PROJECT REPORT

ON
OLIGOPOLY
IFIM B-SCHOOL, BANGALORE
Section B,

GUIDE CERTIFICATE
This is to certify that the Project Report entitled “TRAINING AND

DEVELOPMENT OF HDFC BANK” submitted by Group 1 Students for the

award of the degree of Bachelor of Commerce from Siddheswar College,

Amrada Road, Balasore, Odisha, India is a bonafide record work carried out

by them under my guidance. Neither this dissertation/ Project report nor any

part of it has been submitted for any degree or academic award elsewhere.

(Mr. B.C JATI)

Lecturer in Commerce

ACKNOWLEDGEMENT
Whatever we do and whatever we achieve during the course of our limited life
is just not done only by our own efforts, but by efforts contributed by other
people associated with us indirectly or directly. We thank all those people who
contributed to this from the very beginning until its successful end.

We sincerely thank Dr. SK Gayasuddin (Principal, Siddheswar College,

Amarda Road, Balasore), person of amiable personality, for assigning such a
challenging project work which has enriched our work experience and getting
us acclimatized in a fit and final working ambience in the premises.
we would also like to give a special vote of thanks to Mr. Raj Kiran Dash
Branch Managers, HDFC Bank, Remuna, Balasore and the staff members for
helping us all throughout our project providing us all sorts of necessary details
when required and for encouraging us to do our work.

We acknowledge our gratitude to Mr. B.C JATI (Lecture in Commerce), for

his extended guidance, encouragement, support and reviews without whom this
project would not have been a success.

Thanking you

B.com 6th Semester Group 1 Students

Siddheswar College, Amarda Road
 Abstract
An oligopoly is a type of a market structure in which there are only a few producers.
Oligopolies are prevalent in today’s reality. They are competitive: oligopolists compete with
each other for sales, yet they are imperfectly competitive. They do compete for sales, but also
possess some market power: the ability to raise market prices. Each oligopolist is not a
monopolist, yet it can affect market prices; its decisions about how much to produce affect
market prices. Product differentiation is also of utmost importance in oligopolies. In my
paper I present the basic analysis of oligopolies.
The study of economics provides various benchmarks against which real world practice
can be measured, particularly with reference to efficiency and the welfare of society as a
whole. The major way this is done is by providing some notion of "ideal" competition and
movements away from that ideal. The perfectly competitive form is the ideal whereas
the exact opposite is monopoly. In this form, the sole supplier has control of the
production of a particular good which implies that it is a price setting firm and is able to
"control" his market. Reasons for market power arising will be discussed.
The lack of a supply curve in terms of the formal analysis we use in economics does
not imply that we are unable to study the market form and make comments about it.
The main concern for economists is to show how monopoly does diverge from perfect
competition and what regulators can do to try and ensure that the monopolist does
not abuse its market power. The analysis of the various options of price
control and taxation will highlight how difficult this really is. This is further complicated
by the use of price discrimination by monopolists to seek to capture consumer
surplus thus further reducing the welfare of the consumer.
Towards the other end of the spectrum we can examine a market form which is not
monopolistic but which displays some of the same features such as high market power,
price exceeding marginal and average cost in the long run and barriers to entry. This
is oligopoly. In some respects, this is the most difficult form to study as economists
have yet to agree on "the" model that explains the actions of firms in an oligopoly. This
is mainly because simple discussion of price and output choices is somewhat limited. The
key to understanding oligopoly is that non-price competition can be vital (e.g.
advertising, collusion, cartels, branding) and that the reactions of competitor firms is
taken into account when production and pricing decisions are made. In this section we
will look at historical models of oligopoly and how they have developed and will focus on
the emphasis given to the way firms react to one another. The Cournot model is then
highlighted with discussion of its applicability and faults before the dominant price
leadership model is explained. Moving on to price competition through the Bertrand
model provides a lead into a brief exploration of game theory. This lies at the heart of
current analysis in microeconomics and the introduction to the Prisoners'
Dilemma and Nash equilibrium will provide a pathway in to second year
microeconomics.

CONTENTS

ACKNOWLEDEGMENT……………………………...3
INTRODUCTION………………………………………4
IMPERFECT COMPETETION……………………….4
CHARACTERISTIC OF AN OLIGOPOLY MKT…..5
EXAMPLE OF OLIGOPOLY………………………….6
CASE STUDY…………………………………. ………6
CONCLUSION…………………………………………9

ACKNOWLEDGEMENT

We would like to express our sincere gratitude to all those who have been
instrumental in the preparation of this project report.

We would like to thank Mrs. Kavita Mathad, Professor Economics Department,

for her guidance and support in our project.

We are deeply thankful to IFIM B-School and its Management for its support in
the project.
Last but not least, we would like to thank The Almighty, our parents and friends
for their help and support that has largely contributed to the successful
completion of the project.

INTRODUCTION
An oligopoly is a market form in which a market or industry is dominated by a
small number of sellers (oligopolists). The word is derived from the Greek oligo
'few' plus -opoly as in monopoly and duopoly. Because there are few
participants in this type of market, each oligopolist is aware of the actions of
the others. The decisions of one firm influence, and are influenced by, the
decisions of other firms. Strategic planning by oligopolists always involves
taking into account the likely responses of the other market participants. This
causes oligopolistic markets and industries to be at the highest risk for
collusion.

Oligopolistic competition can give rise to a wide range of different outcomes. In

some situations, the firms may employ restrictive trade practices (collusion,
market sharing etc.) to raise prices and restrict production in much the same
way as a monopoly. Where there is a formal agreement for such collusion, this
is known as a cartel. A primary example of such a cartel is OPEC which has a
profound influence on the international price of oil.

Firms often collude in an attempt to stabilize unstable markets, so as to reduce

the risks inherent in these markets for investment and product development.
There are legal restrictions on such collusion in most countries. There does not
have to be a formal agreement for collusion to take place (although for the act to
be illegal there must be a real communication between companies) - for
example, in some industries, there may be an acknowledged market leader
which informally sets prices to which other producers respond, known as price
leadership.

In other situations, competition between sellers in an oligopoly can be fierce,

with relatively low prices and high production. This could lead to an efficient
outcome approaching perfect competition. The competition in an oligopoly can
be greater than when there are more firms in an industry if, for example, the
firms were only regionally based and didn't compete directly with each other.

IMPERFECT COMPETETION
Imperfect competition includes industries in which firms have competitors but
do not face so much competition that they are price takers.

Types of Imperfectly Competitive Markets

Oligopoly: Only a few sellers, each offering a similar or identical product to

the others.

Monopolistic Competition: Many firms selling products that are similar but
not identical.

CHARACTERISTICS OF AN OLIGOPOLY MARKET

 Few sellers offering similar or identical products

 Interdependent firms
 Best off cooperating and acting like a monopolist by producing a small
quantity of output and charging a price above marginal cost
 There is a tension between cooperation and self-interest.

There is no single theory of how firms determine price and output under
conditions of oligopoly. If a price war breaks out, oligopolists will produce and
price much as a perfectly competitive industry would; at other times they act
like a pure monopoly. But an oligopoly usually exhibits the following features:

1. Product branding: Each firm in the market is selling a branded

(differentiated) product
2. Entry barriers: Significant entry barriers into the market prevent the
dilution of competition in the long run which maintains supernormal
 profits for the dominant firms. It is perfectly possible for many smaller
firms to operate on the periphery of an oligopolistic market, but none of
them is large enough to have any significant effect on market prices and
output
3. Interdependent decision-making: Interdependence means that firms
must take into account likely reactions of their rivals to any change in
price, output or forms of non-price competition. In perfect competition
and monopoly, the producers did not have to consider a rival’s response
when choosing output and price.
4. Non-price competition: Non-price competition s a consistent feature of
the competitive strategies of oligopolistic firms.

Above the kink, demand is relatively elastic because all other firm’s prices
remain unchanged. Below the kink, demand is relatively inelastic because all
other firms will introduce a similar price cut, eventually leading to a price war.
Therefore, the best option for the oligopolist is to produce at point E which is
the equilibrium point and the kink point.

EXAMPLE:
INDIAN OIL AND GAS SECTOR
Key Players Analyzed
Oil India Ltd., Oil and Natural Gas Commission, Indian Oil Corporation,
Hindustan Petroleum Corporation Ltd., Bharat Petroleum Corporation Ltd., Gas
Authority of India Ltd., and Reliance Industries Ltd.

CASE STUDY:

In 2007-08, India’s five largest companies were oil companies. Four out of five
were government owned. The sales of the sixth—Essar Oil—were negligible.
Reliance’s share of sales was 17%, but 60% of its output was exported. It does
not require much analysis to conclude that the Indian oil industry is an
oligopoly, and that it is dominated by government firms. The retail market for
petrol and diesel is almost entirely a government monopoly. This monopoly also
affects exploration and production as a number of companies that have struck
oil or gas cannot find a domestic market because of the government’s monopoly
of distribution. How can this situation be changed, and competition be
introduced?

All hydrocarbon products are tradeable, although their transport costs vary
greatly—the more valuable a refined product, the lower proportionally are
transport costs. So the most expeditious way of introducing competition is
freeing imports. There cannot be competition in refining unless crude is freely
importable.

The next condition is tax parity of imports and domestic production. This means
that whatever domestic taxes are levied should be applicable to imports. Import
duties may be levied; but unless there is a reason to protect exploration and
production beyond the size to which they would grow without protection, crude
imports should be duty-free, so that there is maximum incentive to invest in
refining. There will inevitably be taxation of refined products, since some of
them are considered inputs into luxuries (e g, aviation fuel and petrol), and are
in fact sources of prolific revenue. Duties on domestic production must be
matched by equal import duties, so that there is no discrimination in favour of
exports.

Typically, a refinery’s margin might be 10%, and crude might account for 80-
90% of its costs. Since some refinery products are considered luxuries and
others necessities, taxes on them will be different; and the average tax on
refined product will be high. In the circumstances, the tax system can be
simplified and competition in refining intensified by not taxing crude at all, and
concentrating all taxation on refined products.
Next, we come to entry restrictions. It should be borne in mind that the
attractiveness of exploration is closely dependent on the ease of entry in refining
and distribution. It is difficult to conceive of completely free entry into
exploration because it involves access to land and governments have a role in
allocation. So some form of exploration licensing is unavoidable. The high
proportion of concessions granted to ONGC would suggest otherwise, but there
is no overt discrimination against foreign companies or exclusion of any
companies other than on such self-evident criteria. However, the government’s
insistence that discovered oil and gas must be used in India—its implicit export
ban—reduces the potential value of finds and probably leads to fewer bids and
lower revenue for the government; now that the balance of payments is no
longer a policy problem, this domestic use requirement is outdated.

Another area of concern is the inconsistency in government policies as in many

instances the government did not stick to contractual agreement and its
regulatory framework remained uncertain. For instance, Directorate General of
Hydrocarbons’ renegotiation of conditions embodied in the model production
sharing contracts issued at the time of announcement of earlier rounds after
bidders had invested money and found oil or gas.

Refining and distribution segments cry out more for reforms. In 2002, the
government abolished the Administered Price Mechanism (APM) and also the
Oil Coordination Committee, which administered the price controls. However,
even after dismantling the APM, government continues to regulate prices of
petroleum products.

Government gives subsidies but at the time when international crude prices
were soaring it did not increase subsidies. All the state-owned companies were
selling petrol, diesel, kerosene and cooking gas below the cost.

Government’s discriminatory policy of subsidising petrol and diesel sold out of

its companies’ pumps, but not subsidising private competitors put private
players at a disadvantage. Therefore, private players like Reliance and Essar
could not find retail sales profitable. This lack of a level playing field between
private and public players has caused the former to withdraw from the retail
market, leaving the entire retail market to public players.

Second, when allowing private entry, the government has insisted that new
entrants must set up a minimum proportion of pumps in ‘backward’ or ‘rural’
areas. Ideally, there should be no such condition; if the government wants more
petrol pumps in certain areas, it must give them subsidies until they reach a
certain minimum turnover. The government has a service tax; it can be applied
to petrol pumps, and a cut-off point may be set below which there would be no
tax.
It is possible to introduce competition in distribution alone, without any changes
in refining. The first condition for this would be to abolish licensing of pumps.
Licensing creates rampant corruption, which reaches right up to the minister.
Second, there should be free imports of products. There should be no
canalisation of product imports, and no quantitative restrictions.

The oil production and distribution chain requires large capital investments with
long gestation lags. If the government is serious about competition, it must
accept and announce self-restraint on its freedom to make and change policies.

Finally, transportation affects competition in an important way. For all

hydrocarbons, pipelines are the cheapest medium of transport. Currently, all
pipelines in India are owned by gas or oil companies, thus insulating them from
competition. If all the pipelines were common carriers and carried oil, gas or
products for all customers without discrimination at pre-announced prices, then
refineries and gas-based plants would spread out more evenly across the
country, and there would be greater competition amongst them. The best
solution now would be to nationalise all existing pipelines and give them to a
new company to run as a public utility on a cost-plus basis.

The conclusions we have reached have implications for the CCI. It is for the
Competition Commission to decide at what level to frame its interventions.
Quite a few of government obstructions to competition that are found in the oil
industry are present in other industries as well; the Competition Commission
would have to take a view on whether to take an industry-specific approach or
to take up more general issues of policy.
CONCLUSION

The Indian oil & gasoline industry is an oligopoly. An oligopoly is a market

form in which a market or industry is dominated by a small number of sellers.
The word is derived from the Greek for few sellers. Because there are few
participants in this type of market, in this case we have four major govt.owned
oil companies and one private company (Reliance).Each oligopolist is aware of
the actions of the others. The decisions of firm influence, and are influenced by
the decisions of other firms. Strategic planning by oligopolists always involves
taking into account the likely responses of the other market participants. This
causes oligopolistic markets and industries to be at the highest risk for
collusion.

BIBLOGRAPHY

Financial Express Newspaper.

http://www.google.com

http://www.wikipedia.com

“Microeconomics “ by BERNHEIM & WHINSTON