Oligopoly(other than cartel)

Presented To: Randeep Mam

ROLL. NO. NAME
05 Arjun Bajwa
OLIGOPOLY
Oligopoly is a market structure characterized by a small number of
large firms that dominate the market, selling either identical or
differentiated products, with significant barriers to entry into the
industry. Oligopoly dominates the modern economic landscape,
accounting for about half of all output produced in the economy.

MAIN FEATURES OF OLIGOLPOLY:

1. Sellers are few in number
2. Any one of them is of such a size that an increase and decrease in
his out put will appreciably affect the market price. Infact, the size of
each sellers output in relation to the total supply is the test.
3. Each seller knows his competitors individually in each market.

Characteristics
The three most important characteristics of oligopoly are:
(1) An industry dominated by a small number of large firms,
(2) Firms sell either identical or differentiated products, and
(3) The industry has significant barriers to entry.

Small number of large firms: an oligopolistic industry is

dominated by a small
number of large firms, each of which is relatively large compared to
the overall
size of the market. This generates substantial market control, the
extent of market control depending on the number and size of the
firms.

 Identical or differentiated products: Some oligopolistic

industries produce
identical products, while others produce differentiated products.
Identical product
oligopolies tend to process raw materials or intermediate goods that
are used as
inputs by other industries. Notable examples are petroleum, steel, and
aluminum.
Differentiated product oligopolies tend to focus on consumer goods
that satisfy
the wide variety of consumer wants and needs. a few examples of
differentiated
oligopolistic industries include automobiles, household detergents, and
computers.
 Barriers to entry: Firms in a oligopolistic industry attain and retain
market
control through barriers to entry. The most common barriers to entry
include
patents, resource ownership, government franchises, start-up cost,
brand name
recognition, and decreasing average cost. Each of these make it
extremely
difficult, if not impossible, for potential firms to enter an industry.

RULE OF THREE

In rule of three oligopoly 3 major firms control of 70 to 90 percent of a

particular
industry, with the remaining companies being relegated to the level of
niche players. To
illustrate this, in the 19th century there were more than 200 cars
manufacturers in the
U.S.A but now there are only 3 major players, viz., general motors, ford
and chrysler.

Strengths of the Rule of Three:

 Rule of thumb.
 Identifying the position of a company with respect to competitors.
 It helps to find a way to improve or change the strategy if required
before
companies fall in the ditch.

COLUUSION
In the study of economics and market competition, collusion takes
place within an industry when rival companies cooperate for their
mutual benefit. Collusion most often takes place within the market
form of oligopoly, where the decision of a few firms to collude can
significantly impact the market as a whole. Cartels are a special case
of explicit collusion. Collusion which is not overt, on the other hand, is
known as tacit collusion for e.g. OPEC countries.

GAME THEORY
A technique often used to analyze interdependent behavior among
oligopolistic firms is
game theory. Game theory illustrates how the choices between two
players affect the
outcomes of a "game." this analysis illustrates two firms cooperating
through collusion
are better off than if they compete.

Soft Drink Advertising

The exhibit to the right illustrates the alternative facing two
oligopolistic firms, juice-up and omnicola, as they ponder the prospects
of advertising their products.
 In the top left quadrant, if omnicola and juice-up both decide to
advertise, then
each receives $200 million in profit.
 However, in the lower right quadrant, if neither omnicola nor juice-
up decide to
advertise, then each receives $250 million in profit. They receive more
because
they do not incur any advertising expense.
 Alternatively, as shown in the lower left quadrant, if omnicola
advertises but
juice-up does not, then omnicola receives $350 million in profit and
juice-up
receives only $100 in profit. Omnicola receives a big boost in profit
because its
advertising attracts customers away from juice-up.
 But, as shown in the top right quadrant, if juice-up advertises and
omnicola does not, then juice-up receives $350 million in profit and
omnicola receives only $100 in profit. juice-up receives a big boost in
profit because its advertising attracts customers away from omnicola.
Game theory indicates that the best choice for omnicola is to
advertise, regardless of the choice made by juice-up, and juice-up
faces exactly the same choice. Regardless of the decision made by
omnicola, juice-up is wise to advertise.
The end result is that both firms decide to advertise. In so doing, they
end up with less profit ($200 million each), than if they had colluded
and jointly decided not to advertise ($250 million each).

THE KINKED DEMAND CURVE

The dependency and uncertainty aspect of the oligopoly leads to the
indeterminateness of the demand curve. The rigid price in oligopoly
leading to Kink in demand curve of an oligopolist was put forward
independently by Paul Swerzy, an American economist and Hall and
Hitch, Oxford economists. Taking an example of an extremely limited
case of oligopoly i.e. a case of duopoly were there are only two firms,
we can explain an oligopolists demand curve- known as Kinky demand
curve.
Reduction in price: If the oligopolist reduces the price below OP to
have more sales of his product the rivals will be quick in reducing their
price in order to not to lose the market. It is possible the rivals may cut
price by a higher margin to capture a larger share of a market. In a
process a price reduction, finally oligpolists will not increase their
individual sale but may succeed in getting a share of increased total
sales dye to reduction in price. Each one’s gain will be a marginal one.
Such weak response of demand for a charge in price OP makes TDb
part of the demand curve DDb less elastic.

Increase in price: If an oligopolists increase the price above the

prevailing price that is OP, he would loose his customers. The buyer
would purchase from other oligopolist as the rival firm would not
increase the price due to the fear of loosing the customers and
consequent decline in sales. The decline on sales of the firm which
increases its price depends on the type of product and availability of
product in the market. A substantial decrease in demand for an
increase in price above OP makes the DT part of the demand curve
less elastic. Now we have the demand curve DDb which can be divided
into two parts DT and TDb. The upper part that is DT is more elastic and
the lower part is less elastic. The difference in elasticity’s gives a kink
or bends for the demand curve at point .

Rigid Price : Price charged by oligopolists is expected to cover full

cost and also to bring excess profit if possible. The price thus charges
remains the same without further changes. A change may come with
the collective decision. The fear of loosing market when price is
increased not gaining much when price is reduced makes the
oligopolistic firm to stick to the price which they initially charge, hence
the price become rigid or sticky. The demand curve at the point of
price has a kink, hence the demand curve is called kinky or kinked
demand curve. The degree or extent of kink depends on the change in
elasticity’s on the two segments of the demand curves.
OLIGOPOLY AND NON-PRICE COMPETITION :

It is viewed with far more equanimity than price cutting and is

frequently quite
unrestrained. The basic reason is that retaliation is much more difficult
against
advertising, personal selling or product improvements, etc. than
against price-cutting.
Patent and know how barriers, long and usually secretive gestation
period, and delay in imitation are other important factors, Moreover,
the sales effects of a particular promotional strategy are far less clear
than the effects of price cutting. The various forms of non-price
competition can be stronger and more durable products, product
research and development, better quality packing and appearance,
easier credit terms, home delivery, after sales service, longer period of
guarantee, promotional effectiveness, dealer loyalty, etc.
A company’s use of non-price competitive strategy would vary
according to the nature of the firm’s product of machine tools would
not compete in the same manner as a producer of perfumes. Again,
non-price competition takes the form of changing models in the motor-
car industry and heavy advertisement in the soap and detergents
industry.
Due to liberalization of licensing, non price competition is getting more
and more popular in India. Several TV manufactures are offering hire
purchase/installment facilities. Many companies are discovering the
virtue of after sales service.
Non price competition may have some benefits to the producer in as
much as higher sales induced by non price competition may lead to
lower unit costs and production. But there is always a risk that changes
in product designs may not be acceptable to consumers.
However, from the viewpoint of consumers, non price competition is
boon as they may get better quality goods and services.

CUT-THROAT COMPETITION :
The existence of idle capacity and the presence of fixed charge often
lead sellers
successively to cut prices to a point where none of the can even
recover his cost and earn a fair return on his investment. Such
situation is characterized by price warfare.
Examples of cut throat competition are:
1) A price war was reported between mills producing synthetic fabrics
within a month of their agreeing to avoid intra-mill price competition.
Due to easy supply position of the polyester fiber in the world markets
a leading manufacturer reduced his price from
$7,180 a ton to $1,050 in December 1977.
2) In November 1986, Hindustan Computers spring rude shocks on its
competitors by having the price of its personal computer, the busy bee
from Rs.40, 000 to a mereRs.20,000.
3) In May 1999, in bid to improve its market share Hewlett Packard
India Ltd. Decided to launch the first Pentium-II tenor of computer by
sub Rs. 50,000 price tag and decided to slash prices of its Briorange of
PCs to below Rs. 40,000 mark.
The most common causes of price wars have been:
• The existence of heavy inventories and resulting competition among
sellers
accompanying the effort to unload their supplies of merchandise.
• The attempt by an aggressive seller to elbow his way into the market
or to expand his operations, with a resulting counteraction by other
sellers striving to protect their share of the market.
• A decline in demand for a generic or individual firm’s product/service,
with
resulting tendency towards the granting of price concessions by sellers
to gin or
protect their sales volume.
• The use of certain merchandise items (cigarettes or books, for
example) as a
leader for attracting patronage, and a resulting retaliatory action by
rival vendors.
• The introduction of a technical innovation in a market accompanied
by greatly
reduced operating costs and resulting pressure on prices.

UNFAIR COMPETITION:
The concept of unfair competition is more ethical than economic and
its precise content is indeterminate. Unfair competition may be defined
to include all of those methods (and none else) which gave one
competitor an advantage or place another at a disadvantage which has
nothing to do with their comparative efficiency in the production and
distribution off good.
Their is a general agreement about the unfairness of the following
practices to take customers away from a competitor by
misrepresenting the quality or the price of one’s goods to interfere
with the sales of a competitor by defaming him, disparaging his
products, harassing his salesmen, obstructing his deliveries, damaging
his goods intimidating his customers, bribing his purchasing agents, or
inducing them to break their contracts with him, or by organizing
boycotts against him, etc. In general, these acts are so designed as to
give a competitor an advantage unrelated to his productive efficiency.

PRICE LEADERSHIP
Price leadership is said to exist when firms fix their prices in a manner
dependent upon the price charged by one of the firms in the industry.
The firm which takes the initiative in announcing its price changes is
called the price leader. All the other firms in the industry which either
match the leader’s price or some variation thereof are termed as price
followers.

Price Leadership arises due to following circumstances:

1. Lower Costs & Enough Financial Resources :
One of the firms has a clear advantage in cost or productive capacity &
enough
financial reserves to stand the losses of a price war without being
seriously
crippled.
2. Substantial Share of the Market :
Often, although not necessarily, the largest firm becomes the leader
because it is
presumed to have the greatest stake in the welfare of the industry,
greater power
to enforce follower ship & the best informed about the industry
demand and
supply conditions& as such best equipped to determine price policy of
the entire
industry.
3. A Reputation for Sound Pricing Decisions based on Better
Information &
more Experienced Judgement than What the Other Firms Have:
In fact, price leadership frequently arises as a natural growth within an
industry
due to the successful profit history, sound management & long
experience of the
price leader in the marketing matters. The remaining firms accept the
leader
because of his ability to coordinate the industry’s growth with that of
its
members.
4. Initiative :
Often the company which first develops a product or area retains the
price
leadership whether or not it retains the largest market.
5. Aggressive Pricing:
Often a company may garb leadership through lower prices& thereby
snatch
large & profitable markets from conservative rivals.

TELECOM INDUSTRIES
Overview of telecom industries
The cellular phone industry is one of India's rapidly growing industries.
Since the
industry came into being in the mid 1990s, its average per annum
growth rate has been a phenomenal 85 percent. By the end of 2002,
the Indian cellular phone industry had over 10 million subscribers. The
industry has undergone a number of changes over the years.
The National Telecom Policy 1999 was an important landmark in the
development of the cellular telecom industry in India; the tariff
rationalization and policy regulation introduced in the Policy helped the
industry grow at the pace it did. The years 2001 and 2002 saw an
increase in level of competition in the industry with more operators
being given licenses, and fixed line providers also entering the mobile
market.
Central government raising the FDI limit in the Indian telecom sector
from 49% to 74% increased foreign investments and global telecom
big wigs are due shortly.
Telecom Regulatory Authority of India (TRAI) has estimated that the
country will need about 350,000 telecom towers by 2010, as against
125,000 in 2007. Growth in the telecom sector can be achieved
through focusing on semi urban and rural areas. It is expected that
market size of the Indian telecom sector will be around US$40–US$45
billion by 2010, with 500 m subscribers and 20 m broadband
subscribers.
India added 8.17 million telecom subscribers in December 2007, taking
its total telecom subscriber base to 272.88 million at the end of
December, according to data released on Tuesday by telecom
regulator TRAI.
The overall teledensity stood at 23.89% at the end of December 2007,
against 23.21% in November. The country had seen addition of 8.2-
million subscribers in November and total subscribers stood at 264.77
million at the end of the month. The wireless segment saw an addition
of 8.17 million subscribers in the month of December, against 8.32
million in November. The total wireless subscriber base, including GSM,
CDMA & WL (fixed), stood at 233.63 million at the end of December
2007. The wire line segment saw a fall in total number of subscribers.
The subscriber base declined to 39.25 million in December 2007,
against 39.31 million subscribers in November 2007.
Total broadband subscriber base crossed 3 million to touch 3.13 million
by the end of December 2007, against 2.87 million by the end of
November. Among wireless operators,
Bharti Airtel added 2.2 million subscribers in December, taking its total
base to 55.16 million.
Vodafone Essar added 1.3 million subscribers and its subscriber base
totaled
39.86-million at December-end.
Idea Cellular, with a total subscriber base of 21.05-million at
December-end, added 0.83-million subscribers in the month.
Reliance’s total wireless subscribers, including WLL (F), stood at 40.96-
million after adding 1.57 million subscribers during the month.

Among wireline operators, state-run telco BSNL saw its subscriber base
decline by 0.14-million in December to 31.7 million. MTNL, too, saw its
wireline base dip by about 0.02 million to 3.59-million. Bharti Airtel
added 0.04 million subscribers in December to take its total wireline
subscriber base to 2.17-million

CASE STUDY:
Handset-driven expansion strategies:
Reliance Info com Ltd. (Reliance), India's leading postpaid mobile
services provider,entered the prepaid mobile services segment by
offering subscription schemes that allowed customers to make use of a
digital mobile phone service at an affordable price. For a price of Rs.
3,5003 for a CDMA enabled Motorola handset, a subscriber could get a
free Reliance India Mobile (RIM) prepaid connection and recharge
vouchers worth Rs.3,240. This connection was valid for six months with
a grace period of another six months during which the subscriber could
receive SMS and incoming calls without having to recharge the
account. Similar subscription offers were made on other RIM handsets
also. If a subscriber purchased an LG handset worth Rs. 6,500, he/she
got a free
RIM prepaid recharge voucher worth Rs. 6,480 valid for six months.
The prepaid
subscription offers were seen as a revolutionary step towards making
communication and data services affordable to a wider range of
customers.
Apart from their price, these offers included several value added
services like three way conference call, national roaming, SMS based
data services, STD and ISD facility, call forward and voice message
service at local mobile rates, etc. Also, RIM prepaid was the only
prepaid mobile service in the country that provided data applications
and internet connectivity. Commenting on the innovativeness and
superiority of these services, S P Shukla, President, Wireless Products
and Services, Reliance, said, “RIM Prepaid raises
the bar for innovation, quality of service and value added services in
prepaid segment of mobile telephony market.” Industry observers felt
that by providing high-end services at affordable prices, Reliance was
creating value for its customers...
Currently Reliance Communications (RCOM) recently launching ultra
budget handsets with prices starting at Rs 777, While CDMA players
like RCOM and Tata Teleservices have adopted handset-driven
expansion strategies to drive up subscriber base, this is the first time
that a GSM player is venturing into this space on a pan-India level.
Bharti joins race, to bundle handsets with connections on 22 Jun, 2007.
In a major shift in strategy, India’s largest mobile operator Bharti Airtel
is set to bundle handsets with mobile connections. This means that the
company will provide a handset with a new connection at partly
subsidized rates.
Vodafone Essar, which will spend nearly Rs 250 crore on a high-profile
brand transition from Hutch to Vodafone being unveiled on Thursday,
is poised to launch cheap cellphones in India under the Vodafone
brand. It will also launch co-branded handsets sourced from major
global vendors.
Bharti’s move follows the recent announcement by its main competitor
in the GSM space Vodafone. This said it will launch a series of ultra low-
cost bundled handsets to get a bigger pie of the rural Indian market
and increase its market share. He also dismissed the argument that
Bharti’s foray into the bundled space was driven by its desire to
counter Vodafone’s entry into India with ultra-cheap handsets.

Lifetime plan
Tata Teleservices, which pioneered lifetime pre-paid services in
October 2005, saw a rapid increase in subscriber base at a time when
it was struggling for stability in the fastgrowing sector. Soon, other
operators including Bharti and RCOM too launched such services. In
between Airtel has introduced first lifetime plan with installment plan
to attract the lower and middle class people which is later on followed
by Reliance. Right now Reliance has introduced lifetime plan in 199
which will lead to cost leadership.
Roaming rate
February, TRAI reduced the roaming charges, as per which, the
maximum permissible charge for roaming calls, irrespective of
terminating networks and tariff plans, was set at Rs 1.40 per minute
for outgoing local calls, Rs 2.40 for outgoing national long distance
calls and Rs 1.75 for incoming calls. The telecom regulator had already
removed rentals.
Telecom major Bharti Airtel has reduced roaming tariffs by up to 56
percent and also scrapped the rental for roaming services. May 22:
Starting a price war, Reliance Communications has slashed its roaming
rates by about 70 per cent at the lowest 40 paise a minute on some
select plans, while incoming has been made just Re 1 per minute. The
public-sector telecom operators, MTNL and BSNL, have slashed
national roaming charges to Re 1 for incoming calls and Re 0.40 for
outgoing calls within any visiting network as part of a new post-paid
plan to be launched on June 3.

ISD rates to US, Gulf

In May, leading private player Bharti Airtel dropped ISD charges to the
US and Canada after which an Airtel mobile user could call at Rs 1.99
per minute with the Airtel STD and ISD Calling Card worth Rs 2,245.
Rel-Comm also had cut its rates to the US and Canada to Rs 1.99 per
minute on its 'Reliance Global Call Card' of Rs 1,900. It had recently cut
call charges to the Gulf to Rs 6.99 per minute.
Triggering another price war in the ISD segment, state-run telecom
major BSNL has reduced call rates to the US, Canada and the Gulf to
Rs 1.75 per minute and Rs 6.75 per minute, respectively, slightly lower
than the rates offered by private firms.

CONCLUSION:
Oligopolistic competition can be said to be beneficial as it ensures, that
management would keep their organization innovative and efficient
over the long run.
Oligopoly also has the tendency to convert the industry into the
monopolistic firm
because it allows them to retain a degree of competition without
ceding too much control.