This area of the coursework aims to recognize the key features of oligopolistic competition in market and the economical ideas related to price mending. In monopoly one company control buttons the major market show while in oligopoly; market is handled by several firm or a group of small businesses. This analysis describes the features of oligopoly and kinked demand curve in oligopolistic situation.
It also explains the pricing theories in context with game theory and Nash Equilibrium.
In oligopoly, large ratio of market is captured by leading firms, producing same product or services. Such firms agree to cooperate and act as single monopoly thus making a cartel to generate maximum income.
Same service or product by the group of dominated firms.
Branded product by each company.
Interdependence among the list of firms.
Small companies may are present in oligopoly however the market is usually handled by large players having more than half of the industry outcome.
Each company produces branded product, therefore creating high competition leading to high advertising costs.
Entry obstacles such as authorities regulations, patents, installation cost and undivided source ownership, restricts a new entrant to enter in the oligopolistic market.
Interdependence means that all firm must take into account the likely reactions of other firms on the market when making pricing and investment decisions (Begg & Ward). This doubt in market can be settled by the use of game theory which is applied by a company taking profile of the decisions created by the rival company.
Non-price competition among the list of oligopolistic firms, aim at increasing their market talk about significantly e. g. press advertising, promotional offers and discounts, use of technology, customer friendly services such as home scanning machines and customer loyalty benefits etc.
Kinked demand curve theory
According to Paul Sweezy's assumptions, if an oligopolistic boosts its price, the competitors are unlikely to check out the same suit because keeping the prices constant increase their market talk about. Income of the organization that increased its price will fall season by fairly great deal, making the demand curve relatively elastic.
However if the company reduces the prices, it is highly likely that the competition will also reduce the prices.
Source: Teacher2u Limited, 2010
This non-collusive theory talks about the stability once the price is set but does not explain how the secure price is achieved. In oligopolistic situation; each company has an option either to get started on a price conflict with the rival or even to cooperate. Game theory handles the prediction of probable results of the game titles of strategy where rivals have incomplete information about other's intensions e. g. Prisoner's dilemma is a predicament where two suspects are interrogated in independent rooms, depicts an example of game theory. Each think has simple options either confesses and bears the consequences or denies and dreams the other in addition has done the same.
To clarify which strategy the organizations will adopt can be explained by Nash equilibrium, where each company considers its competitors response before taking their own strategy. (Begg & Ward, p. 131) Equilibrium occurs when each player needs the best possible action for themselves given the action of the other player. Nash equilibrium is a situation in which none of the companies could improve pay-off, given the rivals strategies e. g. company A wouldn't normally be able to improve gains, given company B's strategy and vice versa.
Each company may enjoy high or good deal strategies. If both companies collude to adopt high price strategy, both would deliver above normal revenue and if both adopt low price strategies, both would yield normal profits. Imagine in long run, each firm fails to trust the rival and indulge in low price technique to increase its revenue and the rival adheres to the high price than the rival may face heavy reduction. Such a dread that the rival may adopt a harmful strategy is out there within the firms which is therefore in the interest of both the firms to look at a minimal price strategy. Such a predicament is named Maximin strategy where the player implementing the strategy yields maximum profits, assuming that the rival may inflict maximum destruction.
At times several oligopolists engage in an overt arrangement to fix the prices and the level of production. This overt collusion, in order to act as a monopolist, is named collusive oligopoly and is designed to earn maximum gains by restricting the production and increasing the costs. Price changes of one firm are sometimes matched by the other firm and the firm initiating the purchase price change is called price head; such collusion is called as tacit collusion.
Rectangle abcd depicts the cartels' income.
Cartels will probably break in long run as the associates are intended to cheat sometime or the other by increasing production. By producing more result than decided, the member can increase its share from cartel's earnings. If each member cheats than cartel ends up in earning monopoly revenue and thereby giving no reason behind the firm to remain in the cartel.
Interdependence is the key feature of oligopolistic market. The outcome of any strategy by a firm is uncertain and the price competition may lead to price-war. Entry barriers help the dominating firms to keep their control over the market. Formation of cartels may deliver short term profits but are unsafe in long run. It is also witnessed that non-price competition may profit oligopolists to increase market share and support in long term.
2B. Extent to which telecom sector in India is an oligopoly and price dedication strategy
Indian Telecommunication industry is the second largest and fastest telecom industry on the planet with around 706. 37 Mil mobile phone (landline and mobile) users and 670. 60 Million mobile phone links by Aug2010. Dominance of few major players has made this sector perfect circumstance of Oligopoly in India. Due to the presence of limited number of players, each player knows the rival's actions and then the decisions of 1 firm is damaged by the action of the other firm.
Service Provider wise Market Talk about as on 31-7-2010
Source: Telecom Regulatory Specialist of India
Table above implies that four firm attention ratio is above 40%
Barriers to entry in Telecom
The high access obstacles in telecom sector as mentioned below turns the market oligopolistic in mother nature.
High capital investment required by the new entrant for original setup
competition with well established operators Airtel, Vodafone, Reliance and Tata
license cost on revenue showing basis and something time entrance fee
continuously rising technology e. g. VOIP, 3G
lowest tariffs in the world
high primary operating deficits. Lower rates helps it be longer for the new entrant to achieve
equilibrium as most new customers churn from one network to another.
Low Tariffs: Element of Competition
Indian telecommunications is the cheapest cost market in the world. The cut throat competition among operators has remaining no scope of having single price innovator in market as all the operators be competitive for lower prices and high customer base. Increased quantity of players has resulted in increased price wars among the list of challengers, with consumer being the beneficiary. Such factors declines the profit margins which are anticipated to consolidate the industry.
Offset of price wars
In mid nineties, in the beginning of mobile services in India, operators used to demand seriously for the inbound calls on their network. After the introduction of BSNL's free inbound call service, other operators followed the same suit. Still the major chunk of customer continued to be with BSNL due to its low call rates and better network coverage.
With the introduction of Reliance Marketing communications as a new telecom giant, teledensity in India increased enormously to 8. 2% in 2004 from that of 2. 32% in 1999 and to 54. 10% in April 2010 (as per TRAI). Release of low priced mobile services, along with handset, made Reliance the purchase price innovator in telecom industry attracting an enormous chunk of customer bottom. Other leading companies like Airtel, Vodafone and Hutch got to complement their prices start of Reliance.
To keep an eye on and control the irregularities in tariffs costed by telecom operators, Telecom Regulatory Specialist of India was developed by the federal government of India. The Telecommunication Tariff Order 1999 began declining tariffs and inspired the rapid development of cellular phone users. TRAI is also in charge to monitor and prevent the formation of cartels by mobile operators in the cover of organizations such as COAI and AUSPI.
Source: Telecom Regulatory Expert of India
Source: Telecom Regulatory Expert of India
Graphs show the ratio decline in nationwide and international call rates. This happened due to intense competition that produced after TRAI laws.
Interconnect Usage Demand - payable by one operator to another for using their network
Reduction in Access Deficit Fee also contributed in bringing down the call rates
Calling Party Pays regime set low termination charges further reduced prices
Unified Gain access to Service License offered providers the privilege to find out tariffs
Impact of price-war
Price battle among operators hits the revenue development significantly. For the new entrants, the break-even point of which expenses equals' earnings also enhances.
The decrease in prices anticipated to competition increases the consumer bottom part to unsustainable levels. Past data shows that only 50% of the customers are new and the others are either churning the network or keeping yet another connection.
Graph shows increase in demand with decrease in price
Table below shows market revenue growth in terms of MRPU.
major players. jpg
Marginal Revenues Per Minutes (MRPU)
Graph below depicts the growth in usage actuated by decrease in tariffs. Aside from low call rates, reduced cost of handsets and free handset facility by providers also added to the upsurge in customer base.
Source: Telecom Regulatory Power of India
Recent unveiling of per second billing option by Tata, pushed its competitors to enjoy non-price competition.
Most of the operators have now started out offering similar per second billing to its customers and this has resulted in creating more pressure on margins. Value added services and customer friendly facilities like online repayment, internet access and better network coverage constituted in non-price competition.
The above research and examination of data means that Indian telecom industry are present in oligopolistic situation where few major players are having large share of the market. Strategic change of one operator impacts the strategy of other players, leading to interdependence among operators. High entry obstacles restrict new entrants to enter in the industry and regulatory expert like TRAI monitors the forming of cartel on the market. Analysis also demonstrates competition in oligopolists is not only anticipated to price-wars but other factors such as better services and low priced of handsets also affect a big customer base.
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