OLIGOPOLY

5-Sep-09

PROJECT REPORT
ON
OLIGOPOLY
IFIM B-SCHOOL, BANGALORE
Section B,

Group Members:
Names: Roll No.
1. Avesh Araya 09
2. Prasun Kundu 21
3. Rakesh Roshan 27
4. Snehashis Goswami 40
5. Shweta Rani 39
6. Yatindra Singh 59

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CONTENTS

ACKNOWLEDEGMENT...3
INTRODUCTION4
IMPERFECT COMPETETION.4
CHARACTERISTIC OF AN OLIGOPOLY MKT..5
EXAMPLE OF OLIGOPOLY.6
CASE STUDY. 6
CONCLUSION9

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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.

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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.

Oligopolistic competition can give rise to a wide range of different outcomes. In

some situations, the firms may employ restrictive trade practices (collusion, market
sharing etc.) to raise prices and restrict production in much the same way as a
monopoly. Where there is a formal agreement for such collusion, this is known as
a cartel. A primary example of such a cartel is OPEC which has a profound
influence on the international price of oil.
Firms often collude in an attempt to stabilize unstable markets, so as to reduce the
risks inherent in these markets for investment and product development. There are
legal restrictions on such collusion in most countries. There does not have to be a
formal agreement for collusion to take place (although for the act to be illegal there
must be a real communication between companies) - for example, in some
industries, there may be an acknowledged market leader which informally sets
prices to which other producers respond, known as price leadership.
In other situations, competition between sellers in an oligopoly can be fierce, with
relatively low prices and high production. This could lead to an efficient outcome
approaching perfect competition. The competition in an oligopoly can be greater
than when there are more firms in an industry if, for example, the firms were only
regionally based and didn't compete directly with each other.

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IMPERFECT COMPETETION
Imperfect competition includes industries in which firms have competitors but do
not face so much competition that they are price takers.
Types of Imperfectly Competitive Markets

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.
CHARACTERISTICS OF AN OLIGOPOLY MARKET
Few sellers offering similar or identical products
Interdependent firms
Best off cooperating and acting like a monopolist by producing a small
quantity of output and charging a price above marginal cost
There is a tension between cooperation and self-interest.
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:
1. Product branding: Each firm in the market is selling a branded
(differentiated) product
2. Entry barriers: Significant entry barriers into the market prevent the
dilution of competition in the long run which maintains supernormal profits
for the dominant firms. It is perfectly possible for many smaller firms to
operate on the periphery of an oligopolistic market, but none of them is large
enough to have any significant effect on market prices and output
3. Interdependent decision-making: Interdependence means that firms must
take into account likely reactions of their rivals to any change in price,
output or forms of non-price competition. In perfect competition and
monopoly, the producers did not have to consider a rivals response when
choosing output and price.
4. Non-price competition: Non-price competition s a consistent feature of the
competitive strategies of oligopolistic firms.

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Above the kink, demand is relatively elastic because all other firms 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

Key Players Analyzed

Oil India Ltd., Oil and Natural Gas Commission, Indian Oil Corporation,
Hindustan Petroleum Corporation Ltd., Bharat Petroleum Corporation Ltd., Gas
Authority of India Ltd., and Reliance Industries Ltd.
CASE STUDY:
In 2007-08, Indias five largest companies were oil companies. Four out of five
were government owned. The sales of the sixthEssar Oilwere negligible.
Reliances 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

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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 governments 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 refinerys 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.
Next, we come to entry restrictions. It should be borne in mind that the
attractiveness of exploration is closely dependent on the ease of entry in refining
and distribution. It is difficult to conceive of completely free entry into exploration
because it involves access to land and governments have a role in allocation. So
some form of exploration licensing is unavoidable. The high proportion of
concessions granted to ONGC would suggest otherwise, but there is no overt
discrimination against foreign companies or exclusion of any companies other than
on such self-evident criteria. However, the governments insistence that discovered
oil and gas must be used in Indiaits implicit export banreduces the potential
value of finds and probably leads to fewer bids and lower revenue for the
government; now that the balance of payments is no longer a policy problem, this
domestic use requirement is outdated.
Another area of concern is the inconsistency in government policies as in many
instances the government did not stick to contractual agreement and its regulatory
framework remained uncertain. For instance, Directorate General of
Hydrocarbons renegotiation of conditions embodied in the model production
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sharing contracts issued at the time of announcement of earlier rounds after bidders
had invested money and found oil or gas.
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.
Governments 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.
It is possible to introduce competition in distribution alone, without any changes in
refining. The first condition for this would be to abolish licensing of pumps.
Licensing creates rampant corruption, which reaches right up to the minister.
Second, there should be free imports of products. There should be no canalisation
of product imports, and no quantitative restrictions.
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.
Finally, transportation affects competition in an important way. For all
hydrocarbons, pipelines are the cheapest medium of transport. Currently, all
pipelines in India are owned by gas or oil companies, thus insulating them from
competition. If all the pipelines were common carriers and carried oil, gas or
products for all customers without discrimination at pre-announced prices, then
refineries and gas-based plants would spread out more evenly across the country,
and there would be greater competition amongst them. The best solution now
would be to nationalise all existing pipelines and give them to a new company to
run as a public utility on a cost-plus basis.

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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

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

Financial Express Newspaper.

http://www.google.com

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http://www.wikipedia.com

Microeconomics by BERNHEIM & WHINSTON

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