2A. Features of an oligopoly and cardinal economic theories of monetary value repair:
Introduction:
This portion of the coursework aims to place the cardinal characteristics of oligopolistic competition in market and the economic theories related to monetary value repairing. In monopoly one company controls the major market portion while in oligopoly ; market is controlled by more than one house or a group of little houses. This analysis describes the characteristics of oligopoly and kinked demand curve in oligopolistic state of affairs.
It besides explains the pricing theories in context with game theory and Nash Equilibrium.
Oligopoly:
In oligopoly, big per centum of market is captured by taking houses, bring forthing same merchandise or services. Such houses agree to collaborate and move as individual monopoly therefore doing a trust to bring forth maximal net incomes.
Key characteristics of oligopoly are:
Same merchandise or service by the group of dominated houses.
Branded merchandise by each house.
Entry barriers.
Mutuality among the houses.
Non-price competition.
Small houses may be in oligopoly but the market is normally controlled by big participants holding more than half of the industry end product.
Each house produces branded merchandise, hence making high competition ensuing in high selling and advertisement costs.
Entry barriers such as authorities ordinances, patents, apparatus cost and undivided resource ownership, restricts a new entrant to come in the oligopolistic market.
Mutuality means that each house must take into history the likely reactions of other houses in the market when doing pricing and investing determinations ( Begg & A ; Ward ) . Such an uncertainness in market can be resolved by the usage of game theory which is applied by a house taking history of the determinations made by the rival house.
Non-price competition among the oligopolistic houses, purpose at increasing their market portion significantly e.g. media advertisement, promotional offers and price reductions, usage of engineering, client friendly services such as ego scanning machines and client trueness benefits etc.
Kinked demand curve theory
Harmonizing to Paul Sweezy ‘s premises, if an oligopolistic raises its monetary value, the challengers are improbable to follow the same suit because maintaining the monetary values constant will increase their market portion. Gross of the house that raised its monetary value will fall by reasonably big sum, doing the demand curve comparatively elastic.
However if the house reduces the monetary values, it is extremely likely that the rivals will besides cut down the monetary values.
Beginning: Tutor2u Limited,2010
This non-collusive theory explains the stableness one time the monetary value is set but fails to explicate how the stable monetary value is achieved. In oligopolistic state of affairs ; each company has an option either to get down a monetary value war with the rival or to collaborate. Game theory trades with the anticipation of likely results of the games of scheme in which challengers have uncomplete information about other ‘s connotations e.g. Prisoner ‘s quandary is a state of affairs in which two suspects are interrogated in separate suites, depicts an illustration of game theory. Each suspect has simple options either confesses and bears the effects or denies and hopes the other has besides done the same.
To explicate which scheme the houses will follow can be explained by Nash equilibrium, in which each house considers its challengers response before taking their ain scheme. ( Begg & A ; Ward, p.131 ) Equilibrium occurs when each participant takes the best possible action for themselves given the action of the other participant. Nash equilibrium is a state of affairs in which none of the houses could better pay-off, given the challengers schemes e.g. house A would non be able to better net incomes, given house B ‘s scheme and frailty versa.
Each house may indulge in high or low monetary value schemes. If both houses collude to follow high monetary value scheme, both would give above normal net incomes and if both adopt low monetary value schemes, both would give normal net incomes. Suppose in long tally, each house fails to swear the challenger and indulge in low monetary value scheme to increase its net incomes and the rival adheres to the high monetary value than the rival may confront heavy loss. Such a fright that the rival may follow a detrimental scheme exists within the houses and it is hence in the involvement of both the houses to follow a low monetary value scheme. Such a state of affairs is called Maximin scheme where the participant following the scheme outputs maximal net incomes, presuming that the challenger may bring down maximal harm.
At times a group of oligopolists engage in an open understanding to repair the monetary values and the degree of production. Such an open collusion, in order to move as a monopolizer, is called conniving oligopoly and aims to gain maximal net incomes by curtailing the production and increasing the monetary values. Price alterations of one house are sometimes matched by the other house and the house originating the monetary value alteration is called monetary value leader ; such collusion is called as silent collusion.
Rectangle abcd depicts the trusts ‘ net incomes.
Trusts are likely to interrupt in long tally as the members are intended to rip off sometime or the other by increasing production. By bring forthing more end product than decided, the member can increase its portion from trust ‘s net income. If each member darnels than trust ends up in gaining monopoly net incomes and thereby go forthing no ground for the house to stay in the trust.
Decision
Mutuality is the cardinal characteristic of oligopolistic market. The result of any scheme by a house is unsure and the monetary value competition may take to price-war. Entry barriers help the dominant houses to keep their control over the market. Formation of trusts may give short term additions but are risky in long tally. It is besides observed that non-price competition may profit oligopolists to increase market portion and sustain in long term.
2B.Extent to which telecom sector in India is an oligopoly and monetary value finding scheme
Introduction
Indian Telecommunication industry is the 2nd largest and fastest telecom industry in the universe with around 706.37 Million telephone ( landline and nomadic ) endorsers and 670.60 Million mobile phone connexions as of Aug2010.Dominance of few major participants has made this sector perfect instance of Oligopoly in India. Due to the presence of limited figure of participants, each participant is cognizant of the challenger ‘s actions and therefore the determinations of one house is affected by the action of the other house.
Service Provider wise Market Share as on 31-7-2010
Beginning: Telecom Regulatory Authority of India
Concentration Ratio
Players
Market Share ( % )
Bharti ( Airtel )
21.34
Reliance
17.37
Vodafone
17.08
Tata
11.47
Concentration Ratio
67.26
Table above shows that four house concentration ratio is above 40 %
Barriers to entry in Telecom
The high entry barriers in telecom sector as mentioned below turns the market oligopolistic in nature.
High capital investing required by the new entrant for initial apparatus
competition with good established operators Airtel, Vodafone, Reliance and Tata
license fee on gross sharing footing plus one clip entry fee
continuously emerging engineering e.g. VOIP,3G
lowest duties in the universe
geting spectrum
high initial operating losingss. Lower rates makes it longer for the new entrant to accomplish
equilibrium as most new endorsers churn from one web to another.
Low Duties: Facet of Competition
Indian telecommunications is the lowest cost market in the universe. The cut pharynx competition among operators has left no range of holding individual monetary value leader in market as all the operators compete for lower monetary values and high client base. Increased figure of participants has resulted in increased monetary value wars among the rivals, with consumer being the donee. Such factors declines the net income borders which are expected to consolidate the industry.
Offset of monetary value wars
In mid 1890ss, at the start of cellular services in India, operators used to bear down to a great extent for the entrance calls on their web. After the launch of BSNL ‘s free entrance call installation, other operators followed the same suit. Still the major ball of client remained with BSNL due to its low call rates and better web coverage.
With the launch of Reliance Communications as a new telecom giant, teledensity in India raised tremendously to 8.2 % in 2004 from that of 2.32 % in 1999 and to 54.10 % in April 2010 ( as per TRAI ) .Introduction of low cost cellular services, along with French telephone, made Reliance the monetary value leader in telecom industry pulling a immense ball of client base. Other taking service suppliers like Airtel, Vodafone and Hutch had to fit their monetary values with that of Reliance.
To supervise and modulate the abnormalities in duties charged by telecom operators, Telecom Regulatory Authority of India was formed by the authorities of India. The Telecommunication Tariff Order 1999 started worsening duties and influenced the rapid growing of cellular phone users. TRAI is besides responsible to supervise and forestall the formation of trusts by cellular operators in the screen of associations such as COAI and AUSPI.
Beginning: Telecom Regulatory Authority of India
Beginning: Telecom Regulatory Authority of India
Graphs show the per centum diminution in national and international call rates. This occurred due to intense competition that generated after TRAI ordinances.
Stairss taken by TRAI that affected duties:
Interconnect Usage Charge – collectible by one operator to another for utilizing their web
Decrease in Access Deficit Charge besides contributed in conveying down the call rates
Naming Party Pays government fixed low expiration charges further reduced monetary values
Unified Access Service License gave operators the privilege to find duties
Impact of price-war
Price war among operators hits the gross growing significantly. For the new entrants, the break-even point at which disbursals peers ‘ gross besides increases.
The diminution in monetary values due to competition increases the consumer base to unsustainable degrees. Previous informations suggests that merely 50 % of the endorsers are new and the remainder are either churning the web or maintaining an extra connexion.
Graph shows addition in demand with lessening in monetary value
Table below shows market gross growing in footings of MRPU.
major players.jpg
Marginal Revenues Per Minutes ( MRPU )
Graph below depicts the growing in use actuated by decrease in duties. Apart from low call rates, reduced cost of French telephones and free French telephone installation by service suppliers besides contributed to the addition in client base.
Beginning: Telecom Regulatory Authority of India
Non-Price Competition
Recent launch of per 2nd charge option by Tata, pushed its challengers to indulge in non-price competition.
Most of the operators have now started offering similar per 2nd charge to its clients and this has resulted in making more force per unit area on borders. Value added services and client friendly installations like on-line payment, internet entree and better web coverage constituted in non-price competition.
Decision
The above research and analysis of informations implies that Indian telecom industry exist in oligopolistic state of affairs where few major participants are holding big portion of the market. Strategic alteration of one operator impacts the scheme of other participants, ensuing in mutuality among operators. High entry barriers restrict new entrants to come in the industry and regulative authorization like TRAI proctors the formation of trust in the industry. Analysis besides shows that competition in oligopolists is non merely due to price-wars but other factors such as better services and low cost of French telephones besides influence a big client base.
