OLIGOPOLY IN AUTOMOBILE INDUSTRY

THE INDIAN CAR INDUSTRY OLIGOPOLY

 Hindustan motors – the first indian car company to start production in india
founded in 1942 by MR BIRLA , Ambassador – the flagship car .
 Establishment of other car manufacturing companies like Premier
Automobiles in 1944, Premier Padmini - The flagship car , now also used for
cab services.
 The act empowered govt. to prescribe prices, methods, volume of
production, channel of distribution.
 Impact on automobiles industry –growth very slow because of low demand
and low economic status of the country.
 Supply was low and there weren’t many competitors.
 Consumers did not have many choices the demand was fairly low as cars
were still a luxury and availability of same models.

1. OLIGOPOLY:
Introduction
 One of the most important forms of imperfect competition is Oligopoly.
The term is a combination of two Greek words, i.e., Oligi, which means
few and Polein, means to sell. This form of marketing occurs when there
are few sellers (more than two) in the market and selling same types of
products.
 It is also referred as the competition among the few. Under this market
condition, one seller can influence the price-output policy of the
product. The reason behind this is that there are few numbers of sellers
or producers, and each firm controls a huge portion of the total supply.
 Oligopoly is a market structure in which the market or the industry is
dominated by small number of sellers.
 In other word oligopoly means the market structure in which there are a
few sellers selling a homogeneous product or differentiated products.
2. FEATURES :
 Few firms
Under Oligopoly, there are a few large firms although the exact number of
firms is undefined. Also, there is severe competition since each firm
produces a significant portion of the total output.

 Barriers to Entry
Under Oligopoly, a firm can earn super-normal profits in the long run as
there are barriers to entry like patents, licenses, control over crucial raw
materials, etc. These barriers prevent the entry of new firms into the
industry.

 Non-Price Competition
Firms try to avoid price competition due to the fear of price wars and hence
depend on non-price methods like advertising, after sales services,
warranties, etc. This ensures that firms can influence demand and build
brand recognition.

 Interdependence
Under Oligopoly, since a few firms hold a significant share in the total
output of the industry, each firm is affected by the price and output
decisions of rival firms. Therefore, there is a lot of interdependence among
firms in an oligopoly. Hence, a firm takes into account the action and
reaction of its competing firms while determining its price and output
levels.

3. PRODUCTS :
 Selling homogeneous products- pure oligopoly , example : industry
producing cement steel ,petrol ,cooking gas , aluminum and sugar .
  Selling differentiated product – differentiated oligopoly, example :
Automobiles , TV sets, soft drinks , computers , cigarettes etc.

4. A .Kinked Demand Curve

In many oligopolist markets, it has been observed that prices tend to
remain inflexible for a very long time. Even in the face of declining costs,
they tend to change infrequently. American economist Sweezy came up
with the kinked demand curve hypothesis to explain the reason behind this
price rigidity under oligopoly. According to the kinked demand curve
hypothesis, the demand curve facing an oligopolist has a kink at the level of
the prevailing price. This kink exists because of two reasons:

The segment above the prevailing price level is highly elastic.

The segment below the prevailing price level is inelastic.

The following figure shows a kinked demand curve DD with a kink

at point P.
B. PRICE RIGIDITY: In oligopoly, price rigidity means Once equilibrium price
is determined by sellers (which are few in numbers and are interdependent in their
behavior). After that! no one, wants to change for simple reasons: If one is going to
increase the price then others will grab the market share without doing the same.

If one is going to decrease the price then every one will follow the same

Ultimately, in both cases the profit maximization condition will not be satisfied.

So, in oligopoly price becomes rigid nobody want to change it.

5. Selling Costs -Since firms try to avoid price competition and there is a
huge interdependence among firms, selling costs are highly important for
competing against rival firms for a larger market share.The firms under
oligopolistic market employ aggressive and defensive weapons to gain a
greater share in the market and to maximise sale. In view of this firms have
toincur a great deal on advertisement and other measures of sale promotion.
Thus advertising and selling cost play a great role in the oligopolistic market
structure.
 6. Pricing strategies of oligopolies : Oligopolies may pursue the
following pricing strategies :

 Oligopolists may use predatory pricing to force rivals out of the market. This
means keeping price artificially low, and often below the full cost of
production.
 They may also operate a limit-pricing strategy to deter entrants, which is
also called entry forestalling price.
 Oligopolists may collude with rivals and raise price together, but this may
attract new entrants.
 Cost-plus pricing is a straightforward pricing method, where a firm sets a
price by calculating average production costs and then adding a fixed mark-
up to achieve a desired profit level. Cost-plus pricing is also called rule of
thumb pricing.

7. Demand factors for automobile industry :

 Higher the price of automobiles, lower the demand would be.
 Availability of finance option makes it affordable for consumers who don’t have
enough money in hand and hence increases demand.
 As income of people increases, their demand for automobiles also increases.
 Better the presence and quality of public transport, lower will be the demand
for private vehicles.
 Demand for petrol and automobiles move together. Hence higher the price of
petrol, lower will be the demand for automobiles.
 If income distribution among the population favours the rich class, automobiles
will be more in demand.
 Economic growth and development. As the economy grows, per capita income,
education, urbanisation, lifestyle of people also improves and this has a positive
impact on automobiles demand too.

8. Supply factors for automobile industry :

 Higher the price of automobiles, higher will be the supply.
 Higher cost of inputs (rubber, steel, labour, machinery etc) would lead to decline
in production of automobiles.
 Technological advancement would make production more profitable and hence
would favour production.
 Taxes. Change in government policies which are pro automobile industry like
reduction in road tax, reduction in custom duty over import of raw materials
needed for manufacturing cars etc would increase supply of automobiles in the
market.