A Report On

OLIGOPOLY MARKET
In partial fulfillment for requirement of Economics course in two years full time Masters of Business Administration

Submitted To: Prof. Bhoosha Pandya

Prepared by: Mihir Makwana (11072) Pritesh Vadera (11168) Punit Datta(11039) Arpit Nagar(11086) Dinesh Valia(11170)

Submitted on: 28nd November

N.R. Institute of Business Management (GLS-MBA)2011-13

ACKNOWLEDGEMENT
This Report shall be incomplete if we do not convey our heartfelt gratitude to those people from whom we have got considerable support and encouragement during this report. Many people have helped, provided direction, information and advice at all stages of our Report and its our pleasure to say vote of thanks to all of them. However, with the help of guidelines by Professor Bhoosha Pandya it seems much more interesting to write this thesis than we expected.

Our first grateful thanks would be expressed to her for her friendly helping on completing our Report satisfactory.

We take rather special privilege of thanking our respected Dr. Hitesh Ruparel and all the faculties for helping us.

Also we are very much thankful for our college N.R. Institute of Business Management (GLS-MBA), which provides us a good study environment & available access to get literature. Besides our friends showed their kindly help & support in our thesis.

Pritesh Vadera (11168) Punit Datta (11039) Arpit Nagar (11086) Dinesh Valia (11170) Mihir Makwana (11072)

PREFACE
This Report of the oligopoly market described in this was prepared for understanding of oligopoly market for students studying in Master of Business Administration. The report has been completed with the help of collecting information and analyzing them. This report is a part of our course related activity in subject economics. This type of extracurricular activities would help student in their corporate life to understand the different market conditions and analyze them to take appropriate decisions.

The Reports outline is below:

Meaning of oligopoly, Characteristics of oligopoly, Colusion theory, Game theory, Kinked demand curve, Oligopoly market industry.

And at the end we have included the details of sources that we have used for help and understanding of particular topic on oligopoly market.

OLIGOPOLY

Oligopoly is a market structure characterized by a small number of large firms that dominate the market, selling either identical or differentiated products, with significant barriers to entry into the industry. Oligopoly dominates the modern economic landscape, accounting for about half of all output produced in the economy.

MAIN FEATURES OF OLIGOLPOLY:

1. Sellers are few in number 2. Any one of them is of such a size that an increase and decrease in his out put will appreciably affect the market price. Infact, the size of each sellers output in relation to the total supply is the test. 3. Each seller knows his competitors individually in each market.

Characteristics
The three most important characteristics of oligopoly are: (1) An industry dominated by a small number of large firms, (2) Firms sell either identical or differentiated products, and (3) The industry has significant barriers to entry. Small number of large firms: an oligopolistic industry is dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This generates substantial market control, the extent of market control depending on the number and size of the firms. Identical or differentiated products: Some oligopolistic industries produce identical products, while others produce differentiated products. Identical product oligopolies tend to process raw materials or intermediate goods that are used as inputs by other industries. Notable examples are petroleum, steel, and aluminum. Differentiated product oligopolies tend to focus on consumer goods that satisfy the wide variety of consumer wants and needs. a few examples of differentiated oligopolistic industries include automobiles, household detergents, and computers. Barriers to entry: Firms in a oligopolistic industry attain and retain market control through barriers to entry. The most common barriers to entry include patents, resource ownership,

government franchises, start-up cost, brand name recognition, and decreasing average cost. Each of these make it extremely difficult, if not impossible, for potential firms to enter an industry.

COLUSION
In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market form of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion for e.g. OPEC countries.

GAME THEORY

A technique often used to analyze interdependent behavior among oligopolistic firms is game theory. Game theory illustrates how the choices between two players affect the outcomes of a "game." this analysis illustrates two firms cooperating through collusion are better off than if they compete. The exhibit to the right illustrates the alternative facing two oligopolistic firms, juice-up and omnicola, as they ponder the prospects of advertising their products. In the top left quadrant, if omnicola and juice-up both decide to advertise, then each receives $200 million in profit. However, in the lower right quadrant, if neither omnicola nor juice-up decide to advertise, then each receives $250 million in profit. They receive more because they do not incur any advertising expense.

Alternatively, as shown in the lower left quadrant, if omnicola advertises but juice-up does not, then omnicola receives $350 million in profit and juice-up receives only $100 in profit. Omnicola receives a big boost in profit because its advertising attracts customers away from juice-up.But, as shown in the top right quadrant, if juice-up advertises and omnicola does not, then juice-up receives $350 million in profit and omnicola receives only $100 in profit. juice-up receives a big boost in profit because its advertising attracts customers away from omnicola. Game theory indicates that the best choice for omnicola is to advertise, regardless of the choice made by juice-up, and juice-up faces exactly the same choice. Regardless of the decision made by omnicola, juice-up is wise to advertise. The end result is that both firms decide to advertise. In so doing, they end up with less profit ($200 million each), than if they had colluded and jointly decided not to advertise ($250 million each)

THE KINKED DEMAND CURVE

The dependency and uncertainty aspect of the oligopoly leads to the indeterminateness of the demand curve. The rigid price in oligopoly leading to Kink in demand curve of an oligopolist was put forward independently by Paul Swerzy, an American economist and Hall and Hitch, Oxford economists. Taking an example of an extremely limited case of oligopoly i.e. a case of duopoly were there are only two firms, we can explain an oligopolists demand curve- known as Kinky demand curve.

Fig 1 explains the derivation of Kinky demand curve There are two demand curve in the Fig 1 DDa of firm A and DDb of firm B. The former is more elastic and latter less elastic. At point T the two demand curve intersects An oligopolists demand curve has the shape shown in the Fig 1. At point T it has a Kink. The Td part of the demand curve is more elastic and the TDb part is inelastic. Kinky demand curve is obtained by taking TD part of firm A and TDb part of firm B. In Fig 2 we have OP price at which OM is sold. The price OP is expected to remain without further change hence it is rigid. Let us understand why oligopolies do not like to reduce or increase price of their product. Reduction in price: If the oligopolist reduces the price below OP to have more sales of his product the rivals will be quick in reducing their price in order to not to lose the market. It is possible the rivals may cut price by a higher margin to capture a larger share of a market. In a process a price reduction, finally oligpolists will not increase their individual sale but may succeed in getting a share of increased total sales dye to reduction in price. Each ones gain will be a marginal one. Such weak response of demand for a charge in price OP makes TDb part of the demand curve DDb less elastic.

Increase in price: If an oligopolists increase the price above the prevailing price that is OP, he would loose his customers. The buyer would purchase from other oligopolist as the rival firm would not increase the price due to the fear of loosing the customers and consequent decline in sales. The decline on sales of the firm which increases its price depends on the type of product and availability of product in the market. A substantial decrease in demand for an increase in price above OP makes the DT part of the demand curve less elastic. Now we have the demand curve DDb which can be divided into two parts DT and TDb. The upper part that is DT is more elastic and the lower part is less elastic. The difference in elasticitys gives a kink or bends for the demand curve at point . Rigid Price : Price charged by oligopolists is expected to cover full cost and also to bring excess profit if possible. The price thus charges remains the same without further changes. A change may come with the collective decision. The fear of loosing market when price is increased not gaining much when price is reduced makes the oligopolist firm to stick to the price which they initially charge, hence the price become rigid or sticky. The demand curve at the point of price has a kink, hence the demand curve is called kinky or kinked demand curve. The degree or extent of kink depends on the change in elasticitys on the two segments of the demand curves.

OLIGOPOLY AND NON-PRICE COMPETITION:

It is viewed with far more equanimity than price cutting and is frequently quite unrestrained. The basic reason is that retaliation is much more difficult against advertising, personal selling or product improvements, etc. than against price-cutting. Patent and know how barriers, long and usually secretive gestation period, and delay in imitation are other important factors, Moreover, the sales effects of a particular promotional strategy are far less clear than the effects of price cutting. The various forms of non-price competition can be stronger and more durable products, product research and development, better quality packing and appearance, easier credit terms, home delivery, after sales service, longer period of guarantee, promotional effectiveness, dealer loyalty, etc. A companys use of non-price competitive strategy would vary according to the nature of the firms product of machine tools would not compete in the same manner as a producer of perfumes. Again, non-price competition takes the form of changing models in the motor-car industry and heavy advertisement in the soap and detergents industry. Due to liberalization of licensing, non price competition is getting more and more popular in India. Several TV manufactures are offering hire purchase/installment facilities. Many companies are discovering the virtue of after sales service. Non price competition may have some benefits to the producer in as much as higher sales induced by non price competition may lead to lower unit costs and production. But there is always a risk that changes in product designs may not be acceptable to consumers. However, from the viewpoint of consumers, non price competition is boon as they may get better quality goods and services.

CUT-THROAT COMPETITION:
The existence of idle capacity and the presence of fixed charge often lead sellers successively to cut prices to a point where none of the can even recover his cost and earn a fair return on his investment. Such situation is characterized by price warfare. Examples of cut throat competition are: 1) A price war was reported between mills producing synthetic fabrics within a month of their agreeing to avoid intra-mill price competition. Due to easy supply position of the polyester fiber in the world markets a leading manufacturer reduced his price from $7,180 a ton to $1,050 in December 1977. 2) In November 1986, Hindustan Computers spring rude shocks on its competitors by having the price of its personal computer, the busy bee from Rs.40, 000 to a mereRs.20, 000. 3) In May 1999, in bid to improve its market share Hewlett Packard India Ltd. Decided to launch the first Pentium-II tenor of computer by sub Rs. 50,000 price tag and decided to slash prices of its Briorange of PCs to below Rs. 40,000 mark. The most common causes of price wars have been: The existence of heavy inventories and resulting competition among sellers accompanying the effort to unload their supplies of merchandise. The attempt by an aggressive seller to elbow his way into the market or to expand his operations, with a resulting counteraction by other sellers striving to protect their share of the market. A decline in demand for a generic or individual firms product/service, with resulting tendency towards the granting of price concessions by sellers to gin or protect their sales volume. The use of certain merchandise items (cigarettes or books, for example) as a leader for attracting patronage, and a resulting retaliatory action by rival vendors. The introduction of a technical innovation in a market accompanied by greatly reduced operating costs and resulting pressure on prices.

UNFAIR COMPETITION:
The concept of unfair competition is more ethical than economic and its precise content is indeterminate. Unfair competition may be defined to include all of those methods (and none else) which gave one competitor an advantage or place another at a disadvantage which has nothing to do with their comparative efficiency in the production and distribution off good. Their is a general agreement about the unfairness of the following practices to take customers away from a competitor by misrepresenting the quality or the price of ones goods to interfere with the sales of a competitor by defaming him, disparaging his products, harassing his salesmen, obstructing his deliveries, damaging his goods, intimidating his customers, bribing his purchasing agents, or inducing them to break their contracts with him, or by organizing boycotts against him, etc. In general, these acts are so designed as to give a competitor an advantage unrelated to his productive efficiency.

PRICE LEADERSHIP
Price leadership is said to exist when firms fix their prices in a manner dependent upon the price charged by one of the firms in the industry. The firm which takes the initiative in announcing its price changes is called the price leader. All the other firms in the industry which either match the leaders price or some variation thereof are termed as price followers. Price Leadership arises due to following circumstances: 1. Lower Costs & Enough Financial Resources : One of the firms has a clear advantage in cost or productive capacity & enough financial reserves to stand the losses of a price war without being seriously crippled. 2. Substantial Share of the Market : Often, although not necessarily, the largest firm becomes the leader because it is presumed to have the greatest stake in the welfare of the industry, greater power to enforce follower ship & the best informed about the industry demand and supply conditions& as such best equipped to determine price policy of the entire industry. 3. A Reputation for Sound Pricing Decisions based on Better Information &more Experienced Judgement than What the Other Firms Have: In fact, price leadership frequently arises as a natural growth within an industry due to the successful profit history, sound management & long experience of the price leader in the marketing matters. The remaining firms accept the leader because of his ability to coordinate the industrys growth with that of its members. 4. Initiative : Often the company which first develops a product or area retains the price leadership whether or not it retains the largest market. 5. Aggressive Pricing: Often a company may garb leadership through lower prices& thereby snatch large & profitable markets from conservative rivals.

Examples Oligopoly

INDIAN CAR INDUSTRY

On 30 December 1998, Indica the passenger car developed by Telco. The standard petrol car was priced at Rs 259,000, and standard diesel car at Rs 285,000. Presenting Indica, Ratan Tata, Chairman of Telco, said, "We started the Indica project with a commitment to develop a car for the Indian market that could be benchmarked against the world's best in terms of features, looks and performance-and yet offers a great value proposition. A car designed for India rather than one adapted for India." Following the TATA Indica announcement on 31 December 1998 Maruti slashed prices to retain lead in middle class dream to own a car a wink away from reality'. MarutiUdyog Limited announced it has slashed prices by 5-12 per cent of its popular, top- selling models like Zen, Omni and Maruti 800 small cars. The prices of its largest selling model, Maruti 800, had been reduced by almost Rs 24,000 to Rs 185,000 from Rs 209,000. Maruti's managing Director, conceded that the price-cuts would impact negatively on Maruti's profit margins. He said ``certainly our profits will go down. But we hope to make up for this by increased salesvolumes.'' A new model, Maruti 800 EX, was launched with coil spring suspension and radial tyres priced at Rs 209,000. Seeing all these, in Bombay, Telco's chairman Ratan Tata told the gathering at Indica's launch party: ``Even for those who do not own or buy an Indica, there is good news. We've triggered price drops in Maruti, and made the car market a friendlier place for the consumer. We have done our level best to produce the bigger small car, taking into account our concern for him.' Current Updates TATA has come up with Rs 1 lakh car. This has created price war once again between leading players in automobile industry. Ford India managing director and President said Nissan-Renault combine would develop a $3000 car using Indias frugal engineering expertise. Bajaj is also experimenting with the concept of a small car. In near future, due to price war, many car companies will come up with cheap cars that will give competitions to Tata Rs 1 lakh car. FUTURE OUTLOOK The automotive industry is witnessing tremendous and unprecedented changes these days. This industry is slowly and gradually shifting towards Asian countries, mainly because of saturation of automobile industry in the western world and also due to ASEAN free trade area under which

the export tariffs are very less. The future seems encouraging for this industry in terms of the expected surge in global demand andupsurge in investments. Several trends such as overcapacity in developed markets, globalization, technology advances, regulation and environmental consideration, and market fragmentation and product proliferation will result in the rapid growth of this sector.

MOVIE DVD
There is a price war happening on the home video front. Following Moser Baersaggressively priced DVD entry into the home entertainment marketplace; its competitors too are not taking chances. Moser Baer priced its DVDs at Rs 34 for a pop while VCDs at Rs 28. The company also recently launched some 75 Hindi titles, besides hundreds of titles in regional languages. Now the competition has responded. T-Series has cut DVD prices to Rs 45 on select movies and is offering a package of three films for Rs 75. Ultra has brought down the price of its old catalogues from Rs 300 to Rs 45 even before Moser Baer started the war. Another company Shemaroo Entertainment says it may follow suit. Taurani, managing director, Tips Industries, says he will see how the response to Moser Baer pans out, and will decide a future course of action. Moser Bear, an Indian leader in digital media manufacture (DVD's and VCD's) is helping change the piracy paradigm. In a laudable initiative, they are acquiring copyright licenses to a widerange of movies and selling DVD's/VCD's for rock bottom prices. A normal DVD version of a movie costs around Rs 200 (USD 5) or upwards in India, whereas the version sold by Moser Baer costs around Rs 30-50 (USD 1).With such low margins,pirates will find it hard to survive!! "Pulling down prices may curb the price-sensitive piracy-a movie being copied and sold for 1020% of the original price.But what will be hard to tackle is the time-sensitive piracy, which happens because, according to law, there has to be a time lag between the theatrical and homevideo release of a film." Moser Baer would have to work with movie producers and film distributors to shorten the time to market a new movie release and allay their fears that the home video market could affect their business. Moreover, MoserBaer could find it difficult to provide low prices for the latest movie releases as the rights would be costlier when compared to old movies.

INDIAN TELECOM
Reliance Info com Ltd. (Reliance), India's leading postpaid mobile services provider, entered the prepaid mobile services segment by offering subscription schemes that allowed customers to make use of a digital mobile phone service at an affordable price. For a price of Rs. 3,5003 for a CDMA enabled Motorola handset, a subscriber could get a free Reliance India Mobile (RIM) prepaid connection and recharge vouchers worth Rs. 3,240. This connection was valid for six months with a grace period of another six months during which the subscriber could receive SMS and incoming calls without having to recharge the account. Similar subscription offers were

made on other RIM handsets also. If a subscriber purchased an LG handset worth Rs. 6,500,he/she got a free RIM prepaid recharge voucher worth Rs. 6,480 valid for six months. The prepaid subscription offers were seen as a revolutionary step towards making communication and data services affordable to a wider range of customers. Apart from their price, these offers included several value added services like three way conference call, national roaming, SMS based data services, STD and ISD facility, call forward and voice message service at local mobile rates, etc. Also, RIM prepaid was the only prepaid mobile service in the country that provided data applications and internet connectivity. Commenting on the innovativeness and superiority of these services, S P Shukla, President, Wireless Products and Services, Reliance, said, RIM Prepaid raises the bar for innovation, quality of service and value added services in prepaid segment of mobile telephony market. Industry observers felt that by providing high-end services at affordable prices, Reliance was creating value for its customers... Currently Reliance Communications (RCOM) recently launching ultra budget handsets with prices starting at Rs 777, While CDMA players like RCOM and Tata Teleservices have adopted handset-driven expansion strategies to drive up subscriber base, this is the first time that a GSM player is venturing into this space on a pan-India level. Bharti joins race, to bundle handsets with connections on 22 Jun, 2007. In a major shift in strategy, Indias largest mobile operator BhartiAirtel is set to bundle handsets with mobile connections. This means that the company will provide a handset with a new connection at partly subsidized rates. Vodafone Essar, which will spend nearly Rs 250 crore on a high-profile brand transition from Hutch to Vodafone being unveiled on Thursday, is poised to launch cheap cellphones in India under the Vodafone brand. It will also launch co-branded handsets sourced from major global vendors. Bhartis move follows the recent announcement by its main competitor in the GSM space Vodafone. This said it will launch a series of ultra low-cost bundled handsets to get abigger pie of the rural Indian market and increase its market share. He also dismissed the argument that Bhartis foray into the bundled space was driven by its desire to counter Vodafones entry into India with ultra-cheap handsets. Lifetime plan: Tata Teleservices, which pioneered lifetime pre-paid services in October 2005, saw a rapid increase in subscriber base at a time when it was struggling for stability in the fast- growing sector. Soon, other operators including Bharti and RCOM too launched such services. In between Airtel has introduced first lifetime plan with installment plan to attract the lower and middleclass people which is later on followed by Reliance. Right now Reliance has introduced lifetime plan in 199 which will lead to cost leadership.

Roaming rate: February, TRAI reduced the roaming charges, as per which, the maximum permissible charge for roaming calls, irrespective of terminating networks and tariff plans, was set at Rs 1.40 per minute for outgoing local calls, Rs 2.40 for outgoing national long distance calls and Rs 1.75 for incoming calls. The telecom regulator had already removed rentals. Telecom major BhartiAirtel has reduced roaming tariffs by up to 56 percent and also scrapped the rental for roaming services. May 22: Starting a price war, Reliance Communications has slashed its roaming rates by about 70 per cent at the lowest 40 paise a minute on some select plans, while incoming has been made just Re 1 per minute. The public-sector telecom operators, MTNL and BSNL, have slashed national roaming charges to Re 1 for incoming calls and Re 0.40 for outgoing calls within any visiting network as part of a new post-paid plan to be launched on June 3. ISD rates to US, Gulf: In May, leading private player BhartiAirtel dropped ISD charges to the US and Canada after which an Airtel mobile user could call at Rs 1.99 per minute with the Airtel STD and ISD Calling Card worth Rs 2,245. Rel-Comm also had cut its rates to the US and Canada to Rs 1.99 per minute on its 'Reliance Global Call Card' of Rs 1,900. It had recently cut call charges to the Gulf to Rs 6.99 per minute. Triggering another price war in the ISD segment, state-run telecom major BSNL has reduced call rates to the US, Canada and the Gulf to Rs 1.75 per minute and Rs 6.75 per minute, respectively, slightly lower than the rates offered by private firms.

STEEL INDUSTRY
Mittal taking over Arcelor: On the consolidation front, the steel industry was focused on Mittals bid to gain control over Arcelor. Mittals victory in the battle for global steel industry control is giving the steel industry a new direction. The worlds number one and two producers have combined and this will go a long way to push consolidation. The now combined Arcelor- Mittal would produce more 10 percent of the world output, close to 100 million tons of steel. This would give an increased pricing power for producers and suppliers, and decrease the fragmentation. Arcelor-Mittal have become the largest steel maker in the world by turnover as well as by volume. The new steel company will have about 334,000 employees worldwide, and revenues close to $70 billion. Arcelor-Mittal is more than three times larger in terms of production of and revenue from steel, than its nearest rival Nippon Steel Corp. of Japan. The combined company will now have a significant advantage in setting prices and negotiating the terms of various contracts with key customers. Tata taking over Corus:

When the news came out that Tata is taking over Corus it was not accepted by the public or rather the investor in a positive way. The stock price fell by around 7% in 15 days time. The deal was finalized at about 18.2 billion dollar. This proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with the strategy of growth through international expansion This made Tata the 5th largest steel producing country in the world. The sales have increased to Rs 63,587/- crores for the first half of FY08. Price reduction undertaken by Tata Steel (Aug 23, 2004): Tata Steel cuts price by Rs 2,000 per tone. "It is expected that this price reduction by Tata Steel will, in turn, contribute in arresting or moderating the pressures on price increases by major users on their products," company chairman Ratan N Tata said in a statement. Hoping that other steel manufacturers and members of the steel trade would also display a sense of corporate responsibility by rolling back their prices in the interest of curbing inflationary trends. Only Ispat Industries came out in support, admitting there was a case for a reduction in prices in the domestic market to control inflation Global market demand and supply: Demand rose from 850mmt in 2000 to 1060mmt in 2005 to 1155mmt in 2007 whereas supply rose from 840 in 2000 to 1070 in 2005 to 1185 in 2007 the main reason for this change is due to the rising demand for the steel all over the world. The main reason is due to the rising demand for steel in China other Asian countries

BIBLIOGRAPHY:
Wikipidea.org Google.com