Extended Essay - Anupama Bhatnagar

Extended Essay in ECONOMICS
Anupama Bhatnagar
To what extent does the market structure of SIM cards sold in Purwakarta, Jawa Barat fulfils the requirements of a Perfectly Competitive Market (PCM)?
SESSION: IB May 2012 IB CANDIDATE NUMBER:dkz219 (000902-023) SCHOOL: Gandhi Memorial International School, Jakarta, Indonesia SUPERVISOR: Ms. Shweta Sinha WORD COUNT: 4000
Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay
Table Of Contents
1. ACKNOWLEDGMENT..................................................................................3 2. ABSTRACT..................................................................................................4 3. INTRODUCTION..........................................................................................5 3.1 Introducing SIM cards............................................................................5 3.2 Purpose of Investigation.........................................................................5 4. INVESTIGATION: ECONOMIC THEORY USED, METHODOLOGY, DATA...................8
PRESENTATION, ANALYSIS & RESULTS
4.1 Homogeneous goods...............................................................................9 4.1.1 Economic Theory..........................................................................9 4.1.2 Data Collection Methodology.........................................................9 4.1.3 Data Presentation.......................................................................10 4.1.4 Analysis and Empirical Results...................................................12 4.2 Many buyers & sellers..........................................................................13 4.2.1 Economic Theory........................................................................13 4.2.2 Data Collection Methodology.......................................................13 4.2.3 Data Presentation.......................................................................14 4.2.4 Analysis and Empirical Results...................................................15 4.3 No Barriers to entry/exit......................................................................16 4.3.1 Economic Theory........................................................................16 4.3.2 Data Collection Methodology.......................................................16 4.3.3 Data Presentation.......................................................................17 4.3.4 Analysis and Empirical Results...................................................18 4.4 Perfect Knowledge................................................................................20 4.4.1 Economic Theory........................................................................20 4.4.2 Data Collection Methodology.......................................................20 4.4.3 Data Presentation.......................................................................20 4.4.4 Analysis and Empirical Results...................................................21 5. CONCLUSION............................................................................................23 6. LIMITATIONS.......................................................................................... 26 7. BIBLIOGRAPHY........................................................................................27 7.1 Books..................................................................................................27 7.2 Interview..............................................................................................27 7.3 Journals..............................................................................................27 7.4 Internet...............................................................................................27 8. APPENDICES..............................................................................................29 8.1 Appendix A..........................................................................................29 8.2 Appendix B..........................................................................................31 8.3 Appendix C..........................................................................................33 8.4 Appendix D..........................................................................................33 8.5 Appendix E..........................................................................................34 8.6 Appendix F...........................................................................................34 8.7 Appendix G..........................................................................................35
1. ACKNOWLEDGEMENT
I would like to express my profound gratitude to our Principal, Mr. A.P Singh, I.B coordinator, Ms. Winnie and Supervisor, Ms. Jaba Biswas for their moral support and motivation during my tenure in Gandhi Memorial International School. My sincere thanks to my supervisor, Ms. Shweta Sinha for her guidance, thoughtful inputs and encouragement. Without her support this extended essay would not have reached its present state. She has also been my economics teacher for two years. I would like to thank her for teaching me how to love economics and inspiring me to take up extended essay in this subject. My heartfelt thanks to Mr. Muhammad (Head of Telkomsel Office in Purwakarta) for his patience, time and insight into the telecommunications industry. Special thanks to my driver, Mr. Narudin, who accompanied me to various SIM card retail shops and was my translator during administration of questionnaires in Bahasa Indonesia.
I would like to thank all my friends for their honest feedback on my work and last, but not the least, I would like to thank my beloved parents for their constant support and encouragement.
2. ABSTRACT
This essay discusses the market form of the SIM card industry (telecommunication industry) in Purwakarta, West Java. Specifically, this paper investigates the research question To what extent does the market structure of SIM cards sold in Purwakarta, Jawa Barat fulfils the requirements of a Perfectly Competitive Market? In order to answer the research question data was gathered from the market in question through conducted surveys and statistical price data analysis. All data was gathered during the period June to October 2011 in Purwakarta. The particular geographical location was selected due to close proximity to the authors home and the presence of both - SIM card selling retailers and offices of major service providers. Forty different retail shops in Purwakarta were chosen using a geographical clustering technique and identified using a local map. Eighty consumers of different ages were chosen at random to represent the consumer population in Indonesia. In addition, secondary data on the respective market shares of all firms and data on SIM card features such as auxiliary services offered and price schemes was obtained from the internet. Processing and analysis of the four criteria suggest that the market is a form of a noncollusive oligopoly where firms are aware of the reactions of other firms when making price decisions. The kinked demand curve is used to demonstrate the working of the market. With the sale of slightly differentiated products, existence of price rigidity in the market, prevalent barriers to entry, firms having adequate information regarding their competitors and the CR4 value of 83% supports this conclusion. In effect the evidence collected supports the hypothesis that the market of SIM cards in the Purwakarta Regency is an oligopoly and is dominated by three main firms namely Indosat, Telkomsel and XL.
Word Count: 291
3. INTRODUCTION
3.1 INTRODUCING SIM CARDS
The modern technological developments in the 21st century cannot be complete without adding the breakthrough of cellular phones. Popularly known as hand phones in Indonesia, these have found a place in almost every purse, pocket or school bag. Being a greatly demanded means of communication and a dear possession to most, it is interesting to note the different factors consumers consider while purchasing SIM cards and how much they spend on it annually. The innumerable private companies all over the world offering atleast one service each, breed the inevitable intrigue to question the closeness of the SIM card market to a perfectly competitive market. GSM mobile phones require a small microchip called a Subscriber Identity Module or SIM Card, to function. The SIM card is as small as a postage stamp and is usually placed underneath the battery in the rear of the unit. A SIM card contains its unique serial number, internationally unique number of the mobile user (IMSI), security authentication and ciphering information, temporary information related to the local network, a list of the services the user has access to and two passwords (PIN for usual use and PUK for unlocking).1
3.2
PURPOSE OF INVESTIGATION
Before the Telecommunication Act of 1999, domestic services were monopolized by P.T. Telkom and international services were monopolized by P.T. Indosat in Indonesia. However, after 1999, the government abolished the exclusive rights of Telkom in providing fixed line services, and Indosat in providing international services and has been trying to promote industry transparency and fair competition since then. Commitment to eliminate all the forms of monopoly by 2010 led to more than 100 registered operators/service providers. The introduction of SMS, and the launch of prepaid services have lead to a growth of subscribers in Indonesia. In August 2005, the government announced the usage of 1900
1
"Mobile Phone Features." Wikipedia, the Free Encyclopedia. Web. 19 July. 2011. <http://en.wikipedia.org/wiki/Mobile_phone_features>.
MHz spectrum for 3G, and 800 MHz spectrum for CDMA which further allowed the new firms to grow. Having a quick glance at the Telecommunication Industry and particularly the sale of SIM cards in Purwakarta now, one gets the impression that the market is perfectly competitive with many retailers selling various kinds of SIM cards. Governments constant efforts seem to be paid off. Therefore, I chose to investigate the market structure of SIM cards in my hometown of Purwakarta located in Jawa Barat, Indonesia; situated 80 km east of Jakarta (the capital city of Indonesia). This district borders the Karawang regency in the West and parts of North, Subang district in the north and parts of East , Bandung regency in the South, and Cianjur districts in the Southwest. The city of Purwakarta lies 720S 10812E2 with an approximate population of 845,509 (2009) with the population growth rate average of 2.28% per year.3 The following research question and hypothesis have been developed to give an insight into the market structure of SIM cards and examine its closeness to a perfectively competitive market: To what extent does the market structure of SIM cards sold in Purwakarta, Jawa Barat fulfills the requirements of a perfectly competitive market (perfect competition theory)? The hypothesis is that the market of SIM cards in the Purwakarta Regency is an oligopoly and is dominated by a three main firms Indosat, Telkomsel and XL. The goal of this essay is to answer the research question and judge whether the above hypothesis holds. The methodology adopted in this essay is discussed in Appendix A.
"Purwakarta." Wikipedia, the Free Encyclopedia. Web. 19 July. 2011. <http://en.wikipedia.org/wiki/Purwakarta>.

3
"Google Translate." Google Terjemahan. Web. 19 July. 2011. <http://translate.google.co.id/translate?hl=en>.
MAP OF PURWAKARTA4
"Purwakarta, Indonesia City Guide." World Weather Forecasts. Web. 19 July. 2011. <http://www.weather-forecast.com/locations/Purwakarta>.
4. INVESTIGATION: ECONOMIC THEORY

USED, METHODOLOGY, DATA PRESENTATION, ANALYSIS & RESULTS
Economists often use models to try to explain how things work and what might be the possible outcomes of certain economic situations.5 The theory of perfect competition is one such model built by economists to analyse and study the nature of markets. It is a theoretical model, based upon the following assumptions: Homogeneous products Many buyers and sellers No barriers to entry/exit Perfect knowledge about market conditions The structure of the market is determined by four different market characteristics: the number and size of the firms in the market, the ease with which firms may enter and exit the market, the degree to which firms' products are differentiated, and the amount of information available to both buyers and sellers regarding prices, product characteristics, and production techniques.6 Economists plot the characteristics of the observed real world market to the above-mentioned theoretical characteristics. The same method has been used in this essay. These characteristics are further discussed in this section. Each criterion has then been examined and appropriate data has been collected to investigate the extent to which the criterion has been fulfilled in this particular market. The data collected has been aptly analysed and evaluated in comparison to these theoretical concepts.
Jocelyn Blink and Ian Dorton. "Chapter 8: Perfect Competition." Economics: Course Companion. Oxford: Oxford UP, 2007. 95. Print.
6
"Economics: Conditions for Perfect Competition." Get Homework Help with CliffsNotes Study Guides. Web. 19 July. 2011. <http://www.cliffsnotes.com/study_guide/Conditions-for-Perfect Competition.topicArticleId9789,articleId-9762.html>.
4.1 HOMOGENEOUS GOODS
4.1.1 ECONOMIC THEORY

In a perfectly competitive market, all sellers produce homogeneous i.e. perfectly identical products. All products are perfectly same in terms of size, shape, taste, colour, ingredients, quality, trade marks etc. It is not possible to distinguish between a good produced in one firm and a good produced in another. There are no brand names and no marketing to attempt to make goods different from each other.7 This ensures the existence of a single price in the market.
4.1.2 DATA COLLECTION METHODOLOGY

On exploring the SIM card industry, one observes the various differences among the SIM cards produced by different firms. Firstly, each SIM card has a specific brand name. Moreover, different service-providers offer diverse price systems and schemes for different SIM cards; thus, the product differs in quality. Since it is possible to distinguish one SIM card from the other, some of these aspects have been compared among varied SIM cards. Data was gathered from the Internet for this purpose. However, if we compare the SIM cards explicitly, all of them are the same in all aspects - be it the size, shape, colour, or quality - irrespective of the retailer. All the selected retail shops in Purwakarta sell almost all the brands of SIM cards. A Mentari SIM card sold in one shop is the same as another Mentari SIM card sold in another shop. Therefore, no data was gathered for the explicit comparison of the products since a particular SIM card is the same in all aspects irrespective of the retailer.
Jocelyn Blink and Ian Dorton. "Chapter 8: Perfect Competition." Economics: Course Companion. Oxford: Oxford UP, 2007. 95. Print.
4.1.3 DATA PRESENTATION
Brand Name Size Shape Colour Type Price System
Mentari Identical Identical Different Pre-paid Calls:

Indosat Operators = Rp. 700/30 sec Other Operators = Rp. 875/30 sec
IM3 Identical Identical Different Pre-paid Calls:

Indosat Operators Three different rates for different times of the day. E.g (17:0024:00) Rp. 240/ 20 sec for first 2 minutes Other Operators = Rp. 240/12 sec
Matrix Identical Identical Different Postpaid Calls:

Indosat Operators = Rp. 450/30 sec Other Operators = Rp. 450/30 sec
SimPATI Identical Identical Different Pre-paid Calls:
Kartu As Identical Identical Different Pre-paid Calls:

To all Operators = Rp. 390/30 sec
Kartu Hallo Identical Identical Different Postpaid Calls:

Local (off net)= Rp. 750/20 sec Non-local (off net) = Rp. 1200/15 sec
Axis Identical Identical Different Pre-paid Calls:

Axisworld Operators = Rp. 780/30 sec Other Operators = Rp. 970/30 sec
SMS:
Indosat Operators = Rp. 99/sms Other Operators = Rp. 149/sms
Telkomsel Operators Four different rates for different regions and time of the day. SMS: E.g (0:00Indosat Operators = 5:59) Rp. 200/12 sec Rp. in 100/sms Sumatera. Other Operators = Other Operators Rp. = Rp. 150/sms SMS: 900/30 sec Domestic= Rp. 150/sms SMS: International= To all Rp. 200/sms Operators = Rp. 150/sms
SMS:
To all Operators = Rp. 99/sms
SMS:
On net = Rp. 125/sms Off Net = Rp. 150/sms
SMS:
To all Operators = Rp. 100/sms
Schemes offered
Three different packages offered
One timebound package offered
Six different packages offered
One regionbound package
One regionbound package
Three different packages offered
Six different packages offered
Table I Features of Different SIM cards compared
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The above information is presented in graphical form:

Average Call & SMS Tariff
2000 1800 1600 1400 1200 1000 800 600 400 200 0 Mentari IM3 Matrix simPATI Kartu AS Kartu Hallo Axis Avg. Call tariff/30 sec Avg SMS tariff/per sms
Average call tariff/30 sec = Rp. 760.71 Average SMS tariff/per sms = Rp. 130.07
Number of Schemes Offered
7 6 5 4 3 2 1 0 Mentari IM3 Matrix simPATI Kartu AS Kartu Hallo Axis No. of schemes offered
Average number of schemes offered = 3

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4.1.4 ANALYSIS & EMPIRICAL RESULTS

On comparing the features of different SIM cards implicitly, it can be concluded that the product is differentiated. The major reason for this is the existence of brand names, different price systems and schemes offered and the service provided by the various operators. Cellular phone systems in Indonesia are operated by eight different private companies, all of whom are partially owned by the government phone company, Telkom.8 Each of these eight service providers offer atleast one prepaid card and one postpaid card. On comparing the prepaid cards in the above table, we find some of the cards having fixed tariffs while others having variable tariffs according to the area and hour of the day. Among the cards with a fixed tariff, Kartu As offers the least prices (Rp. 390/30 sec and Rp. 99/sms for all operators) and Axis offers the highest prices (Avg Rp. 875/30 sec and Rp. 100/sms for all operators). However, on comparing the schemes offered by these cards, Axis offers the maximum number of packages to attract customers. IM3 and simPATI cards offer variable charges. While IM3 divides its rate according to three main time-periods in a day, simPATI divides its rate into four different time-periods in a day and also charges different prices for different areas in Indonesia. The schemes offered are also divided similarly. Postpaid cards like Matrix and Kartu Hallo work in a different manner. While, Matrix splits its charges according to the operator, Kartu Hallo splits its charges according to the net usage. However, Matrix offers more number of packages than Kartu Hallo.
RESULT:
After comparing a few features of the SIM cards, it can be concluded that firms are selling slightly differentiated products. One SIM card can be distinguished from another on the basis of its brand name and the service it offers. Therefore, this criterion does not fulfil the requirement of a perfectively competitive market. Instead, the market is either an oligopoly or a monopolistically competitive market.
"Hand Phones - Cellular Phones, Mobile Phones, and Blackberry in Indonesia." Living in Indonesia, Site for Expatriates-Jakarta Indonesia. Web. 18 July 2011. <http://www.expat.or.id/info/handphones.html>.
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4.2 MANY BUYERS & SELLERS

A perfectly competitive market consists of a large number of buyers and sellers. Each firm is so small, relative to the size of the industry, that it is incapable of altering its own output to have a noticeable effect upon the output of the industry as a whole. This means that a firm cannot affect the supply curve of the industry and thus, cannot affect the price of the product. Similarly, the number of buyers is so large that an individual buyer cannot control the price by changing or controlling the demand. This is because a buyers individual demand forms a very small part of the total market demand. Hence, both buyers and sellers are forced to accept the ruling market price and are said to be price-takers. This ensures a single price in the market decided solely by the market forces of demand and supply. The demand curve for an individual firm is thus, horizontal or perfectly elastic. See Figure 1.1
INDUSTRY D Price of a good P (in $) S 0 Q Quantity of good 0 Quantity of good Price of a good P (in $) D=AR=MR FIRM
FIGURE 1.1: DEMAND CURVES FOR THE INDUSTRY AND THE FIRM IN PERFECT COMPETITION

A perfectively competitive market contains a large number of buyers and sellers ensuring i) only one market price and making ii) all sellers price-takers. To investigate i), the mathematical method of Standard Deviation was used. Through this method, the price divergence from the mean could be determined. In the case of a perfect competition, the mean will be equal to the market price and the standard deviation will be zero, i.e. no divergence from the mean in any case. In the investigation, the lower the standard deviation, the closer the market is to a PCM.
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To investigate ii), the sellers were asked to what extent they are likely to change their price to follow a competitor i.e. if they are price-takers or price-makers. The author chooses to utilise qualitative interviews for this investigation. An example of a question asked in the interview is: If your competitor changes its price for atleast three different SIM cards or alters their respective credit rates, will you follow suit? The complete interview can be found in Appendix F. The answers to these questions and their evaluation can be found below.

To find out whether firms in this market are price-takers or not, the prices of different SIM cards and their respective credit rates were recorded from over forty retail shops in Purwakarta. These readings were used to calculate the standard deviation. The numerical results of this analysis can be found in Appendix B. Forty sellers were asked questions in order to study the extent to which they are likely to change their price to follow a competitor i.e. if they are price-takers or price-makers. The results of this interview are presented below:
QUESTIONS TO THE RETAILERS: Q1 Are your prices fixed? Q2 Do you (the shopkeeper) set the prices? Q3 Do you change your prices often (once in 3-4 months)? Q4 So, if your competitors (3-4 shops on an average) change their price for atleast three different SIM cards or alters the respective credit rates, will you follow suit? Q5 Do you alter your prices according to your cost price (prices offered by the manufacturer/ dealer) ? Yes 40 35 27 5 Maybe 9 No 5 13 26 Average Answer Yes Yes Yes No
40
Yes
Table II Questions asked to the retailers
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From the above questions, it is clear that sellers are simply price-takers, since most of the retailers refuse to change their prices if their competitors alter the prices for atleast three different SIM cards and/or their respective credit rates. It is seen that these independent sellers tend to change their prices slightly (once in a few months) only when their cost price i.e. the prices offered by their dealers change. Few of the retailers also commented on how their prices remain stable and they need to alter the prices very rarely. For instance, in one of the shops named Toko Ponsel, the price of IM3 (SIM card provided by Indosat) was Rp. 1800 in March 2011 and after six months it was increased to Rp. 2000. Among these forty shops, three shops were service centres of three main service providers Indosat, Telkomsel and XL. These claimed to receive their stock of SIM cards directly from the manufacturers in Jakarta. Even these three shops had fixed prices which were directly set by the Centre. Therefore, even these sellers are price-takers. This also explains that in a small city like Purwakarta, the competition is not much and therefore, the sellers find it less necessary to follow their competitors. Also, most of these independent shops get their stock of SIM cards from the same dealer and therefore, there is not much of a difference in their prices. This is confirmed by the lower standard deviation of these retailers (Rp. 673.52) complying with the criterion.
RESULT:
Having a low standard deviation and the sellers being price-takers is in line with the criterion and it can be concluded that the market fulfils this condition of many buyers and sellers. This means that the hypothesis of the market being an oligopoly may or may not hold true. The market can either be a form of monopolistic competition with many sellers selling the differentiated goods or a collusive/non-collusive oligopolistic market with price rigidity.
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4.3 BARRIERS TO ENTRY & EXIT

Firms in a perfectly competitive market are completely free to enter or leave the industry. They are not restricted by government rules and regulations, start-up costs, or other barriers to entry and are not prevented from leaving an industry as is the case for government-regulated public utilities.9 Also, perfectly competitive firms can acquire whatever labour, capital, and other resources they need without delay or restrictions. There is no racial, ethnic, or sexual discrimination and there exists perfect resource mobility. This feature ensures existence of normal profit in perfect competition. When profit is more, new firms enter the market and this leads to competition. Entry of new firms competing with each other results in an increase in supply and fall in price. This reduces profit from abnormal to normal level. When profit is low (below normal level), some firms may exit the market. This leads to fall in supply. So, remaining firms raise their prices and their profits go up; thus, ensuring normal level of profit.10

The third criterion was evaluated using two methods. First, the costs of setting up a SIM card retail store and the costs of leaving the market were examined. Retailers from over ten different shops were asked, in a detailed qualitative interview, abut their stances on barriers of entry/exit. An example of a question asked in the interview is: When starting up a SIM card retail shop, how difficult is it to find a suitable location for the store? The complete interview with detailed answers can be found in Appendix G. The evaluation of the data can be found below. Second, the mobile market share in Indonesia was found using secondary sources and the concentration ratio of the four largest firms (CR) was calculated. CRs are a common
9
"AmosWEB Is Economics: Encyclonomic WEB*pedia." AmosWEB: Economics with a Touch of Whimsy! Web. 19 July. 2011. <http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd>.
10
"Perfect Competition - Meaning, and Main Features In Economics." KALYAN CITY LIFE BLOG - KCL. Web. 19 July. 2011. <http://kalyan-city.blogspot.com/2010/11/perfect-competition-meaning-and-main.html>.
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indicator of concentration in an industry. They are expressed in the form CRX, where X represents the number of the largest firms.
The higher the percentage, the more concentrated is the market power of the four largest
firms.11

The retailers from ten different stores were questioned in an in-depth qualitative interview about their views on the barriers to entry/exit. The results are summarized in the table below:
FACTORS 1. Retail Store Location 2. Storehouse Costs 3. Advertisement Costs 4. Government Policy 5. Penalty Costs 6. Other barriers to exit EVALUATION Barrier Barrier Barrier Not a barrier Not a barrier Not a barrier
Table III Results of Barriers to entry/exit
11
Jocelyn Blink and Ian Dorton. "Chapter 11: Oligopoly." Economics: Course Companion. Oxford: Oxford UP, 2007. 119. Print.
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INDONESIAN CELLULAR MARKET SHARE12
8%
CR4 = 44 + 16 + 15 + 8 = 83%

On analysing the different barriers, retail store location and storehouse costs are the only barriers present. There are no barriers to exit. Regarding store locations, retailers expressed difficulties, both financial and access to prime locations on the main-road which are important for the business to run. A side-business is a must, too. Storehouse costs are also regarded as a barrier to entry since it requires large set-up costs and is limited in size. Firms are found to spend large amounts on advertisement by focusing on their products quality and packaging. Moreover, each firm has its own website designed to attract customers. However, government policies, penalty costs and other factors are not considered a barrier to entry/exit in the market. Therefore, there are significant barriers to entry present.
12
Ahmadi, Hazim. "Cellular Industry in Indonesia | Wireless Wisdom." Wireless Wisdom | Make It Easier! Web. 10 Nov. 2011. <http://hazimahmadi.wordpress.com/2010/04/19/indonesias-wireless-operators-landscape/>.
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When we look at the pie chart of the Indonesian Cellular Market Share, we find Telkomsel (GSM), Indosat (GSM), XL Axiata (GSM) and Telkomflexi (CDMA) being the four largest firms producing 83% of the industrys output. It is an industry with a high concentration of market power among the larges four companies. The CR4 is therefore, 83%.
RESULT:
There are barriers to entry present. Since, in a monopolistic competition there are no barriers to entry and exit, it is likely that the market is an oligopoly. This is further confirmed by the value of CR4 which is found to be 83%. Thus, it can be concluded that the hypothesis does hold true for this particular criterion.
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4.4 PERFECT KNOWLEDGE

All producers and consumers have perfect knowledge of the market. The producers are fully aware of market prices, costs in the industry, and the workings of the market. Each seller also has complete information about the prices charged by other sellers so they do not inadvertently charge less than the going market price. Perfect knowledge also extends to technology. All perfectly competitive firms have access to the same production techniques. No firm can produce its output faster, better, or cheaper because of special knowledge of information.13 The consumers are fully aware of prices in the market, the quality of products, and the availability of the goods. In perfect competition, buyers are completely aware of sellers' prices, such that one firm cannot sell its good at a higher price than other firms.

To study the extent to which there existed perfect knowledge in this particular market, questions were posed regarding how much the sellers know about their buyers and viceversa. Eighty buyers were asked to relate to statements such as: I know the general price level and forty sellers too were asked to mark their accord with statements such as: We keep track of our competitors price. The full enquiry form can be found in Appendix D and E.

In a PCM, all producers and consumers have perfect knowledge of the market. To study the extent to which there existed perfect knowledge in the market, questions were posed regarding how much the sellers know about their buyers and vice-versa. The data from the enquiry forms is presented below:
13
"AmosWEB Is Economics: Encyclonomic WEB*pedia." AmosWEB: Economics with a Touch of Whimsy! Web. 19 July. 2011. <http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd>.
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QUESTIONS TO BUYERS Yes/no (1-5) Q1 Are you familiar with the different SIM card selling shops in Purwakarta? Q2 Are you familiar with the general price level? Q3 Do you know where it is cheapest to buy? Q4 Are you aware of all the different types of SIM cards sold in Purwakarta? Q5 Are you aware of the different types of schemes offered by each of the service providers?
1 2 69 56 6 6
2 8 8 12 11 10
3 64 3 8 55 14
4 6 0 2 7 19
5 0 0 2 1 31
AVERAGE 2.93 1.18 1.53 2.83 3.74
Table IV Questions asked to the consumers
QUESTIONS TO SELLERS/FIRMS Yes/no (1-5) Q1 Are you aware of the general cost of production in the industry? Q2 Are you updated with the latest production techniques in the industry? Q3 Are you aware of the different types of schemes/services provided by the your competitors? Q4 Do you keep track of your competitors prices? Q5 Are you familiar with the expectations of your consumers?
1 3 0 3
2 0 0 0
3 0 3 0
4 0 0 0
5 0 0 0
AVERAGE 1.00 3.00 1.00
2 31
0 6
16 3
7 0
12 0
3.53 1.30
Table V Questions asked to the producers

From these enquiry forms, it is clear that majority of the consumers have an idea of the different SIM card selling shops in Purwakarta and the market prices. One reason why the buyers know where it is cheapest to buy could be the small area of Purwakarta. However, when it comes to the different schemes offered by the various SIM cards, the average is
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only 3.74 indicating that majority of the consumers only know about schemes offered by the SIM cards they use. One reason for this could be the durability of the product itself. A particular SIM card can be used for several years without being damaged. Another reason for this could also be customer loyalty and satisfaction. Offers such as free SMS and free talk-time attract many consumers and these services encourage brand loyalty. This could be one reason why people do not switch to other SIM cards so often and thus, are not aware of the services provided by other SIM cards. Though the sellers are familiar with the expectations of their users, they possess very little information regarding other sellers in the market. Majority of the sellers do not keep track of their competitors prices (3.53). One reason for this could be the reduced competition due to the availability of the product (same dealer providing the stock to the different shops in Purwakarta) and the small size of the market. The three service centres, however, claimed to keep track of their competitors prices and also mentioned how they bought products of other service providers, and used it personally to check the quality of the competitors products. One of the comments from Telkomsel include We obtain the greatest competition from Indosat and XL since they use the same GSM system. The three service centres which can be said to represent the firms, have perfect knowledge about the general cost of production of firms (1.00) and the different types of schemes/services provided by the their competitors (1.00). They are also mediocrely familiar with the latest production techniques used by firms (3.00).
RESULT:
Therefore, it can be concluded that consumers and sellers have perfect knowledge to some extent about each other. The sellers too, have enough information regarding their competitors. With just a few firms producing 83% of the industrys output, each needs to take careful notice of each others actions. Therefore, the hypothesis may hold true.
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5. CONCLUSION
This essay has tried to guide the reader through the comparison of the four main criteria of the Theory of Perfect Competition and that of features of the SIM card market in Purwakarta in order to investigate the market structure of the sale of SIM cards in Purwakarta. Furthermore this essay set up a hypothesis that the market of SIM cards in the Purwakarta Regency is an oligopoly and is dominated by a three main firms Indosat, Telkomsel and XL. For the first criterion of Homogeneous goods, the result is that the hypothesis may or may not hold true. This is because, with the sale of differentiated products, the market can either be an oligopoly or a monopolistically competitive market. For the second criterion of Many buyers/sellers, the investigation showed that the market fulfils the condition of many buyers and sellers. Therefore, hypothesis of the market being an oligopoly may or may not hold true. The market can either be a form of monopolistic competition with many sellers selling the differentiated goods or a collusive/non-collusive oligopolistic market with price rigidity. The hypothesis can still not be rejected. In the third criterion of Barriers to entry/exit, the result is that the hypothesis holds true. There are barriers to entry present and the value of CR4 which is found to be 83%, confirms the nature of the market. In investigating the fourth and final criterion of Perfect Knowledge, the sellers were found to have adequate information regarding their competitors. With just a few firms producing 83% of the industrys output, each needs to take careful notice of each others actions. Therefore, the hypothesis may hold true. The results of the four criteria suggest that the market is a form of a non-collusive oligopoly where firms are aware of the reactions of other firms when making price decisions. We say that the behaviour of firms in an oligopoly is strategic behaviour as they must develop strategies that take into account all possible actions of rivals. In order to explain how firms behave in these situations, economists often use game theory.
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The outcome of price rigidity in non-collusive oligopoly can be best illustrated using the kinked demand curve. Let us assume that in this oligopolistic market, a non-collusive price is somehow arrived at, P. We know that firms are in a highly interdependent situation, where a change in price will certainly lead to a reaction from other firms in the oligopoly.
FIGURE 1.2: THE KINKED DEMAND C URVE 14
The model suggests that: i. Firms are afraid to raise prices above the current market price, because other firms will not follow and they will lose trade, sales and probably profit. ii. Firms are afraid to lower their prices below the current market price, because other firms will follow, undercutting them, and so creating a price war that may harm all the firms involved. iii. The shape of the MR curve means that if marginal costs were to rise, then it is possible that MC would still equal MR and so the firms, being profit maximisers, would not change their prices or outputs. This can be seen in the diagram below. If we assume that the firm is operating on MC2, then they are maximising profits by
14
Javanmard, Mike. "Microeconomics Lecture Notes." Rio Hondo Community College Faculty Websites. Web. 19 July 2011. <http://faculty.riohondo.edu/mjavanmard/microlectures1.htm>.
24
producing Q and selling at P. Marginal costs could rise as high as MC1 and the firm would still be maximising profits by producing at Q and charging P. Thus the market remains stable, even though there have been significant price changes. The answer to the research question is that the market structure of SIM cards sold in Purwakarta, Jawa Barat fulfils only two requirements (many buyers/sellers and perfect knowledge) of a perfectly competitive market, that too, upto a certain limit. This market is a non-collusive oligopoly dominated by three main firms - (Indosat, Telkomsel and XL).
25
6. LIMITATIONS
Apart from the constraints of time and resources, which limited the scope of this research, the other limitations were: All analysis is based on sample size of 80 questionnaires/opinions from consumers and 40 questionnaires from producers. Given the current subscriber population of over 700000, a larger sample can produce more accurate results. More price information and more interviews could help reduce random uncertainties. An error occurring when choosing customers is the possible attachment between buyers and sellers. Certain customers select their retailers upon social reasons as well as geographical. Language barriers could be one reason for the inaccuracy of data collected. All interviews as well as questionnaires were answered in the local language of Bahasa Indonesia and then translated into English. This could lead to misinterpretation of data. It was decided that internet sources were the most pertinent to this investigation. Due to the internets nature as a free source, much of the data was verified. Thus, for all internet sites, no information was quoted or used in the investigation unless taught by an economics teacher, written in a textbook in support, or verified on at least two, preferably three different internet sources.
26
7. BIBLIOGRAPHY
BOOKS: Blink, Jocelyn, and Ian Dorton. Economics - Course Companion. Oxford, 2007. Print. McGee, Matt. Economics: In Terms of the Good, the Bad and the Economist. Victoria: IBID, 2005. Print.
INTERVIEW: H. Muhammad. "Telecommunication Industry in Purwakarta." Personal interview. 6 Oct. 2011
ONLINE JOURNALS: Economics E-Journal. Web. 20 July 2011. <http://www.economicsejournal.org/economics/journalarticles>.
WEBSITES: "Mobile Phone Features." Wikipedia, the Free Encyclopedia. Web. 19 July. 201. <http://en.wikipedia.org/wiki/Mobile_phone_features>. "Purwakarta." Wikipedia, the Free Encyclopedia. Web. 19 July. 2011. <http://en.wikipedia.org/wiki/Purwakarta>. "Google Translate." Google Terjemahan. Web. 19 July. 2011. <http://translate.google.co.id/translate?hl=en>. "Economics: Conditions for Perfect Competition." Get Homework Help with CliffsNotes Study Guides. Web. 19 July. 2011. <http://www.cliffsnotes.com/study_guide/Conditions-for-PerfectCompetition.topicArticleId-9789,articleId-9762.html>. "AmosWEB Is Economics: Encyclonomic WEB*pedia." AmosWEB: Economics with a Touch of Whimsy! Web. 19 July. 2011. <http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd>. "Perfect Competition - Meaning, and Main Features In Economics." KALYAN CITY LIFE BLOG - KCL. Web. 19 July. 2011. <http://kalyan-city.blogspot.com/2010/11/perfectcompetition-meaning-and-main.html>. "Hand Phones - Cellular Phones, Mobile Phones, and Blackberry in Indonesia." Living in Indonesia, Site for Expatriates-Jakarta Indonesia. Web. 18 July 2011. <http://www.expat.or.id/info/handphones.html>.
27
"HALO Fit - Telkomsel." Telkomsel | Home. Web. 20 July 2011. <http://www.telkomsel.com/halofit>. "Tarif KartuHALO - Telkomsel." Telkomsel | Home. Web. 20 July 2011. <http://www.telkomsel.com/product/kartuhalo/8723-Tarif-kartuHALO.html>. "Indosat Integrated Portal - IM3 - IM3 Update." Indosat Integrated Portal - Home. Web. 20 July 2011. <http://www.indosat.com/im3>. "Kartu As - Telkomsel." Telkomsel | Home. Web. 20 July 2011. <http://www.telkomsel.com/product/kartu-as>.
"Indosat Integrated Portal - Matrix." Indosat Integrated Portal - Home. Web. 20 July 2011. <http://www.indosat.com/matrix>. "Tarif SimPATI - Telkomsel." Telkomsel | Home. Web. 20 July 2011. <http://www.telkomsel.com/product/simpati/1670-Tarif-simPATI.html>. "Perfect Competition." Wikipedia, the Free Encyclopedia. Web. 19 July 2011. <http://en.wikipedia.org/wiki/Perfect_competition>. "Prepaid Tariff." Axisworld.co.id. Web. 20 July 2011. <http://www.axisworld.co.id/PrepaidTariff?lang=en>.
"Promo SimPATI - Telkomsel." Telkomsel | Home. Web. 20 July 2011. <http://www.telkomsel.com/simpati-puas-2>. Business Studies Teaching and Education Resources: Biz/ed. Web. 17 June 2011. <http://www.bized.co.uk>. "Extended Essay Guide." Web. 15 June 2011. <http://productionapp2.ibo.org/publication/19/part/4/chapter/10>.
" Extended Essay Samples." School District #42. Web. 17 June 2011. <http://schools.sd42.ca/gsslibrary/?page_id=805>.
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8. APPENDICES
APPENDIX A Methodology
The research question has been answered by using a two-step inductive approach from primary and secondary sources. Primary sources have been used for accurate information and to prevent any distortion of data. Firstly, data was gathered from the market in question through the conducted surveys and statistical price data analysis. Secondly, the results from this analysis were then set in comparison with the national market of smart phone cards. For the hypothesis to hold true, the three main firms of Indosat, Telkomsel and XL should be dominating the market by controlling the market price, producing a large proportion of the industrys output and thus, posing shrewd barriers to entry in the market. In order to answer the research question, data was collected from a range of different consumers and retailers. The aim of the research was to gather price information and characteristics of the consumers and retailers. Both retailers and consumers were given questionnaires with multiple-choice questions and were asked to tick the most appropriate answers.
SELECTION OF CONSUMERS, RETAILERS & SERVICE PROVIDERS

All data was gathered during the period June to October 2011 in Purwakarta, Jawa Barat. The period was chosen to include the festivity of Idul Fitri, assuming that both buyers and sellers would be at a supply/demand information peak due to heavy advertising and enlarged demand. The particular geographical location was selected due to close proximity to the authors home and the presence of both - SIM card selling retailers and offices of major service providers. The data was gathered so that a comparison of the selected SIM card market to the Theory of Perfect Competition could be made.
29
Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay I) SELECTION OF CONSUMERS
This investigation assumes that the consumer: Lives in the city of Purwakarta. Is willing and able to purchase a SIM card. Is still using the product if it has been purchased already.
Special consideration has been given to age, sex and income and data has been collected from five different groups of consumers 1. Students/children, 2. House-wives, 3. Working women (including teachers and salesperson), 4. Businessmen, 5. Local employees (including any factory workers or house maids). This was done to overbridge the possible demand differences among consumers. The average from these different groups was then used for further analysis.
II) SELECTION OF RETAILERS
This investigation assumes that the retailer: Owns a retail shop in the city of Purwakarta. Is willing and able to sell atleast three different types of SIM cards.
Within the borders of Purwakarta, forty different retail shops selling atleast three different SIM cards were recognized. These were selected at random with an aim to represent the entire producer population in Purwakarta. This was done to overbridge the possible supply differences among retailers.
III) SELECTION OF SERVICE PROVIDERS
Though Purwakarta is a small city, offices of two major service providers Indosat and Telkomsel are located here. The author chose to interview the Head of one of these offices for improved understanding and insight into the telecommunication industry.
30
APPENDIX B Calculation of Standard Deviation

Retail shop no. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Mentari IM3 Matrix Starone simPATI Kartu As 3800 3800 3600 3400 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 2800 2800 2800 2800 2800 2800 2800 2800 2500 2500 2500 2000 2000 2000 2000 2000 2000 Kartu HALLO 3400 3400 3400 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 2700 2700 2500 2500 2500 2200 2200 2200 Axis XL Three Fren
5500 5500 5000 5000 5000 5000 5000 5000 5000 4800 4800 4800 4800 4500 4500 4500 3800 3800 3500 3500 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 2800 2800 2800 2800 2800
3000 2500 2500 2500 2500 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500
3000 3000 3000 2500 2300 2300 2000 2000 2000 2000 2000 2000 2000 2000 1800 1800 1800 1800 1800 1800 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1200 1200 -
3000 2800 2800 2800 2800 2500 2000 2000 2000 2000 2000 2000 1850 1850 1800 1800 1800 1800 1800 1600 1600 1500 1500 1500 1500 1500 1500 1500 1450 -
5800 5500 5000 5000 5000 4850 4850 4800 4800 4800 4800 4800 4800 4500 4500 4500 3800 3800 3500 3500 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 2800 2800 2800 2800 2800
3500 3500 3200 3200 3200 3200 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 2700 2700 2400 2200 2200 2200 2200 2000 2000 2000
5000 5000 5000 5000 5000 4800 4800 4800 4500 4500 4500 4500 4500 4500 4500 4500 3800 3800 3500 3500 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 2800 2800 2800 2500 2500
5000 5000 5000 5000 5000 4800 4800 4800 4500 4500 4500 4500 4500 4400 4400 4400 3800 3800 3500 3500 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 2800 2800 2800 2500 2500 2500 2000 2000 2000
2800 2500 2500 2500 2500 2500 2000 2000 2000 2000 2000 2000 2000 2000 1800 1800 1800 1800 1800 1800 1800 1800 1500 1500 1500 1300 1300 1300 1300 -
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The average price of the SIM cards in each shop was calculated to find out the standard deviation:
Retail shop no. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Avg. Price (in Rp.) 4000 4000 4000 4000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000
Avg Price (in Rp.) (x) 4000 3000 2000 Sum:
Frequency (f) 4 15 14 33
x- 1303.04 303.04 -696.96
f(x - )2 6791653.0 1377498.6 6800545.4 14969697
Calculating Standard Deviation:

14969697 33 Rp.673.52
Where mean () = Rp. 2696.96
32
APPENDIX C
APPENDIX D Perfect Knowledge: Questionnaire for Consumers

Q1 - Are you familiar with the different SIM card selling shops in Purwakarta? 1 2 3 4 5
Q2 -Are you familiar with the general price level? 1 2 3 4 5
Q3 - Do you know where it is cheapest to buy? 1 2 3 4 5
Q4 - Are you aware of all the different types of SIM cards sold in Purwakarta? 1 2 3 4 5
Q5 - Are you aware of the different types of schemes offered by each of the service providers? 1 2 3 4 5
33
APPENDIX E Perfect Knowledge: Questionnaire for Producers

Q1 - Are you aware of the general cost of production in the industry? 1 2 3 4 5
Q2 - Are you updated with the latest production techniques in the industry? 1 2 3 4 5
Q3 - Do you keep track of your competitors prices? 1 2 3 4 5
Q4 - Are you aware of the different types of schemes/services provided by the your competitors? 1 2 3 4 5
Q5 - Are you familiar with the expectations of your consumers? 1 2 3 4 5
APPENDIX F Many Buyers & Sellers: Questionnaire for Retailers

Q1 - Are your prices fixed? Yes Maybe No
Q2 - Do you (the shopkeeper) set the prices? Yes Maybe No
34
Q3 - Do you change your prices often (once in 3-4 months)? Yes Maybe No
Q4 - So, if your competitors (3-4 shops on an average) change their price for atleast three different SIM cards or alters the respective credit rates, will you follow suit? Yes Maybe No
Q5 - Do you (the shopkeeper) set the prices? Yes Maybe No
APPENDIX G Barriers to Entry/Exit: Questionnaire for Retailers

QUESTIONS Retail Store Location When starting up a SIM card retail shop, how difficult is it to find a suitable location for the store? SELLERS Not difficult, but expensive. Popular locations on the main-roads are preferable. Need a side-business since SIM cards alone are not so profitable. Large start-up costs ( >Rp. 1000 million) On-going costs are manageable. CONCLUSION: Barrier Storehouses need to be in close proximity; are usually an extension of the shop. Large setting-up costs Size is often limited; expansion in prime store locations is difficult. Labour costs are manageable. CONCLUSION: Barrier
Storehouse Costs Evaluate the storehouse costs that you had to bear while setting up this store initially (comment on other costs-capital, labour, resources, etc.)?
35
Advertisement Costs How large were your advertisement costs when you i) first set-up your store/firm and ii) now, currently?
Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay i) No advertisement costs; location is advertisement enough. Ii) No advertisement costs CONCLUSION: Not a Barrier
Government Policy How significant are the government policies? How far does license requirements, pollution standards, product testing regulations,etc. limit entry into the market?
License required; government policies are not a hindrance.
CONCLUSION: Not a Barrier Penalty costs How difficult is it to overcome contract contingencies with suppliers or buyers and any penalty costs incurred from cutting short tenancy agreements? Low penalty costs for SIM cards.
CONCLUSION: Not a Barrier Other barriers to exit What, in your view, are some other existing barriers to exit in the market? Is it difficult to overcome them? Asset-write-offs: Low expenses associated with writing off stocks of SIM cards. Loss of business reputation and consumer goodwill: Not a problem; since all retail shops sell almost all types of SIM cards. CONCLUSION: Not a Barrier
36

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Extended Essay in ECONOMICS

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Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

Word Count: 291

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

"Purwakarta." Wikipedia, the Free Encyclopedia. Web. 19 July. 2011. <http://en.wikipedia.org/wiki/Purwakarta>.

"Google Translate." Google Terjemahan. Web. 19 July. 2011. <http://translate.google.co.id/translate?hl=en>.

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4. INVESTIGATION: ECONOMIC THEORY

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.1 HOMOGENEOUS GOODS

4.1.1 ECONOMIC THEORY

4.1.2 DATA COLLECTION METHODOLOGY

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.1.3 DATA PRESENTATION

Brand Name Size Shape Colour Type Price System

Mentari Identical Identical Different Pre-paid Calls:

IM3 Identical Identical Different Pre-paid Calls:

Matrix Identical Identical Different Postpaid Calls:

SimPATI Identical Identical Different Pre-paid Calls:

Kartu As Identical Identical Different Pre-paid Calls:

Kartu Hallo Identical Identical Different Postpaid Calls:

Axis Identical Identical Different Pre-paid Calls:

Three different packages offered

One timebound package offered

Six different packages offered

One regionbound package

One regionbound package

Three different packages offered

Six different packages offered

Table I Features of Different SIM cards compared

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

The above information is presented in graphical form:

Average number of schemes offered = 3

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.1.4 ANALYSIS & EMPIRICAL RESULTS

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.2 MANY BUYERS & SELLERS

4.2.1 ECONOMIC THEORY

4.2.2 DATA COLLECTION METHODOLOGY

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.2.3 DATA PRESENTATION

Table II Questions asked to the retailers

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.2.4 ANALYSIS & EMPIRICAL RESULTS

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.3 BARRIERS TO ENTRY & EXIT

4.3.1 ECONOMIC THEORY

4.3.2 DATA COLLECTION METHODOLOGY

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.3.3 DATA PRESENTATION

Table III Results of Barriers to entry/exit

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

INDONESIAN CELLULAR MARKET SHARE12

4.3.4 ANALYSIS & EMPIRICAL RESULTS

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

Anupama Bhatnagar dkz219 (000902-023) Economics Extended Essay

4.4 PERFECT KNOWLEDGE

4.4.1 ECONOMIC THEORY

4.4.2 DATA COLLECTION METHODOLOGY

4.4.3 DATA PRESENTATION