Economics Oligopoly

Main economic gass of an Oligopoly and key economic theories of determine fixing. This part of the coursework aims to happen upon and explain the main economic features of an Oligopoly and besides the key economic theories which influence the price of a reaping or service. This part deals with the theoretical aspects of Oligopoly and the later part emphasizes on the practical applications of the theories and oligopoly features.According to Pass et al (2000), Oligopoly, a type of commercialize structure is characterised by a few firms and many buyers, where the bulk of market bestow is in the control of relatively few large firms who in turn sell to many pure buyers. To describe the degree of oligopoly, concent ration ratio is often utilized. Concentration ratio is the measure of the market get by of the largest four firms in the patience expressed as a percentage. A low concentration ratio suggests a high-pitched level of argument and vice versa for.As in that location a re few players dominating the industry, for each cardinal player or an oligopolist is said or correspondingly to be aware of separates course of actions. The decision taken by atomic number 53 player seems to affect the decision taken by others and strategic planning by the firms needs to take into account the likely response of other participants (Wikipedia, 2010). For example, a proper game of swindle depends on how well you read your opponents moves, similarly in oligopoly strategies are devised unintellectuald on the moves of competing market firms.The reason for existence oligopoly as stated by Maunder et al (1991) is for the masterment of economies of scale. Firms ladder to reduce their average speak to of production by increasing their scale of operation and since the small firms gestate higher average costs, they tend to go out of business or be absorbed by the larger ones. The features of oligopoly are- a. Number of Firms-The very important feature of an oligopo ly is the number of firms. Even though there are a large number of firms operating in a particular industry, only a handful of firms hold the major manage between them. . Interdependence A very distinctive feature of an oligopoly is interdependence. When a very few large firms operate in a particular industry, their activities or schema cannot be independent of each other. Unlike monopoly, where the monopolist need not worry nigh the reply of its rivals as there are none, an oligopolist takes into consideration the possible reactions of all rival firms. For example, a fraternity considering a price reduction of its products may wish to estimate the chances of price reduction by the rival company and hence starting a price war. . Profit Maximization Condition The firms in an oligopoly generally check to co-operate and act as one monopolist as it generates high profits (Begg and Ward 2007). This good-hearted of testicle collusive mark offment is called a cartel. An oligopol y maximises profits where the marginal revenue equals the marginal cost. This is also cognize as profit maximization condition. Price ELASTIC UNIT ELASTIC P MC, AC PROFIT maximizing OUTPUT O MR Quantity (Source Begg and Ward 2007) d.Perfect Knowl meet Oligopolists are said to have a better knowledge about their cost and demand functions but a littleer information about other firms (Wikipedia, 2010). e. Entry Barrier One of the main important features of oligopoly also is the entry barrier. There are high entry barriers that restrain a bleak firm from entering a market. For example, the barriers can be the economies of scale, admission price to expensive and complex technology, lower costs for an established firm, brand loyalty, patented production process and strategic action by incumbent firms etc.The t subject below gives the market concentration in contrary industries. As discussed earlier, the large few firms form a cartel and set a price. Once the members of the cartel agree on the price, they compete a raisest each other using non price competition in order to gain the maximum revenue. There are other various ways in which the firms fix the price. One of them macrocosm tacit collusion, where the firms agree on a price set by an established admiter. This is also known as preponderating firm price leadership as the price setting firm is the dominant firm in the industry.The other way is the barometric firm price leadership, where the price leader is the one whose prices reflect the market conditions in the most stable form (Sloman et al, 2010). To fix prices, the producers must be able to control the market supply. The other forms of price fixing in tacit collusion is average cost determine, where producers add a certain percentage of profit on top of average costs and price benchmarking, where firms raise the price only up to a benchmark already set.Price fixing is achieved by the competing firms orgasm together on a platform where they can a gree on a common pricing and production strategy thus acting in a manner in which a monopoly operates. This kind of collusion is known as cartelisation. Cartels although banned in many countries, is difficult for the enforcement agencies to gather evidence and penalise the participants. The quantity for the cartel and the individual firm will not be the same as one firm individually will have the scope for further increase in productivity to achieve a situation where the marginal cost equals the marginal revenue.In such cases firms may decide to go out front with excess supply which can lead to a price war and inconsistent revenues to the industry. Even without subject collusion firms in an oligopoly are able to reach a point of profit maximisation when they execute in a manner reflected in Nash Equilibrium (Begg and Ward 2007). 2B) look at to Home (DTH) television industry in India acting as an oligopoly. India has a total television population of about 135 jillion of which a bout 108 million have an access to cable and satellite television (Plugged in, 2010).The total DTH sub low at the end of first quarter in the year 2010 was 23 million ( process TV India Ltd, 2010) which was about just 1 million in the year 2006. Indian DTH industry has seen a flurry of activities in the recent years after a monopolistic reign by Dish TV for a couple of years. It is currently in a state of Oligopoly with the top four operators controlling nearly 80% of the total market. The major players in the market are Dish TV by Zee group, TataSky- a joint venture by Tata and Star TV, Big TV by Anil Dhirubhai Ambani Group, Digital TV by Bharati Telemedia and SUN Direct from fair weather TV.Since there are only 3 major players in the DTH market, Indian DTH industry is an oligopoly. (Indiadth, 2010) The product offering by the rival firms are more or less similar in nature with little or no product differentiation. Amongst all the players, Sun Direct has essentially remained a re gional operator who made a late debut in the field scene. The content or the carry are same with all the operators barring few omissions and additions. The DTH industry market office is as follows. BRAND MARKET SHARE Dish TV 30%TataSky 22% Sun Direct 25% Big Tv 13% Airtel 8% D2H 2% (Source http//www. pluggd. in/dth-industry-in-india-analysis-297/) From the data supra we can see that Dish TV, TataSky and Sun Direct together hold the maximum market share with over 75%. (Source http//www. slideshare. acquit/) To confirm the oligopoly, we can use the Herfindahl-Hirschman index or the HHI. It measures the size of the firms in relation to the industry and also indicates the amount of competition between them. Mathematically, (Adapted from Pass et al, 2000)Here Si = market share of firm i in the market and N is the number of firms. Hence H = 302 + 222 + 252 + 132 + 82 + 22 H = 2246. With this value of H we can conclude that this industry is an oligopoly. Although there is no indication of an unresolved collusion in the industry, a closer look at their price plan (fig 1. 1) can lead us to a strategic or tacit understanding between the players. The market is abuzz with merchandising drives to garner market share and the customer is currently loaded with freebies like free installation, free channels and the like.Going by the level of investment and infrastructure the operators need to garner as much subscriber base as possible to be in a profitable proposition. They are however aware of the competition and are refraining from a price war. Such behaviour of the operators is characteristic of a non-price competition in Oligopoly. This is repayable to the interdependency of firms in the oligopoly and the strategic behaviour can also be referred to the Nash Equilibrium (Begg and Ward 2007). (Source Slideshare. net/researchonIndia) Brand Name PricePlan(inINR)/month Dish TV 135. 0 TataSky 150. 00 Sun Direct 115. 00 Videocon 136. 00 Fig 1. 1 (Source Company websites, 20 10) Now as in any oligopoly, it has to be supported by entry barriers, both(prenominal) endogenous and exogenous. The natural barrier of entry in this particular industry is primarily associated with government licensing and also the intensity of capital investment required. Given that all the DTH operators are already established players in think sectors such as telecom, media it gives them a strategic advantage in terms of distribution and content.For any new entrant it could pose as a strategic entry barrier. Indian DTH market has constantly been attracting different players over the years given the increasing number of television subscribers. Although there have been entry barriers, companies like Videocon along with its cutting edge technology entered into the market in the presence of established players. The cutting edge technology proved to be a barrier breaker. Videocon managed to build television sets with set top boxes which helped it break-dance its own customer base. References Begg, D. , and Ward, D. (2007). political economy for Business, 2nd edition. Berkshire McGraw Hill Publication. Christopher Pass, Bryan Lowes and Leslie Davies (2000). Economics, 3rd edition. HarperCollins Publishers. DTH, (2010). http//www. pluggd. in/dth-industry-in-india-analysis-297/ Accessed 21/11/2010 Dish TV, (2010). http//www. dishtv. in/packages. aspx Accessed 21/11/2010 Indiadth, (2010). http//www. indiadth. in/ Accessed 22/11/2010 Maunder, P. , Myers, D. , Wall, N. , and Miller, R. L. 1991) Economics Explained, 2nd edition. Collins Educational. Sloman, J. , and Hinde, K. (2007). Economics for business, 4th edition. Essex Pearson Education Limited. Sun Direct, (2010). http//www. sundirect. com/packages. php Accessed 22/11/2010 Tata Sky, (2010). http//www. tatasky. com/channel-packages. html Accessed 22/11/2010 Videocon, (2010). http//www. videocond2h. com/wsc/packages. html Accessed 22/11/2010 Wikipedia, (2010). Oligopoly. http//en. wikipedia. org/wiki/Oligopoly Accessed 21/11/2010)