8/8/2019 Economic Assignmet 2

1/5

8/8/2019 Economic Assignmet 2

2/5

1.Automobile sector is a an example of oligopoly, this statement can be justified with the

help of definition of oligopoly and the characteristics we observe in the oligopoly market.

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 Greekoligo 'few' plus -opoly as in monopoly

and duopoly. Because there are few participants in this type of market, each oligopolist is awareof 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

Characteristics of oligopoly

A few large producers

Usually three, four, or five firms occupy the market, e.g. "Big Three" in the U.S. aluminum

industry and companies such as Nokia or Motorola in the cell phone industry, as well ascompanies in the video game console market. The four largest firms in the market occupy greater

than 40% of the market.

Homogenous OR differentiated products

Some oligopolistic industries offer homogenous, or standardized, products, e.g. those of steel,

zinc, copper, lead, industrial alcohol. Other industries, e.g. those of automobiles, tires,

electronics, breakfast cereal, offer different products and place an emphasis on nonprice

competition, such as advertising.

Price maker, but still mutually interdependent

The small number of firms let oligopolies to set prices and output levels, to some extent.

However, because there are rival firms, oligopolies must take note at how they react to its change

in price, output, product or advertising.

Relatively high entry barriers

Entry barriers exist that allow a handful of firms to achieve economies of scales, but no more

beyond that. Any new firms would have too small a market share and would have to produce at

too high a price. Sometimes the cost of capital is too high and other times, ownership and control

of the raw materials is a factor. Patents and brand loyalty are also barriers of entry into an

oligopolistic market.

If we analyze the automobile industry we can find that there are few large players who dominate

the market. In the automobile industry there are many firms serving in the market but at the same

time if we consider the number of customers to whom they are serving then the ratio of sellers id

to buyers is very small. For the sake of simplicity if we assume that there are 50 big well known

8/8/2019 Economic Assignmet 2

3/5

car manufacturing and selling companies and there are at least 100 crore car users in the world

then the ratio is very small.

All the players in the automobile industry are in the business of manufacturing and selling of

same products that is automobiles. Car manufacturers produce cars and sell them. The cars which

are produced are relatively same in nature that is the utility they provide is same that means thecars are homogenous in nature. Homogeneity is present even in the features provided in the car

like all the cars of one segment have same seating capacity, same engine capacity and almost

same facilities like A/C, stereo etc.

Companies in the automobile sector are price makers but they are interdependent on each other.

Consider an automobile company like Tata who has launched nano in recent time, this company

is the price maker in the particular segment of carlike nano but still before deciding its price it

had to consider prices of other cars in the market. So what we can say is when the product is

innovative or loaded with special features company can become the price maker in the company

but still it has to depend upon the other competitors to fix the price.

Entry in the automobile market is tough. There are various barriers in for the entry in the

automobile market. Customers of cars are either brand loyal or they would like to go for the cars

of well established firms, so entry of new firm is a risk for that new firm as the market share they

will be getting is very less. Apart from that the cost of setting a plant of automobile

manufacturing and arranging for the distribution and after sales service of it is very costly matter.

Cost of borrowing will also be very high if a company opts of borrowed capital to start the

business in automobile sector.

Kinked behavior is observed In automobile industry. Whenever any company will change theprice of its car model then immediately the competing companies will show some reaction by

changing modifying the price of their car models. Whenever any company will raise the price of

its car, the other competing companies will not change the price of their car but if any company

lowers the price of their car then the other competing companies will also lower the price of

their car. For example when Maruti Udyog lowered the price of their car model Wagon R then

immediately price of Santro which is a car by Hyundai also came down . so in automobile

industry companies follow same pattern of pricing.

So in all we can say that the automobile sector is an example of oligopoly.

8/8/2019 Economic Assignmet 2

4/5

2.In the absence of complete information individual rationality leads to group sub

optimality.

Absence of complete information is such a situation in which appropriate decision cannot be

taken. This is the situation decisions are made which are not optimal but they can be sub-optimal

that is the decision can be correct according to the information.

In day to day scenario we can see that there are many examples where people tend to buy things

which a group will buy. Basically this thing happens when individual does not possess complete

information about the product or the service. Absence of complete information leads to

individual decision based on the available information, and in this situation individual thinks that

the decision is optimum.

If we consider the example of any individual who is planning to open a demat account with one

of the reputed broking firms in India, then he will make his decision based on various factors like

reputation of the firm, brokerage charges, total number of clients. If he feels that the number ofclients which are availing the demat facility from the broker is large then he will also make the

decision to buy the same decision and according to his information that decision will be optimal.

In this case it any happen that the individual is not aware of the problems which customers are

facing as those will never be explained by the main information providers, so the decision of the

individual will lead to group sub optimality

Lets consider the point from companies point of view. Almost every company makes every

decision on the basis of certain information. The information which company posses can be

complete information or can not be the complete information. For any company information

related to different aspects like present market demand, competitors pricing strategy, competitorsoverall strategy, availability of required materialistic is necessary to take decision. In this case

any company can not posses cent percent correct information about each and every factor and

thus the company has to make decision in the absence of complete information, which may be

correct and optimal according to the company but not necessarily optimal decision.

For example lets consider the example of automobile sector where a company X has decided to

produce a car which runs on LPG. This decision of the firm is not disclosed in the market and

thus the competitors are not in a position to make any strategy for new product development. At

the same time there is slow growing demand for high mileage diesel cars in the market which

company X is not able to interpret. Within the 1 year company X launched the car in the marketand after its launch other competitors analyzed the market and introduced their car in the market

within few months. As both the companies have car with same feature there exist a sense of

competition in the market but before launching the car both the companies did not interpreted the

demand perfectly as a result sales of both the companies did not rise very fast. So according to

the information companies did posses, their decision was optimal but as the information was

incomplete their individual decisions lead to group sub optimality.

8/8/2019 Economic Assignmet 2

5/5

Any company can achieve Nash equilibrium by taking its own decision with taking the

competitors decision into consideration. With the incomplete information companies may take

individual decision which may not give the optimal solution but will give some mediocre or

group sub optimal solution which will fetch medium benefits to all the players in the market.