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Oligopoly :telecom industry
An oligopoly is market form in which a market is dominated by a small number of sellers (oligopolists). The word is derived from the Greek for few sellers. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. An oligopy is a form of economy. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. Using this measure, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40%. An example would be Indian mobile industry , with a four-firm concentration ratio of over 70% and the cold drink industry also in the U.S.A has a two firm concentration ratio of a staggering 85%.
In an oligopoly, firms operate under imperfect competition, the demand curve is kinked to reflect inelasticity below market price and elasticity above market price, the product or service firms offer are differentiated and barriers to entry are strong. Following from the fierce price competitiveness created by this sticky-upward demand curve, firms utilize non-price competition in order to accrue greater revenue and market share.
In industrialized countries oligopolies are found in many sectors of the economy, such as cars, consumer goods, and steel production. Unprecedented levels of competition, fueled by increasing globalisation, have resulted in the emergence of oligopsony in many market sectors, such as the aerospace industry. There are now only a small number of manufacturers of civil passenger aircraft. A further instance arises in a heavily regulated market such as wireless communications. Typically the state will license only two or three providers of cellular phone services.
Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may collude to raise prices and restrict production in the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
Kinked Demand Curve
• If the firm prices above existing price it will lose much market share as no competitor will match price increase
• If firm prices below then it wont gain market share as competitors match price decrease
Bertands Model
Price determination in an oligopoly
• If you expect the competitor to price below Marginal Cost you price at Marginal Cost
• If competitor prices above MC below monopoly price then price just below competitor
• If the competitor prices above monopoly price then price at monopoly and take 100% market share
The mobile telecom industry
• Limited players in the GSM market
• Triopoly between Hutch, Airtel and Trump (MTNL)
• Intense competition
• Basically duopoly between Airtel & Hutch
• High rates of customer attrition
• Heavy regulation by TRAI
• Homogeneity in products
No winners surviving in an Oligopoly
• Hutch is market leader
• Airtel fast catching up due to attractive plans
• Almost simultaneous drops in prices
• Trump is ignored
• Freebees are used as a marketing tool
• Value added services are used to differentiate the products
Survival strategies
• Focus on corporate customers less resistant to price changes
• Informal agreements between rivals not to cut prices below a particular point
• Build brand loyalty
• Provide more value added services
Changes in the industry
• More entrants to be allowed in the sector currently limited to four
• Proposal to increase FDI in the sector allowing more competition
• Number mobility may lead to further price wars
• Increased competition from the CDMA players (Reliance & TATA)
An oligopoly is market form in which a market is dominated by a small number of sellers (oligopolists). The word is derived from the Greek for few sellers. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. An oligopy is a form of economy. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. Using this measure, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40%. An example would be Indian mobile industry , with a four-firm concentration ratio of over 70% and the cold drink industry also in the U.S.A has a two firm concentration ratio of a staggering 85%.
In an oligopoly, firms operate under imperfect competition, the demand curve is kinked to reflect inelasticity below market price and elasticity above market price, the product or service firms offer are differentiated and barriers to entry are strong. Following from the fierce price competitiveness created by this sticky-upward demand curve, firms utilize non-price competition in order to accrue greater revenue and market share.
In industrialized countries oligopolies are found in many sectors of the economy, such as cars, consumer goods, and steel production. Unprecedented levels of competition, fueled by increasing globalisation, have resulted in the emergence of oligopsony in many market sectors, such as the aerospace industry. There are now only a small number of manufacturers of civil passenger aircraft. A further instance arises in a heavily regulated market such as wireless communications. Typically the state will license only two or three providers of cellular phone services.
Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may collude to raise prices and restrict production in the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
Kinked Demand Curve
• If the firm prices above existing price it will lose much market share as no competitor will match price increase
• If firm prices below then it wont gain market share as competitors match price decrease
Bertands Model
Price determination in an oligopoly
• If you expect the competitor to price below Marginal Cost you price at Marginal Cost
• If competitor prices above MC below monopoly price then price just below competitor
• If the competitor prices above monopoly price then price at monopoly and take 100% market share
The mobile telecom industry
• Limited players in the GSM market
• Triopoly between Hutch, Airtel and Trump (MTNL)
• Intense competition
• Basically duopoly between Airtel & Hutch
• High rates of customer attrition
• Heavy regulation by TRAI
• Homogeneity in products
No winners surviving in an Oligopoly
• Hutch is market leader
• Airtel fast catching up due to attractive plans
• Almost simultaneous drops in prices
• Trump is ignored
• Freebees are used as a marketing tool
• Value added services are used to differentiate the products
Survival strategies
• Focus on corporate customers less resistant to price changes
• Informal agreements between rivals not to cut prices below a particular point
• Build brand loyalty
• Provide more value added services
Changes in the industry
• More entrants to be allowed in the sector currently limited to four
• Proposal to increase FDI in the sector allowing more competition
• Number mobility may lead to further price wars
• Increased competition from the CDMA players (Reliance & TATA)
