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Economics Project On Oligopoly PDF
Economics Project On Oligopoly PDF
5-Sep-09
PROJECT REPORT
ON
OLIGOPOLY
IFIM B-SCHOOL, BANGALORE
Section B,
Group Members:
1. Avesh Araya 09
2. Prasun Kundu 21
3. Rakesh Roshan 27
4. Snehashis Goswami 40
5. Shweta Rani 39
6. Yatindra Singh 59
MANAGERIAL ECONOMICS 1
OLIGOPOLY
CONTENTS
ACKNOWLEDEGMENT……………………………...3
INTRODUCTION………………………………………4
IMPERFECT COMPETETION……………………….4
CHARACTERISTIC OF AN OLIGOPOLY MKT…..5
EXAMPLE OF OLIGOPOLY………………………….6
CASE STUDY…………………………………. ………6
CONCLUSION…………………………………………9
MANAGERIAL ECONOMICS 2
OLIGOPOLY
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.
MANAGERIAL ECONOMICS 3
OLIGOPOLY
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.
MANAGERIAL ECONOMICS 4
OLIGOPOLY
IMPERFECT COMPETETION
Imperfect competition includes industries in which firms have competitors but do
not face so much competition that they are price takers.
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.
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:
MANAGERIAL ECONOMICS 5
OLIGOPOLY
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
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.
MANAGERIAL ECONOMICS 7
OLIGOPOLY
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.
MANAGERIAL ECONOMICS 8
OLIGOPOLY
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.
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
MANAGERIAL ECONOMICS 9
OLIGOPOLY
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
http://www.google.com
http://www.wikipedia.com
MANAGERIAL ECONOMICS 10