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Eco Project Oligopoly Group10

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    OligopolyPrice and output under oligopoly

    Group 10

    WMP 2009-2012

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    Key Issues

    Meaning of oligopoly

    Interdependence between producers

    Examples of oligopoly

    Concentration Ratio in Oligopoly

    Price and non-price competition

    The kinked demand curve

    Price and output under conditions of oligopoly

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    What is an Oligopoly?

    Oligopoly is best defined by the market conduct

    (behaviour) of firms

    A market dominated by a few large firms I.e.

    Competition amongst the few

    High level ofmarket concentration

    Concentration ratio is the market share of the

    leading firms

    Each firm tends to produce branded /

    differentiated products

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    What is an Oligopoly?

    Entry barriers long run supernormal profits

    Mutual interdependence between competingfirms (important)

    Intensive non-price competition is common

    Periodic aggressive price wars

    Strong tendency for many market structures to

    tend towards oligopoly in the long run Market consolidation

    Exploitation of economies of scale

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    To name a few examples of oligopolies

    Electronic Comsumer Durables LG, Samsung, Videocon, Sony,Voltas etc

    Brewers - UB brands (Kingfisher, Zingaro and Kalyani Black) have a 48% market share, SAB'sacquired brands (Haywards, Royal Challenge,Knock Out and Foster's) delivera combined market share of 37%, all

    othersare limited to the remaining 15% Detergents HLL, Proctorand Gamble, Fena, Ghari Group, Karnataka

    Soaps & Detergents, Nirma

    Music retailing Saregama India Limited, TIPS Industries, Times Music

    Banks SBI, HDFC, Citibank, ICICI

    Entertainment Sony Pictures, Zee Telefilms, Cinevistas, BalajiTelefilms

    Electrical retail NDPL, BSES,

    Cement Manufacturing ACC, Grasim, Birla, UltraTech

    Mobile phone networks Bharti Airtel, Reliance, Vodaphone, Idea,BSNL

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    Concentration ratio & market share

    Market forms can often be classified by their concentration ratio.Listed, in ascending firm size, they are:

    Perfect competition, with a very low concentration ratio.

    Monopolistic competition, below 40% for the four-firm

    measurement.

    Oligopoly, above 40% for the four-firm measurement.

    Monopoly, with a near-100% four-firm measurement.

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    Market Share in Telecom

    G s ri r i r s lhi J

    2

    3

    5

    6

    J n' 9

    irtel

    Vo afone

    I ea

    MTN

    ircel

    Whats the concentration

    ratio of top 3?

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    The Concentration Ratios

    Steel Industry : 71% (Tata/ SW/SAIL/Ispat)

    Cement Industry : 44% (ACC/Grasim/Ultratech/Birla)

    Automobile Industry : 1% (Maruti,Hyundai,Tata, Honda)

    Mobile Handset Industry : 0% ( okia/Samsung/Ericsson/LG)

    Pizza Industry : % (Dominoes/PizzaHut/PizzaCorner)

    uice Industry : 8 % (MinuteMaid/Tropicana/Onjus)

    Multiplex Industry : 78% (BigCinemas, P R, FunCinemas, DT)

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    Use of Price and Non-Price Tools

    How Oligopolies compete apart from Price!

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    PriceWars in Oligopolistic Markets

    Price wars are concerned with raising or defending market share

    Firms depart from short run profit maximization when they engage inprice wars but can return to this in the long run

    They often happen after a period of relative price stability or whennew firms enter the market

    Low cost airlines

    ewsPaper Business

    Petrol Retailing

    Personal Computers

    Broadband internet services Online holiday industry

    Mobile Phone Companies

    Banking Industry

    Car and home insurance

    Can you think of some

    pricing strategies

    that these businesses

    tend to use?

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    Why Firms Advertise? Game Theory

    Ads

    o Ads

    Ads o Ads

    00/ 00 0/100

    100/ 0 0/ 0

    Firm 1

    Firm

    ashEquilibrium,

    where both

    firms advt.

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    LG and Samsung After Sales

    In oligopoly market, After Sales is another tool for market

    power!

    LG Launches 11 initiative :

    Call back in hours At site for repair in 1 day

    Repair within 1 hour

    Samsung : Speed, Smile and Sure

    1 hour Response

    1 day repair

    Service with Smile and Surety!

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    Brand Effects Petrol is not the same anymore!

    IOL, HPCL and BPCL oligopoly in Retail Fuel. 004

    changed the story

    Retail Fuel opened to Private sector ( 00 )

    Reliance opens multiple outlets ( 00 -04)

    Uniform product, Little differentiation, no branding Easy

    kill for Private players?

    PSUs resorted to branding fuel, and launched a huge

    marketing campaign

    Starting of Loyalty Programmes (ClubHP, XtraRewards

    etc)

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    The Kinked Demand Curve

    One model of price and output determination

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    The Kinked Demand Curve

    AR1

    MR1

    AR2

    MR2

    Rival firms assumed to follow a price cut(making demand relatively inelastic)

    but

    firms are assumed not follow a priceincrease (making demand relatively

    elastic)

    Assumes the main aim ofthe firm is to maintainmarket share

    Price

    Output

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    Assume we start out at P1 and Q1:

    Will a firm benefit from raising price above P1?

    Will it benefit from cutting price below P1?

    Deriving the Kinked Demand Curve

    Price

    Output

    P1

    Q1

    AR1

    MR1

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    Assume we start out at P1 and Q1:

    Will a firm benefit from raising price above P1?

    Will it benefit from cutting price below P1?

    Deriving the Kinked Demand Curve

    Raising price above P1

    Demand is relatively elastic

    Firm loses market share and

    some total revenue

    Price

    Output

    P1

    Q1

    AR1

    MR1

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    Assume we start out at P1 and Q1:

    Will a firm benefit from raising price above P1?

    Will it benefit from cutting price below P1?

    Deriving the Kinked Demand Curve

    Raising price above P1

    Demand is relatively elastic

    Firm loses market share and

    some total revenue

    Reducing price below P1

    Demand is relatively inelastic

    Little gain in market share

    other firms have followed suit

    Total revenue may still fall

    Price

    Output

    P1

    Q1

    AR1

    MR1

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