Key Economic Theories Of Price Fixing Economics Essay

Key Economic Theories Of Price Fixing Economics Essay2A. Features of an oligopoly and make economic theories of wrong fixing Introduction This part of the coursework aims to identify the key features of oligopolistic arguing in mart and the economic theories related to worth fixing. In monopoly one company controls the major foodstuff sh atomic number 18 while in oligopoly market is controlled by more than one home or a group of small riotouss. This analysis describes the features of oligopoly and kinked demand curve in oligopolistic situation.It besides explains the pricing theories in context with game theory and Nash Equilibrium.Oligopoly In oligopoly, whacking percentage of market is captured by leading firms, producing very(prenominal) product or utilitys. Such firms agree to assemble and shape as single monopoly thus making a cartel to generate supreme profits.Key features of oligopoly beSame product or redevelopment by the group of dominated firms.Branded prod uct by each firm.Entry barriers.Interdependence among the firms.Non-price disceptation.Small firms may exist in oligopoly further the market is usually controlled by large players having more than half of the industry turnout.Each firm produces branded product, therefore creating high challenger resulting in high marketing and advertising costs.Entry barriers much(prenominal) as governing body regulations, patents, setup cost and undivided resource have gotership, restricts a new entrant to participate the oligopolistic market.Interdependence authority that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions (Begg Ward). Such an uncertainty in market can be resolved by the use of game theory which is applied by a firm taking account of the decisions do by the rival firm.Non-price competition among the oligopolistic firms, aim at increasing their market share significantly e.g. media advertising, promotional offers and discounts, use of technology, customer friendly services such as self scanning machines and customer loyalty benefits etc.Kinked demand curve theoryAccording to Paul Sweezys assumptions, if an oligopolistic raises its price, the rivals are unlikely to follow the same suit because keeping the prices constant will increase their market share. Revenue of the firm that raised its price will fall by fairly large amount, making the demand curve relatively elastic.However if the firm reduces the prices, it is highly likely that the competitors will also reduce the prices.Source Tutor2u Limited,2010This non-collusive theory explains the stability formerly the price is set but fails to explain how the stable price is get throughd. In oligopolistic situation each company has an option either to start a price war with the rival or to cooperate. Game theory deals with the prediction of probable outcomes of the games of strategy in which rivals have incomplete informatio n about others intensions e.g. Prisoners dilemma is a situation in which two suspects are interrogated in separate rooms, depicts an example of game theory. Each suspect has simple options either confesses and bears the consequences or denies and hopes the other has also done the same.To explain which strategy the firms will scoop up can be explained by Nash equilibrium, in which each firm considers its rivals response before taking their own strategy.(Begg Ward,p.131) Equilibrium occurs when each player takes the best possible action for themselves given the action of the other player. Nash equilibrium is a situation in which none of the firms could improve pay-off, given the rivals strategies e.g. firm A would not be able to improve profits , given firm Bs strategy and vice versa.Each firm may indulge in high or low price strategies. If both firms collude to adopt high price strategy, both would yield preceding(prenominal) normal profits and if both adopt low price strategies, both would yield normal profits. Suppose in long run, each firm fails to intrust the rival and indulge in low price strategy to increase its profits and the rival adheres to the high price than the rival may face sedate loss. Such a fear that the rival may adopt a damaging strategy exists within the firms and it is therefore in the interest of both the firms to adopt a low price strategy. Such a situation is called Maximin strategy where the player adopting the strategy yields maximum profits, assuming that the rival may inflict maximum damage.At times a group of oligopolists engage in an overt agreement to fix the prices and the level of production. Such an overt collusion, in order to act as a monopolist, is called collusive oligopoly and aims to earn maximum profits by restricting the production and increasing the prices. Price changes of one firm are sometimes matched by the other firm and the firm initiating the price change is called price leader such collusion is called as tacit collusion.Rectangle abcd depicts the cartels profits.Cartels are likely to interrupt in long run as the members are intended to cheat sometime or the other by increasing production. By producing more output than decided, the member can increase its share from cartels profit. If each member cheats than cartel ends up in earning monopoly profits and thereby leaving no reason for the firm to remain in the cartel.ConclusionInterdependence is the key feature of oligopolistic market. The outcome of any strategy by a firm is uncertain and the price competition may lead to price-war. Entry barriers help the dominant firms to maintain their control over the market. Formation of cartels may yield short term gains but are hazardous in long run. It is also observed that non-price competition may benefit oligopolists to increase market share and sustain in long term.2B.Extent to which telecommunicationmunication sector in India is an oligopoly and price determination strategyIntroduction Indian Telecommunication industry is the second largest and fastest telecom industry in the realism with around 706.37 Million telephone (landline and mobile) subscribers and 670.60 Million mobile phone connections as of Aug2010.Dominance of few major players has made this sector perfect case of Oligopoly in India. delinquent to the presence of limited number of players, each player is aware of the rivals actions and therefore the decisions of one firm is affected by the action of the other firm.Service provider wise Market Share as on 31-7-2010Source Telecom Regulatory Authority of IndiaConcentration balancePlayersMarket Share(%)Bharti (Airtel)21.34Reliance17.37Vodafone17.08Tata11.47Concentration Ratio67.26Table above shows that four firm concentration ratio is above 40%Barriers to entry in TelecomThe high entry barriers in telecom sector as mentioned below turns the market oligopolistic in nature.High capital investment required by the new entrant for initial setupcompetition w ith well established operators Airtel, Vodafone, Reliance and Tatalicense fee on revenue sharing basis plus one time entry fee forever emerging technology e.g. VOIP,3Glowest tariffs in the worldacquiring spectrumhigh initial operating losses. Lower rates makes it longer for the new entrant to achieveequilibrium as most new subscribers churn from one network to another.Low Tariffs Facet of ambitionIndian telecommunications is the lowest cost market in the world. The cut throat competition among operators has left no scope of having single price leader in market as all the operators compete for land prices and high customer base. Increased number of players has resulted in increased price wars among the competitors, with consumer being the beneficiary. Such factors declines the profit margins which are expected to consolidate the industry.Offset of price warsIn mid nineties, at the start of cellular services in India, operators used to charge heavily for the incoming calls on their network. After the hurl of BSNLs let off incoming call facility, other operators followed the same suit. Still the major chunk of customer remained with BSNL due to its low call rates and better network coverage.With the launch of Reliance Communications as a new telecom giant, teledensity in India raised enormously to 8.2% in 2004 from that of 2.32% in 1999 and to 54.10% in April 2010 (as per TRAI).Introduction of low cost cellular services, along with handset, made Reliance the price leader in telecom industry attracting a huge chunk of customer base. Other leading service providers like Airtel, Vodafone and Hutch had to match their prices with that of Reliance.To monitor and regulate the irregularities in tariffs charged by telecom operators, Telecom Regulatory Authority of India was formed by the government of India. The Telecommunication Tariff Order 1999 started declining tariffs and influenced the rapid growth of cellular phone users. TRAI is also responsible to monitor and prevent the formation of cartels by cellular operators in the cover of associations such as COAI and AUSPI.Source Telecom Regulatory Authority of IndiaSource Telecom Regulatory Authority of IndiaGraphs show the percentage decline in national and international call rates. This occurred due to intense competition that generated after TRAI regulations.Steps taken by TRAI that affected tariffsInterconnect Usage Charge collectable by one operator to another for using their networkReduction in Access Deficit Charge also contributed in bringing overcome the call ratesCalling Party Pays regime fixed low termination charges further cut pricesUnified Access Service License gave operators the countenance to determine tariffsImpact of price-warPrice war among operators hits the revenue growth significantly. For the new entrants, the break-even point at which expenses equals revenue also increases.The decline in prices due to competition increases the consumer base to unsustainable levels. Previous data suggests that only 50% of the subscribers are new and the rest are either churning the network or keeping an spare connection.Graph shows increase in demand with decrease in priceTable below shows market revenue growth in terms of MRPU.major players.jpgMarginal Revenues Per Minutes (MRPU)Graph below depicts the growth in usage actuated by reduction in tariffs. Apart from low call rates, reduced cost of handsets and free handset facility by service providers also contributed to the increase in customer base.Source Telecom Regulatory Authority of IndiaNon-Price CompetitionRecent launch of per second bill option by Tata, pushed its rivals to indulge in non-price competition.Most of the operators have now started offering similar per second billing to its customers and this has resulted in creating more pressure on margins. Value added services and customer friendly facilities like online payment, internet access and better network coverage make up in non-price competi tion.ConclusionThe above research and analysis of data implies that Indian telecom industry exist in oligopolistic situation where few major players are having large share of the market. Strategic change of one operator impacts the strategy of other players, resulting in interdependence among operators. High entry barriers restrict new entrants to enter the industry and regulatory authority like TRAI monitors the formation of cartel in the industry. Analysis also shows that competition in oligopolists is not only due to price-wars but other factors such as better services and low cost of handsets also influence a large customer base.