Competition in

Competitive Market & Monopoly

OUR TEAM
 PART 1
Agenda
● Competitor Identification and Market
Definition
● Measuring Market Structure: Concentration
Ratio (CR), Herfindhal Index (HI)

PART 2

● Market Structure
-Perfect Competition
- Monopoly
 Competitor Identification in simple idea :
‘Competitors are the firms whose strategic
choices directly affect one another.’
 Generally can be classified into two :
● Direct Competitors

For Example : If Mercedes reduced the car price, it might affect BMW to consider
response at their pricing.

● Indirect Competitors

For Example : If Mercedes reduced the price on its sport vehicles, Acura might do
the same. This might cause Jeep to change price on its Cherokees.
The Basics of Competitor Identification

● They examine whether merging firms will monopolize a market and whether existing
monopolist are abusing their power.
● A necessary first step in identifying monopolist is market definition, also known as
competitor identification.
How to identify Market Definition?
● DOJ claim that we can use SSNIP.
● Dapat dikatakan kompetitor apabila 2 perusahaan melakukan
merger akan berujung dengan kenaikan harga yang kecil ‘tidak
lebih dari 5 persen’ dalam satu tahun.
● Apabila setelah melakukan merger kenaikan harga melebihi kriteria
sistem SSNIP maka dapat dikatakan kedua perusahaan tidak berada
di market yang sama.
Putting Competitor Identification into Practice

● The SSNIP criterion suggest that two firms

directly compete if a price increase by one
firm causes many of its customers to do
business with the other.

Example : If German car makers raise price

to 5 percent, lose a lot of customer to Lexus
and Acura, then the Japanese brands
compete with the Germans.
Putting Competitor Identification into Practice
● The SSNIP criterion is based on substitutes concept.
● At intuitive level, product tend to be substitutes when three
conditions :
○ They have the same or similar product performance
characteristics
○ They have the same or similar occasions for use
○ They are sold in the same geographics market
How to identify that two products are used in different occasions?
1. Describes the when, where, and how it is used.

Example : Kopi dan Soft Drinks keduanya berguna untuk mengatasi dahaga, namun
biasanya kopi diminum pada pagi hari, maka dapat dikatakan bahwa kedua minuman
berada di market yang berbeda.

How to identify that two products are in the different geographical

markets?
1. Two products are sold in different locations
2. It is costly to transport the goods
3. It is costly for consumers to travel to buy the goods.
Empirical Approach to Competitor Identification
● Cross price elasticity demand (measures responsiveness of demand for good
Y following a change in the price of a related good X)

Eyx =(ΔQy/ Qy)/ (ΔPx/ Px)

- If Eyx > 1 , then goods X and Y are substitutes

- If Eyx < 1 , then goods X and Y are complements
Examples
Substitutes Complements
Measuring Market Structure

Market structure
Refers to the number and distribution of firms in a market
Concentration Ratio
How much of the total industry output is manufactured by
the largest firms

N-firm concentration ratio

Four firm concentration ratio formula:

C4 = (S1 + S2 + S3 + S4)/ Stotal

Concentration Ratios Interpretation
0% : perfect competition (or at the very least monopolistic competition)

0% - 50% : perfect competition to oligopoly

50% - 80% : likely an oligopoly

80% - 100% : ranges from oligopoly to monopoly

100% : monopoly
Example 1
C4 = (S1 + S2 + S3 + S4)/ Stotal

= (150 + 100 + 80 + 70)/ 450

= 400/ 450

= 0.889

= 88.9%
Example 1
C4 = (S1 + S2 + S3 + S4)/ Stotal

= (150 + 100 + 80 + 70)/ 450

= 400/ 450

= 0.889

= 88.9%

Interpretation
Four largest firms account for 88.9% of the total industry output/ sales
(Oligopoly)
Example 2
Herfindhal-Hirschman Index (HHI)
Squaring the market share of each firm competing in a market and
then summing the resulting numbers

Range : 0 - 10,000

Formula:
HHI Interpretation
Below 0.1 (<1,000) : No market concentration (competitive)

Between 0.1 to 0.18 (1,000 to 1,800) : Moderate market concentration

Above 0.18 (>1,800) : High market concentration

10,000 : Pure monopoly

Example
Firm Market Share in Percent Market Share

A 38% 0.38

B 25% 0.25

C 20% 0.20

D 17% 0.17

HHI = 38^2 + 25^2 + 20^2 + 17^2

= 1,444 + 625 + 400 + 289

= 2,758
Example
Firm Market Share in Percent Market Share

A 38% 0.38

B 25% 0.25

C 20% 0.20

D 17% 0.17

HHI = 38^2 + 25^2 + 20^2 + 17^2 Interpretation

There is a high market
= 1,444 + 625 + 400 + 289
concentration in this market
= 2,758
Types of Market Structure
1. Perfect Competition
2. Monopoly
1. Perfect Competition
 Perfect Competition
Perfect Competition adalah salah satu struktur pasar (market structure)
yang berbentuk sejumlah besar pembeli dan penjual hadir, dan
semuanya terlibat dalam suatu sistem jual dan beli produk-produk
homogen dengan harga tunggal yang berlaku di pasar.

Dengan kata lain, persaingan sempurna juga disebut sebagai kompetisi

murni, ada ketika tidak ada persaingan langsung antara para pesaing
dan semua menjual produk yang sama secara identik dengan harga
tunggal.

“A seller is the price taker and cannot influence the market price.”
1. Large number of buyers and sellers
2. Homogeneous Product
3. Perfect knowledge of prices and technology
4. Absence of Government and Artificial Restrictions
5. Free Entry and Exit
6. No transportation cost
2. MONOPOLY
ABOUT MONOPOLY
Frank Fisher describes monopoly as :

The ability to act in an unconstrained

way, such as increasing price or
reducing quality

Satu penjual banyak pembeli

Monopolist & Monopsonist Firms
● Disebut monopoli jika sama sekali tidak menghadapi persaingan di
pasar konsumen (output)

Ability to raise output prices

● Disebut monopsoni jika sama sekali tidak menghadapi persaingan

di pasar bahan baku (input)

Ability to reduce input prices

 CIRI-CIRI MONOPOLI
1) Di dalam pasar monopoli hanya terdapat satu penjual.

2) Jenis barang yang diproduksi atau dijual tidak ada barang penggantinya, no substitute

yang mirip.

3) Adanya hambatan atau rintangan atau barriers bagi perusahaan baru yang akan masuk ke

dalam pasar monopoli. Hambatan ini merupakan faktor kuat mengapa pasar monopoli

terbentuk. Hambatan dapat berupa legalitas yaitu dibatasi oleh undang-undang, hambatan

teknologi yaitu teknologi yang digunakan sangat tinggi sehingga barang sulit ditiru, atau

hambatan modal yaitu perlunya modal besar dalam memproduksi barang sejenis.
 CIRI-CIRI MONOPOLI

4) Pelaku pasar monopoli dapat menentukan harga barang sesuai keinginannya.

5) Sifat monopoli menyebabkan perusahaan tidak memerlukan promosi atau iklan dalam

memasarkan produknya.
Max Profit :
MR = MC
Monopoly in Indonesia :
THANK YOU