seyedamirabbas et al. 2020). Alternatives mainly include Enlightenment, Star Fort, Kaizhi, among others. Complementary products include parts supplements. When the cross-price elasticity of demand is less than 0, it means that when the price of a commodity rises, the quantity of Lego’s demanded decreases (Landers, 2008). This product is therefore a complementary product of Lego. When the cross-price elasticity of demand is greater than 0, it means that when the price of a commodity rises, the quantity of Lego’s demand increases. Therefore, this product is a substitute to Lego.
- c) The income elasticity of demand refers to the percentage change in the quantity of demand when income changes by a certain percentage (Seyedamirabbas et al. 2020). When Chinese parents become rich, it means that the income of Chinese parents is increased. From the discussion in the case, the income of Chinese parents increase is helping Lego recover, that is, the quantity of demand is increasing. Therefore, Lego’s demand income elasticity will be greater than 0 (Landers, 2008).
（3）About Question 3
a)
Not true. According to the discussion in the case “Prising a child from Lego’s vast shop near People’s Square can be like unsticking two stubborn bits of Lego”, the children’s enthusiasm for Lego is extremely high.
The law of diminishing marginal utility states that as consumers continue to increase the amount of consumption of a commodity, the utility that the consumer gets from the increased consumption is gradually decreasing. Compared with this case, every time the children increase their Lego consumption, the utility they get will not decrease, that is, the children are very happy to get an extra Lego (Ryan, 2019). The increasing number of Lego will bring more utility to children, instead of reducing the utility gain of children contrary to the law of diminishing marginal utility.
- b) Due to ‘educational merits of bricks appeal to Chinese parents’, they attach great importance to education. When Lego enters the Chinese market, its core development strategy is to deeply explore the educational value of Lego. Besides, its investment in this area is huge, and the most profitable. The educational value of Lego will be the most critical factor for parents to choose Lego. Therefore, parents are rational when buying Lego (Magnus, & Andreas, 2016). According to the Rules of Thumb in Behavioral Economics, from parents ’experience, they are aware of whether Lego’s different aspects of educational value are useful to their children. They will also choose targeted Lego products to provide children with unique educational value, and ultimately achieve their educational goals. Parents ’consumption of Lego is often seldom affected by the consumption behavior of others, but, mainly by their own preferences (Eddie, 2018). Considering factors that affect consumption, consumer preference will be an extremely critical factor. As a result, when consuming Lego, parents will first consider their own consumption preferences in terms of the kind of education their children need (Ryan, 2019). This targeted consumption and choice will promote the rational behavior of parents.
（4）About Question 4
First, monopoly means that in a certain commodity or service industry, there is only one seller. Moreover, the products or services produced by monopolistic manufacturers are unique and cannot be imitated. Therefore, manufacturers also have the pricing power of their goods and services, that is, they can obtain monopoly profits by adjusting monopoly prices. Oligopoly is a market structure in which, only few manufacturers produce goods or services to provide products for the entire market (Eddie, 2018). Each oligopolistic company has a large market share and has certain control over market prices and quantities. There are barriers to entry in the oligopoly market, which can prevent more companies from entering, and the oligopolistic manufacturer also knows that his behavior will have a certain impact on the behavior of other manufacturers. The leader can set the price of the entire industry through priority pricing and quantity (Magnus, & Andreas, 2016). Based in this information, this article considers Lego to be an oligopoly in the Chinese market.
According to Euromonitor International, although sales in the LEGO market have slowed down globally, sales revenue in China has increased significantly. In 2016, Lego’s sales revenue in the Chinese market increased by 25-30%. Also, Lego is competing with Barbie maker Mattel Inc (MAT.O) and Hasbro (HAS.O), the firm behind My Little Pony. At the same time, Lego’s market share in China is about 3%, Mattel and Hasbro account for 2% and 1% respectively (Pei and Jacob, 2018). Therefore, in the toy and entertainment markets, these three major companies account for a larger share (Alfred, 2019). As a result, Lego’s market type in China is oligopoly. “Tellingly, Mattel’s most successful brand in China is a maker of educational baby toys, Fisher-Price, with a market share of 1.1%, according to Euromonitor, a data provider. Barbie has 0.3%, ranks 31st in the Chinese market. By contrast, Lego’s 4.5% share puts it firmly in first place: a fortification that will serve it well, as China’s market for toys and video games, worth $45bn, overtakes America’s in the next few years.” According to the description in the article, we can also draw the same conclusion that Lego, Barbie and Mattel all occupy a larger position in the Chinese market. In this market, Lego manufacturer monopolizes all market shares, and is the largest manufacturer who controls a larger market share.
In terms of Lego’s strategy in China, first of all, Lego can build a Lego online community. In the online community, Lego can provide more video displays for children and develop the online community into an excellent creative design platform for Lego. This can help children bravely express their ideas and communicate with others in a timely and effective manner (Seyedamirabbas et al. 2020). Secondly, they pay attention to the educational value of company. Given Chinese parents attach great importance to education; the educational philosophy contained in Lego will bring great attraction to parents. For example, Lego bricks can develop children’s creativity through free activities, and can also help children acquire computer coding concepts by developing structural kits.
Lego can also cooperate with Chinese colleges and universities to develop toys and courses, and teach children science, technology, engineering, art, and mathematics. The company’s in-depth research in these two areas will be of great significance to its continued competitive advantage (Nathan et al. 2019) Finally, Lego can continue to innovate its product line in combination with modern technology and technical means, and attract consumers’ attention through diversified product lines, thereby obtaining more sales (Ryan, 2019). For instance, the integration of intelligence and digitization into the production and design of each new product allows the product to be controlled not only with original means but also through application software.
In addition, Lego introduced the first batch of plant-based granules—sustainable building blocks made from plant-based plastics derived from sugar cane, and announced that by 2025, product packaging will use 100% sustainable materials. This is helpful for children’s health and long-term collection and use. Therefore, we should not only spend more time on product design, but also optimize the material and time. (Ryan, 2019).
（5）About Question 5
- A) Lego practices price discrimination. Price discrimination refers to the phenomenon that manufacturers impose different sales prices on products. Primary price discrimination refers to manufacturers selling each unit of products at the highest price that consumers are willing to pay (Seyedamirabbas et al. 2020). The company manufacturers can classify consumers in the market in advance, distinguishing those who are willing to pay for high quality from those who are not willing to pay for high quality (Nathan et al. 2019). Then, they will launch for different consumers different products through price discrimination. Consequently, high-quality Lego kits are expensive, showing that Lego manufacturers try to use the quality of Lego kit products to implement price discrimination.
When consumers have strict requirements for product quality, then they will be willing to pay a higher price for each unit of Lego products (Eddie, 2018). And those consumers who do not have requirements for product quality, they will not buy high-quality and high-priced products. In this way, the firm’s manufacturers benefits from price discrimination.
- B) Products’ similarities mean that there is a certain degree of homogeneity between products, but there may be differences in certain aspects. Products may have different characteristics (Nathan et al. 2019). The buyers are willing to pay the highest price for similar products in the market. In this market, consumers have strict requirements for these special characteristics; they may have strong product stickiness. Special consumer preferences will make them pay less attention to the price level; they only pay attention to the characteristics of the product itself, which is based on the purchase of products. They have obvious strict requirements on product characteristics, such as quality and material among others (Alfred, 2019). In order to obtain this product, they will be willing to pay the highest price. In this case, consumers’ preference for product characteristics exceeds the exclusion of price. Therefore, to meet this special preference, they will be very willing to buy the product at a higher price but more productive and quality products.
3. Conclusion
Due to the importance Chinese parents place on their children’s education, Lego is extremely popular in the Chinese market. Moreover, for Chinese parents, they believe that Lego is very important to the well-being of their children, thereby further affecting the growth and development of their children. Ultimately, the education improves the happiness of the entire society. So, Lego has a positive externality. Given that Barbie is arrogant, they think the positive externalities that they create can be lower than Lego. However, the production of Lego and Barbie is not enough, and the positive externalities they can bring will be needed.
Moreover, the government should determine whether measures such as taxation or subsidies should be implemented based on the actual situation and the predicted implementation effect. For Lego, the degree and preference of Chinese consumers for Lego, the number of alternative products, the wide range of uses, the time frame, and the Proportion of Income are all important factors that affect the price elasticity of demand. Due to Lego’s oligopoly position in the Chinese market, it should take more measures to maintain its competitive advantage and promote its long-term development and profitability.
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