A MINI PROJECT REPORT

“ECONOMICS” ON

“OLIGOPOLY”

A MINI PROJECT REPORT submitted to the SRM Institute

of Science and Technology in partial fulfilment of the
requirements for the Degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by
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

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 notidentical.

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 rival’s response when choosing
output and price.
4.Non-price competition
Non-price competitions a consistent feature of the competitive
strategies of oligopolistic firms. 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.
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. 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 the mare considered inputs into luxuries
(eg, 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. 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 over discrimination against
foreign companies or exclusion of any companies other than on such
self-evident criteria. However, the government’s insistence that
discovered oil and gas must be used in India—its implicit export
ban—reduces 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
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.
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. 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.
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 for min 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