By

Section C

Shruti Bhatia

Yogita Singh

Sangeeta Prakash

Sarthak Taneja

Oligopolistic Market StructuresFew Firms

Heterogeneous or Homogeneous Products A duopoly is an oligopoly with only two members. It is

the simplest type of oligopolyExample -- athletic shoe market

Nike has 47% of marketReebok has 16% and Adidas has 7%

Homogeneous product or product differentiation

 Restriction on entry : Oligopolies have barriers to entry Economies of scale High capital requirement Exclusive franchises (patents, copyrights, and licenses)

Interdependence among various Firms

Consequently, each firm must consider the reaction of rivals to price, production,

or product decisions

Changes in price, advertising, product characteristics, etc. may

stimulate response by rivals.

This is how competition among the sellers is kept low

CARTELSCARTELS• Formal (explicit) agreement among firms.

• Usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products.

• Members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, establishment of common sales agencies, and the division of profits or combination of these.

• The aim of such agreement is to increase individual member's

profits by reducing competition.

EXAMPLESEXAMPLES

OPEC: As its name suggests, OPEC is organized by sovereign states is a good example of cartel.

De Beers is a cartel of companies that trade in rough diamond exploration.

OPECOPEC OPEC is a prototype of a successful cartel.

OPEC contains a few members, so many of internal problems that trouble a cartel are reduced.

It has been benefited by policies of oil importing nations to discourage their domestic oil producers.

Danger to OPEC is from increased production by nonmembers.

OPEC shows harm brought on by an oligopoly market in reduced availability of needed product and increased price.

De-BeersDe-Beers Major investors in diamond merged interests to

control production of diamonds.

De Beers group is an international cartel of group

of producers who fix prices, control supply and

limit competition.

De Beers (market share above 40%), ALROSA

(market share above 20%) others hold below 10%.

COLLUSIONCOLLUSIONCollusion is an agreement, usually secretive, which occurs between

two or more persons to deceive, mislead, or defraud others of their legal

rights, or to obtain an objective forbidden by law typically involving fraud

or gaining an unfair advantage. It can involve "wage fixing, kickbacks, or

misrepresenting the independence of the relationship between the

colluding parties."

Features * Uniform prices * A penalty for price discounts * Advance notice of price changes * Information exchange

CASE: CELLULAR OPERATORS

The cellular operators used the State including the official regulatory authority to prevent entry and charge tariffs that ensured high profits.

The cellular telephone system has been dominated by a few service providers who won themselves licenses by bidding to pay huge license fees.

They Claim that they would have to shut business if such fees were actually paid by them, and virtually frightening the public and the government into believing that this would ensure the mortality and benefit of industry, they managed to migrate to a license fee regime that reduced their burden substantially.

This amounted in providing concessions to providers who, under false pretences, had in essence prevented entry by those who had originally submitted lower and more rational bids.

Having won themselves an oligopolistic position under false pretences, these operators combined under Cellular Operators’ Association of India (COAI), to pressurize the regulatory authority, the Telecom Regulatory Authority of India (TRAI), to adopt their pricing principle and ceilings on tariffs.

The monopolistic position of the operators in different circles have helped them earn large profits from subscribers, by keeping tariffs close to the maximum permissible.

What is shocking is the recent revelation that the cellular operators had in fact even flouted the TRAI ceilings.

In the wake of migration the rental and airtime tariff ceilings worked out by the TRAI were Rs. 422 per month and Rs. 4.65 per minute respectively.

As opposed to this cellular operators were charging Rs. 600 and Rs. 475 as rental for different time spans during the August 1999 to January 2000 period and Rs. 6 and Rs. 4 per minute as airtime charges.

Across the country, the collusive practices of the operators have resulted in excess charges close to Rs. 400 crore.

Also due to their dominance in market, COAI has lobbied against the entry of new operators into the mobile telephony business, whether as fully-mobile operators or operators with limited mobility.

For example, to stop the entry of MTNL into the mobile telephony business

using GSM, CDMA or WLL technologies. It has taken close to five years to break the stranglehold the COAI ensured over the industry through these means.

The moment MTNL won its case to enter the GSM business in the Delhi

metro circle with its Dolphin service, cellular tariffs have collapsed by more than a third on average.

Kinked Demand Curve

Game Theory and the Economics of Cooperation

Because the number of firms in an oligopolistic market is small, each firm must act strategically.

Game theory is the study of how people behave in strategic situations. The prisoners’ dilemma is a well known game

that provides insight into the difficulty in maintaining cooperation.

The Prisoners' Dilemma is a two-person game, but many of the applications of the idea are really many-person interactions.

A crime is committed, and two suspects are arrested.

The police separate the suspects, Shruti and Yogita , into separate interrogation rooms.

The cops give Shruti and Yogita the following "deal":

ISSUES WITH RESPECT TO THE PRISONERS' DILEMMA

HERE'S A SUMMARY OF THE OUTCOMES

2 years

2 years

3 months

3 months

5 years

5 years

go free

go free

Confess

Confess

Don't confess

Don't confess

Shruti

Yogita

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