The Extent to Which Mobile Phone Networks Reflect Oligopolistic Market Structure - Literature review Example

Name: Institution: Title: Mobile Phone Networks Tutor: Course : Date: Introduction Oligopoly market refers to a condition that exists when there are few sellers and as a result leading to a greater influence in the price of a commodity and other market factors. The market structure exists in many nations. Various industries such as mobile phone network normally have some aspects of oligopolistic market structure. In analyzing the nature of oligopoly, it is important to look at the nature of producers and buyers in the market, the type of products produced by the producers or firms in the market. According to Hutchison and Macy (2009), it is also important to consider if there exist interdependence and competition among the few large firms in the market. The extent to which industries reflects oligopolistic market structure can be done by considering if the industry in question displays the main characteristic of oligopolistic market structure. The nature of oligopoly Oligopoly can be described as a condition in an industry in which few companies that control a lot of the market share dominate the market. The firms in oligopoly are few in away that the actions of a given firm can easily control the actions of the other firm. Profit maximization by an oligopolistic firm facing a kinked-demand curve Oligopolists face kinked-demand curve due to high competition that emanate from other oligopolists in the market. A price increase by an oligopolist above the p (equilibrium price) is assumed to mean that other players in the market will not follow the price increase of their own. The firms will then face a more elastic demand curve MD1 In Australia, the mobile phone network industry is dominated by four firms, which are Telstra, Three, Optus and Vodafone Hutchison Australia. These few companies have control over the price and impose high barriers to new entrants in the market. Barriers to entry in oligopoly are usually high. The most significant barriers are patents, economies of scale, access to costly and complicated technology and strategic actions by present companies organized to destroy or discourage growing companies. The mobile network companies in Australia are using complicated technology. Optus is providing 3G networks, a complicated technology to implement. Telstra on the other hand is providing next G networks. In the long run, Firms in an oligopoly can retain abnormal profits. The high barriers to entry prevent sideline companies from entering the industry to get rid of excess profit. Commodities in oligopoly market can either be homogenous or differentiated (Hutchison, 2009). Hutchison (2009) argues that the commodities that oligopolistic companies produce are always almost identical. In Australia, the four major companies in mobile phone networks industry produce almost identical products. Production of identical products normally leads to stiff competition. The competition can cause broad range of outcomes. In some cases, companies might use trade practices that aim at enhancing prices and restricting production. Trade practices such as collusion can be applied by firms as an attempt of stabilizing unstable markets. Firms always collude so that they can minimize the risks experienced in investment and product development markets. In many countries there exist legal restrictions on collusion (Hutchison & Macy, 2009). Competition among producers in an oligopoly can be stiff, with fairly low prices and increased production. This can result to an outcome that is useful and close to perfect competition. In most cases, competition in oligopoly can be greater than in the market that has many firms. This therefore implies that oligopolies’ welfare analysis is responsive to parameter values that are applied in defining the structure of the market. In oligopoly market, the level of dead weight loss is always difficult to assess. For firms in an oligopoly to stifle competition, they normally develop more levels of differentiation when producing their products. Oligopolies normally have perfect information about their expenses and demand functions. Their inter-firm information on the other hand might be incomplete. Buyers always have imperfect information about the quality of the product, price and cost. The most outstanding aspect of an oligopoly is interdependence. An oligopoly is typically characterized by availability of few large firms in the market. Each firm is very big in away that its action can easily influence market conditions. This normally makes the competing firms to react correctly because they are aware of firms’ market actions. This therefore implies that in a contemplating market action, a firm needs to consider the probable responses of every competing firm and countermoves of a firm. In oligopoly, firms normally anticipate for a number of moves and countermoves in finding out how they can attain their objectives. For instance, an oligopoly that assumes price reduction may desire to approximate the possibility that firms that are competing may reduce their prices and probably trigger price war that is unfavorable. If the firm on the other hand is assuming price increase, it might desire to know if other firms will also enhance their prices or hold constant the prevailing prices (Morton & Goodman, 2003). According to Tucker (2008), firms in an oligopoly market normally function under imperfect competition. Firms in this industry employ non-price competition since application of price competition is always not favorable. In Australia, mobile phone network Companies normally involve in non-price competition so that they can accumulate huge amount of revenue and market share. The demand curve for these firms is kinked. The kinked demand curve resembles the traditional demand curve since they also slope downwards. Kinked demand curve can be differentiated from the common demand curve by its hypothesized convex bend with a discontinuity at the bend, referred as kink (Sloman, 2008). The motivation behind the kink is the fact that in an oligopolistic competitive market, companies cannot increase their prices since a small increase in price might cause companies to lose their customers. This is because other players in the market will not respond to the increased price. They will be hoping to attain a huge market share as a result of having relatively lower prices. A large price reduction on the other hand will result to only gaining few customers. This is because an action of this kind normally starts a price war with other companies. Therefore, the demand curve for oligopoly market is more price-elastic for increased price and less price-elastic for price reduction. This implies that firms can only enter into the market in the long run (Tucker 2006). The extent to which Mobile phone networks reflects oligopolistic market structure According to Tucker (2006), an oligopoly is a market structure that is common in many nations. The four-firm concentration is usually employed when describing oligopoly quantitatively. The measure normally displays the market share of four biggest firms in the market as a percentage. For instance it is estimated that Telstra, Three, Optus and Vodafone Hutchison Australia together control more than 80% of Australia mobile phone networks market. In Australia, Optus is the most common firm in mobile phone networks industry. Optus has a market share of about 25%. The market concentration ratio of mobile phone networks in Australia is quite high. In United States the mobile phone networks have a total market share of approximately 89%. It therefore implies that the concentration ratio for mobile phone networks is quite high in almost all the countries in the globe thus mobile phone networks follows an oligopolistic market structure. In United Kingdom O2 company is a firm that is well established and has been in the mobile phone networks industry for several years (Morton & Goodman, 2003). The mobile phone networks industry is usually considered a mature industry. Oligopoly market structure is the main feature of a mature industry. The mobile phone networks industry in Australia and other major nations such as US has been in existence for along period of time thus considered as a mature industry. Firms in an industry normally involve in competition so that they can win large share of the market. Several types of Competition exist in the industry. In Australia, mobile phone networks are employing non-price competition and branding. Morton & Goodman (2003) notes the firms in the industry that have greater focus on marketing normally have an opportunity of obtaining greater market share. Branding is also important since many people have a lot of trust on Networks Company such as Optus, Three, Vodafone and Telstra that have been in the market for many years. These four companies have been in operation for many years and have been able to maintain their good reputation since their existence. The presence of kinked demand curve also prevails in the mobile phone networks industry. In the market, the four large firms cannot dare to raise their prices anyhow simply because a small increase in price by any firm will result in losing many customers (Mukherjee 2007). Collusion normally occurs in an oligopoly market structure. Two or more firms can collude and influence the whole market. As much as mobile phone networks industry is concerned, collusion does not exist in Australia’s networks industry. All the networks companies are operating independently, that is, there is no corporation that prevail among the mobile networks companies. Supernormal or abnormal profit of the firm is a profit that exceeds the normal profit. In mobile phone networks markets, companies do not always earn abnormal profit instead they earn normal profits that are equivalent to opportunity cost of capital and labor. Barriers to entry into the market also exist in mobile phone networks industry. This implies that there are specific barriers that prevent all new firms from entering the mobile phone networks industry. In case a local firm desires to operate internationally, it needs to be informed initially about its international and globally dispersed players and the barriers that it is going to encounter when it go globally (Forgang & Einolf 2006). Conclusion An oligopoly is a market structure with few firms in the market. Oligopolistic market structure is always characterized by Presence of barriers to entry, interdependence, production of homogenous products, presence of collusion, presence of kinked demand curve and presence of non-price competition and branding. It is evident from the discussion that the mobile phone networks industry reflects clearly an oligopolistic market structures theory to a certain extent. The concentration ratio for mobile phone networks industry is quite high. The industry uses non-price competition and branding as away of competing. In the industry there is also a presence of barriers to entry, presence of a price leader and some interdependence. These are features of oligopolistic market structure. The industry however, does not reflect a true oligopolistic market structure since collusion does not exist in the market. Firms in the industry do not also earn abnormal profit. It is therefore recommended that for firms in mobile phone networks industry to fully reflect pure oligopolistic market structure they need to have a market concentration ratio of 100%. The four large firms need to collude with the two small firms thus forming four biggest firms with market concentration ratio of 100%. The firms will also be capable of getting abnormal profits. Bibliography Hutchison W. T., & Macy A., 2009, Record label marketing, New York: Focal Press. Morton S.J. & Goodman B. R., 2003, Advanced Placement Economics: Teacher Resource Manual, New York: National Council on Economic Educ. Mukherjee S., 2007, Modern Economic Theory, New York: New Age International. Sloman, J., 2008, Economics and the Business Environment. 2nd edition, FT Prentice Hall. Forgang G.W., & Einolf W. K., 2006, Management economics: an accelerated approach, New York: M.E. Sharpe. Tucker, B. I., 2008, Microeconomics for Today, London: Cengage Learning. Read More