Oligopoly Market Structure

Discuss about the Market In Economics And Participants.

The economc definition of market structure differs from that understood by marketers. Marketers view market as competetive device and hence focuses on only marketing strategies or plan. Economists on the other hand comsiders the overall structure of market beyond only competition with an attempt to analyze and anticipate behaviours market participants. The concept of market in economics thus extended beyond just a simple place of exchanging goods and services (Goodwin et al., 2015). The four common form of market structure based on number of participants in the market include perfectly cometitive market, monopoly, oligopoly  and monopolstic competition.

The oligopoly market is a representative market structure containimg small number of competiting firm with each enjoying a relatively large size in the market. High level of concenration is an obivios feature of oligopoly market. Firms in the oligopoly market do not have large number of competitiors. Rather there are intense competition among the few large firms. Each firm keeps a close look on strategy of its rival firms (Baumol & Blinder, 2015). Strategy of the firms are interdepenent on each other. For this, if one firm decide to lower price to increases its share of market the competiting firms follow the same and this iften results in a price war in the market place. Apart from price competion firms in this form of market are engage in non-price competition in terms of product differentiation, investment in advertisimg and others.

The oliopolistic firms need to take decision regarding price and competition. The firms in the market place decides whether to compete with other firms or to agree on a mutually beneficial understanding. When firm in the oligopoly market takes their joint decision about price and outout combination then they it is called collusive oligopoly. In contrast, if the fims decode to compete with each other then it is called  non-collusive oligopoly (McKenzie & Lee, 2016). Firms in a pure oligopoly market sell homogenous products while firms in differentiated oligopoly sells heteregenous or differentiated product.

The monopolistically competetive market structure has several small firms in the market. The firms in the monopolistically competitive market exercise a freedom to enter or exit the market. Each firm in the market has large number of competitors with each sellling a differentiated product. Each seller in the market takes decision of price and outpt if its own product indepent of other competitors. The seller in the monopolistic competition thus enjoy some degree of monopoly power over its own product (Friedman, 2017). Again they face intense competition like the perfectly comprtitive market. The monopolistically competitive market thus is comsidered to have characteristics of both monopoly and perfectly comprtitive market.

Monopolistically Competitive Market Structure

One exclusive feature of monopolistic competition is product differentaition. Each seller in the market tries to make its own product as much different as possiblr from its competitors. With product differenatition firms attempts to make its perceive demand curve less elastic. Aprt from physical product differentiation firms also engage in marketing differentiation, differentation of human capital or differentiation in the distribution. The mnopolistically competitive firms faces a downward sloping demand curve as they are able to chragge a higher or lower price than its competitors (Moulin, 2014). However, because of availability of close substitute firms usually do not engage in such price competition. Rather they focus on advertising, brand promotion or other forms of non-price competition.

Both the above discussed market structures represent imperfect competition. These two forms of markets are however differs in a number of ways. The key factors distingusing oligopoly and monopolistic competition are given below

The oligopoly market is characterized as having a few large sellerswhile in the monopolistically competitive market there present a large number of small sellers (Rader, 2014). Because of dufferences in number of sellers the degree of competition differ in the two form of market.

Difference in the two firm of market exists in terms of their relative size and market control devised by each of these firms. There is though no speific size to clearly defining the two form of market but in general a monpolistically competitive firm is relatively large in size as compared to an oligopoly market. Because of presence of large number of firms in the market, the market share is divided between these firms with each having a relatively small share in the market. As each firms have a small market share decision of any signle firm does not have much impact on the entire market (Stoneman, Bartoloni & Baussola, 2018). The oligopoly market on the other hand is chsaracterized by dominance of few large sellers. The sellers in the oligopoly market enjoy a considerble share of market and thus devices a greater control in the mrket.

The incumbant firms in the oligopoly market maintains a high barriers to entry of the new firms in the market. The need for government authorization often acts as a major entry barrier in the market. Government often limits the number of competitors in the oligopoly market. Apart from government regulation there exists other forms of barriers as well. The existing firms might enjoys exclusive owenership over a specific input. With lack of access to such input new firms cannot enter the market. The presence of high fixed cost likely to discourage new seller to enter the industry (Cowen & Tabarrok, 2015). The exising firms enjoys advantages of economies of scale which help them to recover huge fixed cost. The new entrants however cannot have the benefits of economies of scale  and hence fear to enter the industry.

Differences Between Oligopoly and Monopolistic Competition

The entry or exit in a monopolostically competitive market is less cumbersome process. Depending on the short run profit or loss firms decides whether to enter or exit the market. The economic profit in the short run encourages new firm to enter while in presence of economic loss firms leave the the industry.

Short run

Firms in any form of market have the common objective of maximizing profit. The marginal revenue and average revenue curve in the monopolistic competition slope downward. The standard profit maximization condition require marginal revenue to be equal to marginal cost and marginal cost curve cuts the the marginal revenue curve from below that is at the profit maximizing level of output slope of MC curve is greater than slope of MR curve (Nicholson & Snyder, 2014). Because of indeoendent price output decision existing firms in the short run have the opportunity to enjoy profit above the normal profit. Firms also can incurr a loss in the short run is price is set below the total average cost.

Long run equilibrium

In the short run, monopolistically competitive firm enjoy an above normal profit or economic loss. In the long run however price adjust by the entry or exit of firms leaving the firms in the industry only with normal or zero economic profit. In the short run, if there is supernormal profit then new firms enter the industry. This increases supply in the indutry resulting in a decline in price and eleminate all the above normal profit. If existing firms in the long run suffrs a loss then some firms exit the industry. This reduces indutrstry supply pushing prices up. This help to recover the loss in the long run. The entry of exit in the industry continues untill all the firms in the industry enjoy only a normal profit (Hutchinson et al., 2017). At the long run equililibrium the demand curve is tangent to the average cost curve. The long run equilibrium in the monopolistically competitve industry occurs to the left of minimum average cost. Hence, output in the industry is less than socially optimum outcome. The firms in the industry thus have an excess capacity in the long run.

State of equilibrium in oligopoly market

Like moonpolistically competitve market, equilibrium in the oligopoly market is obtained from the two standard profit maximization condition. One distingusing feature of oligopoly market is the presence of  a kinked demand curve rather than a smooth downward sloping curve. The kink occurs because of the two different nature of elasticity present in the market. In the figure below, the  kink occurred at the point A. corresponding to  this point equilibrium price and quanity is obtained as P* and Q* respective. Above poiny demand is relatively elastic while below A, demand is relatively inelastic (Goodwin et al., 2015). The profit is shown as the area of the rectangle P*ABC. In the oloigopoly market, in the presence of high entry barriers firms are able to retain their supernormal profit even in the long run.

Short Run and Long Run Equilibrium

Thr fast moving consumer good (FMGC) consumer goods industry in Indis is charecteries as a monopolistically competitive market. The imdustry is highly crowed witn the presence of large number of players operating at  domestic and global margin. Several features of a monopolistically competitive market is observed in the FMGC narket (Kotler, 2015). The monopolistic competition is characterized by the presence of large number of firms involve in selling differentiating products. Similary in the FMGC industry of India has numerous sellers in the industry. This fact is highlighted from the presence of more than 700 companies in the  Indian soap and detergent market. Some of the major players in the industry include ITC limited, Hindustan Unilever Limited and Procter & Gamble (Dey & Sharma, 2017).

Like monopolistically competitive market firms in the industry are allowed to freely enter or exit the market. The propect of rising income from rural and urban consumers make the industry an atrractive one with several new companies entering the business. The mechanism of free entry or exit result lead to only a normal profit in the industry (Roshif, 2015). For example, the brand Nirma was introduced a low priced detergent to capture customer group belonging to middle income class. The successful strategy of Nirma was encouraged other companies to launch product with a much lower price.

Another feature of monopolistic competition is product differentiation. The products in the industry differs in terms of packaging, size, color, associate discount and shape. Ariel, a product of P&G group is avaible in different variety. Ariel color, Ariel strain remover and Ariel Quiclwash are the different sub product each having at least one distingushing characteristic ((Dey & Sharma, 2017).

The other features of a monopolistically competitive market that are found in the concerned industry include investment in advertising, promotion of sales, absence of interdependece and a downward sloping demand curve.

The aviation industry in India has characteristics similar to a oligopoly market. The airlinbe industry is dominated by a few large airline companies. The degree of competition in the industry is indenfied from the concentreation ratio in the industry. Four to eight airline companies in India capture 80 percent share in the market (Jain & Natarajan, 2015) Major player in the industry include Indigo (30%), Air India (19%), Spice jet (20%), Go Air (17%), Jet Airways (17%) and Jetlite (5%).

In the oligopoly market there are only few seller selling homogenous product or service. In the Indian airline industry there are only eight domestic carriers. Like an oligopoly market, entry of new firms in the industry is limited by permit of government. Similar to collusive oligopoly, the existing sellers in the forms a cartel with an attemp to fix prices at a relatively high level (Albers et al., 2017).

Case Study: The Fast Moving Consumer Goods Industry in India

Productive efficiency is concerned with efficient allocation of resources. This sugeests production needs to be done in such a way that no amlunt of resoources is wasted. In a market productive efficieny is achieved only when the price charged in the long run equals the minimum of average cost. Allocative efficiency on the other hand is concerned with socially preferred production and distribution of a good (McKenzie & Lee, 2016).

A perfectly competitive market attains both productive and allocative efficiency. The lomg run price in the competitive industry is set at the minimum of average cost. This helps to ensure productive efficiency. The compretitve price also equals to the marginal cost of production which ensures allocative efficiency.

The monopolistically competitive firm in the long run operate at falling part of lomg run average cost.  As the firms do not expand production to the minimum point of average cost productive efficiency cannnnot be attained. The price in the monopolitcally competituve market is set above the marginal cost indicating deviation from allocative efficiency as well (Moulin, 2014). Similarly in the oligopoly market equilibrium price is above the marginal cost of production and thus cannot produce outout equivalent to minimum average cost. Hence, neither productive nor allocative effciency is achived in the oligopoly market. 

The real estate sector of India in the post crisis period has experienced strong rebound with gaining support from high demand for housing and other favourable economic condition. The main contributors of a growing housing demand include growth of output along with a growth in disposable income which promotes consumerism (Chiu & Ha, 2018).  The expansion of middle income class along witn spread of urbanization in combination of other supportive measures sugnificantly drives housing demand.

A considerable gap in demand and available supply of housing has been experienced in recent years. The highest demand-supply gap is found to exists among low and middle income segement of housing market. In certain cities of India, housing demand exceeds supply by almost three to four fold. Demand was forecasted to grow at an annual compund rate of 15% from 2010 to 2014. The cumulative housimg demand stands as 4.25 million units (Gopalan & Venkataraman, 2015). The National Capital Region and metropolitan cities like Mumbai are expected to contribute an additional demand of 40%.  The forecasted housing demand is highest for Mumbai  (23%) followed by NCR (20%).

A number of factor has been held responsible for growing residential demand for housing. Of these the most important are rapid spread of urbanization, decline in average size of household and availability of cheap loans. The impact or urbanization on housimg demand is most prevalant in cities fall on Tier 1 group. In these cities, housing demand is surged due to increase in immigrant population proportion (Singla, Chaudhuri & Batchu, 2016). The growth of average income encourages people to settle in independent house. As the family structure breaks, the household size gets smller and smaller causing an increase in demand. The socio cultural shift is one of the important factor givinmg an additional push housing demand.

The main concern for housing market today is the existance of a supply shortage in the real estate sector. 80% of total supply shortage belongs to the economically weak section of the population (indiatvnews.com, 2018). If the supply shortage persists, then the country is estimated to face an addition housing demand of 30 million by 2020.

The 12^th five year plan has recorded that India has a housing shortage of 18.78 million. The main supply side constraint in the housing market include high price of land, financial and regulatory concern and such others. Land is India is not an asset that is availabe easily. The process of acquring a plot of land for develoment of new houses is complex , involve much time and is an expensive process. With a rising population and increase im urban density the housing demand has accounted an expotential growth rate (Gill & Sharma, 2014). The problem is further aggaravated by poor regulatory framwork of government operating at local, state and central level.

In response to housing afftrding crisis in India governemt has undertaken undertaken several schemes. The objectibve of government is to make housing affordabl for all by 2022, the Prime minister has launched ‘Pradhan Mantri Awas Yojana’ scheme on 1sr June, 2015. The scheme mainly aims to offer affordable house to the poorer section of population living in urban areas. The scheme suggests construction of house in town and cities at an affordable price undertaking construction method that are eco-friendly in order to benefit poor in urban India. Credit linked subsidy is an important part of PMAY (Gopalan & Venkataraman, 2015). This allows buyers of houses an interest subsidy seeking for housing finance or willing to contruct new houses. The subsidized interest rate thus by reducing effective cost of home loan helps to increase housing affordability. Under the concerned scheme, eligible beneficieries can avail housing loans at a subsidized rate of 6.5% on housing finance a 15 years term (reuters.com 2018). The grounds floors are kept restricted senior citizens and for different abled members of the society. Additionally, the scheme aims to encourage eco friendly construction technology to increase housing affordability. The offered schemes covers nearly 4041 statutory towns. Among these the first priority has been given to fifty class I cities of the nation.

In order to qualify for a beneficiary of PMAY, an individua need to fulfill some criteria. The income of the household should lie between Rs 6 lakh and Rs 18 lakh (Ghosh & Mane, 2017). The scheme is applicable only for purchase of new houses and not for purchase of old existing reall estate sectors. Minortity groups particulary scheduled casts and scheduled tribes are eligible to apply for the scheme.

The main solution of the government is thus to offer a subsidy to the home buyers in form of a lower subsidized rate. The proposed subsidy helps to reduces the effective burden of home loans and thus increases affordibility of new homes (Tiwari & Rao, 2016).

Housing is considered as one of the basic necessities of human being. It is therefore responsibility of the government to ensure affordability of housing for the people in the nation. Weaker class of the society are more vulnerable to the affordability crisis. Therefore, government should give more focus to create more opportunities for the weaker class of the society belongning to low income group. Buyers seeking residential property should be  offered a high income tax benefit.

In addition to the demand side solution, focus should be also given to reduce supply side constraint. A stable price in the market needs a balance between supply and demand. The public private partnership model can be used to address the problem of housing affordability. Public-private collaboration helps to create a large pool of resources along with some inherent benefits to the stakeholders (Ghosh & Mane, 2017). The model shows partnership between public private partnership has benefits in four major areas namely increse in available land for housing development, improvement in financing, reduction in effective cost of housing projects and a greater economies of scope. These benefits together contribute to an increase in hosing supply contributing to a reduction in prices.

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