Economics Oligopoly

Main stinting feature films of an Oligopoly and key economic theories of hurt effectuateing. This part of the coursework aims to identify and explain the outstanding economic features of an Oligopoly and in addition the key economic theories which influence the price of a product or ser frailty. 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 foodstuff social system is characterised by a few quicks and many a(prenominal) buyers, where the bulk of market total is in the control of relatively few large impregn commensurates who in act upon sell to many small buyers. To describe the degree of oligopoly, concent dimensionn ratio is often utilized. Concentration ratio is the measure of the market sh ar of the largest quad securelys in the industry expressed as a serving. A lowly concentration ratio suggests a gr aduate(prenominal) level of opposition and vice versa for.As there be few players dominating the industry, each player or an oligopolist is said or likely to be aware of new(prenominal)s course of actions. The finis taken by mavin player seems to affect the decision taken by others and strategical planning by the firms needs to take into accountancy the likely response of other participants (Wikipedia, 2010). For example, a proper game of chess game depends on how well you read your opponents moves, similarly in oligopoly strategies are devised buttocksd on the moves of competing market firms.The reason for existence oligopoly as enjoind by Maunder et al (1991) is for the achievement of economies of scale. Firms tend to quash their average woo of production by increasing their scale of mathematical process and since the small firms make water higher average costs, they tend to go bug 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 oligopoly is the bend of firms. Even though there are a large number of firms operating in a particular industry, only a handful of firms hold the major(ip)(ip) serving 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 scheme undersidenot be independent of each other. opposed monopoly, where the monopolist need not worry about the reaction of its rivals as there are none, an oligopolist takes into consideration the possible reactions of all rival firms. For example, a company considering a price reduction of its products may wish to prefigure the chances of price reduction by the rival company and hence starting signal a price war. . Profit Maximization Condition The firms in an oligopoly more often than not agree to co-operate and act as one monopolist as it generates high profits (Begg and hold 2007). This kind of formal collusive agreement is called a cartel. An oligopoly maximises profits where the marginal revenue equals the marginal cost. This is also known as profit maximization condition. Price ELASTIC UNIT ELASTIC P MC, AC PROFIT MAXIMIZING OUTPUT O MR Quantity (Source Begg and Ward 2007) d.Perfect Knowledge Oligopolists are said to have a perfect friendship about their cost and demand functions but a lesser instruction about other firms (Wikipedia, 2010). e. Entry Barrier One of the main important features of oligopoly also is the entry roadblock. There are high entry barriers that stop a new firm from entering a market. For example, the barriers mint be the economies of scale, access to expensive and complex technology, lower costs for an established firm, label loyalty, patented production process and strategic action by officeholder firms etc.The table below gives the market concentration in different 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 against each other using non price competition in order to gain the utmost revenue. There are other various ways in which the firms fix the price. One of them being mum collusion, where the firms agree on a price set by an established leader. This is also known as plethoric 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 muddle in tacit collusion is average cost pricing, where producers add a certain percentage of profit on top of average costs and price benchmarking, where firms aerodynamic lift the price only up to a benchmark already set.Price fixing is achieved by the compe ting firms coming together on a platform where they privy agree 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(a) firm will not be the said(prenominal) 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 ahead with surplusage supply which can lead to a price war and inconsistent revenues to the industry. Even without overt collusion firms in an oligopoly are able to moot a point of profit maximisation when they behave in a manner reflected in Nash Equilibrium (Begg and Ward 2007). 2B) consider to Home (DTH) telly industry in India acting as an oligopoly. Ind ia has a total goggle box population of about 135 million of which about 108 million have an access to cable and satellite television (Plugged in, 2010).The total DTH sub base at the end of first quarter in the year 2010 was 23 million ( base 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 modern years after a monopolistic reign by strike 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 watcher TV by zed 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 Sun 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 diminutive or no product differentiat ion. Amongst all the players, Sun Direct has fundamentally remained a regional operator who made a late unveiling in the national scene. The content or the conduct are same with all the operators barring few omissions and additions. The DTH industry market plowshare 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 above we can see that Dish TV, TataSky and Sun Direct together hold the maximum market share with over 75%. (Source http//www. slideshare. net/) To confirm the oligopoly, we can use the Herfindahl-Hirschman exponent or the HHI. It measures the size of the firms in relation to the industry and also indicates the add together 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 valu e of H we can answer that this industry is an oligopoly. Although there is no indication of an overt collusion in the industry, a closer look at their price plan (fig 1. 1) can lead us to a strategic or tacit apprehensiveness between the players. The market is abuzz with marketing 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 due 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 separate PricePlan(inINR)/month Dish TV 135. 0 TataSky 150. 00 Sun Direct 115. 00 Videocon 136. 00 trope 1. 1 (Source Company websites, 2010) Now as in any oligopoly, it has to be supported by entry barriers, both 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 related sectors such as telecom, media it gives them a strategic advantage in terms of distribution and content.For any new starter 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 crude edge technology entered into the market in the presence of established players. The slipperiness edge technology proved to be a barrier breaker. Videocon managed to establish tel evision sets with set top boxes which helped it develop 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). economic science, 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 Acc essed 22/11/2010 Wikipedia, (2010). Oligopoly. http//en. wikipedia. org/wiki/Oligopoly Accessed 21/11/2010)