HI5016: Monopolistic Competition and Oligopoly Markets Report

This report examines the market structures of monopolistic competition and oligopoly, using the Indonesian banking industry and the Indian telecom industry as case studies. It begins by defining market structure and its classifications, focusing on monopolistic competition and oligopoly. The report then analyzes the Indonesian banking sector through the lens of monopolistic competition, detailing the sector's growth, the absence of entry barriers, and the application of the Panzar-Rosse model to assess market competition. The findings suggest that the Indonesian banking industry exhibits monopolistic competition. The report further investigates the oligopoly market structure, using the Indian telecom industry as an example, and discusses key players, competitive tactics, entry barriers, and the disruptive impact of Reliance Jio. The report concludes by summarizing the key findings, highlighting the characteristics of each market structure and their implications.

Didi DANADYAKSA
[COMPANY NAME] [Company address]
[DOCUMENT TITLE]

Topic: Monopolistic competition and Oligopoly markets
Executive summary
Market structure of a particular industry specifies a particular condition which must be in the
market. Ease of entry in the market, number of companies, a form of competition and
uniformity of inter-company products are main elements of market structure. This report aims
to investigate the concept of monopolistic competition and oligopoly market with the use of
case study examples. In this report, the monopolistic competition market structure of
Indonesian banking industry has been examined on the basis of the Panzas and Rosse model.
In this model, the operational activities of the banking industry require 3 types of input such
as finance, physical capital, and labour for achieving maximum profit. The findings of this
research showed that the nature of marketing structure of Indonesian banking industry is
monopolistic as there is no barrier for participants to start new bank branches and they offer
differentiable services/products to their customers. In the next section of this report, the
behaviour of oligopoly market has been investigated in context to the Indian telecom
industry. It has observed that the oligopoly market structure of Indian Telcom industry has
been disrupting by Reliance Jio when it kills the competition in the industry by offering
telecommunication services at an astonishingly cheap rate.
Introduction
Market structure can be defined as the degree and nature of competition for services and
goods in the market. Economies of scale, conditions of entry into and exit from the market,
nature of the product, nature, and a number of buyers/sellers are the main determinants of
market structure. The market structure can be classified into five categories on the basis of
competition such as perfect competition, monopoly, oligopoly, monopolistic competition, and
duopoly. The main purpose of this research report is to examine the Oligopoly markets and
Monopolistic competition by using real-time examples of the particular market industry.
Monopolistic competition refers to an imperfect competition where many of the firms are
selling goods and services which have been differentiated from one another in terms of
quality and pricing. On the other hand, in the oligopoly market structure, there are few large-
scale organizations who are selling differentiated or homogeneous products and services.
Both oligopoly and monopoly market structures provide business organizations with
advantages of assured revenue. Oligopolistic business organizations should optimize their
outputs rather than enjoying the assured profits because oligopolistic markets are bound to
exist in all national economies (Gaol and Yusuf, 2018). In the first section of this report, the

concept of monopolistic competition has been examined in the context of the Indonesian
banking industry. The next section of this report outlines the concept of oligopoly market in
context to the Indian telecom industry. The last section of this report summarized the key
findings of this conducted research.
Monopolistic competition market structure
The monopolistic competition market structure falls between a pure monopoly and perfect
competition market structures (Abduh, 2017). It is imperfect competition market structure
where most of the business organizations are selling similar goods and services which are not
identical. All business organizations have been provided with a certain degree of market
power in the monopolistic competition market structure which allows them to charge their
consumers at higher prices. Free entry and exit, product differentiation and many sellers are
main attributes of monopolistic competition (Gaol and Yusuf, 2018). In this type of market
structure, a number of business organizations adjust until the value of economic profit is zero
(Božinović, 2011). In the following section, the concept of monopolistic market structure has
been examined in context to the Indonesian banking sector:
Indonesian banking sector
In 1988, there were only 104 private banks and 7 states banks in Indonesia. The banking
sector grew at a rapid rate between 1982-1992 due to regulations made by the government of
Indonesia (Arrawatia and Misra, 2012). In the current scenario, the branches of the banking
industry have been grown rapidly which leads to an increase in the price of production factor
and revenue. In the monopolistic competition market, there is no barrier or restriction for
firms to enter the business market. October 1988 Package offers a mild condition in terms of
forex transactions and establishment for the banking industry in Indonesia. At that time, the
investors have easily established their new banks in the market which results in rapid growth
in the banking sector (Gaol and Yusuf, 2018). According to the micro banking policy,
banking organizations are free to open new branches, differentiate their deposit products and
ease inter-bank lending. Moreover, Foreign investors are eligible for buying shares of a
banking organization in the stock market. The baking industry has been offered a broad range
of service and products to its customers. There is no doubt that the perspective of customers
is the same in context to all services/products, but the advantages of each product or service
are different. According to Boedi Armanto and Ratna Sri Widyastuti (2013), in the
monopolistic competition market, the revenue of firms should be increased with the increase
in production factor price such as wages of labour.

The competition in the Indonesian baking sector is a monopoly but not perfect competition.
Moreover, the banks are not in pure competition situation because, in perfect (pure)
competition stage, new banks are threatening to go bankrupt. However, there is an inter-bank
competition occurs in the banking industry because participants are struggling for productive
resources like saving, deposits, and lending of income sources (Arrawatia and Misra, 2012).
During the last ten years, the increasing number of bank branches led to an increase in the
wage of labour and the price of production. According to Boedi Armanto (2013) and Yildirim
(2004), the revenue of the organization has increased with an increase in production price in
the monopolistic competition market structure. Moreover, there is a positive relationship
between production factor and revenue if the competition is in perfect competition. On the
other hand, the competition can be monopolistic, if there is a negative relationship between
production factor and revenue (Božinović, 2011).
The PR (Panzar and Rosse) model has been used for assessing the market competition in the
baking industry of Indonesia (Božinović, 2011). John C. Panzar and James have introduced
this model in 1987 by developing empirical tests that allow users to distinguish perfect
competition, monopolistic competition and oligopolistic competition. It uses cross-sectional
for assessing competitive nature and behaviour of banks based on characteristics of revenue
equations. The PR model is applicable to the banking industry as it delivers one type of
service product (loan/credit). In the context of this model, the operational activities of the
banking industry require 3 types of input named as finance, physical capital, and labour for
achieving maximum profit. In the context of this model, the optimization done by the banking
organization in Indonesia should fulfil zero profit condition in order to make a balance
between the cost and income. The PR model can be described as the balance of marginal cost
(input price) with gross revenue (Yomogida, 2010). The empirical study conducted by (Gaol
and Yusuf, 2018) stated that input prices of LOATA (Loan to Total Assets), EQTA (Equity
to Total Asset) and PL decline (fund, capital and labour cost) used for generating the overall
output of banks have a positive impact on the revenue. These input variables increase the
revenue of the banking organizations in Indonesia. Moreover, banking organizations have
control over the price of their services and goods (Božinović, 2011). By analysing the

existing market structure of the banking industry of Indonesia, it has been observed that it has
possessed the characteristics of monopolistic competition industry as there is no barrier for
participants to enter the market (Yomogida, 2010). (Gaol and Yusuf, 2018) has measured the
competitive level of the banking industry in Indonesia with the use of the PR model in terms
of loan funds, physical capital and labour. The value of measured H-statistics was 0.11405
which lies between 0<H<1. However, there is imperfect competition in the Indonesian
banking industry on the basis of the measured value of H Statistic. Hence, the key findings of
the study conducted by (Gaol and Yusuf, 2018) showed that the Indonesian banking industry
has monopolistic competition. Along with this, different banking organizations offer different
products and services to customers. These attributes of the banking industry have been
proved its monopolistic competition market structure (Abduh, 2017).
Oligopoly market structure
Oligopoly is a type of market structure in which only a few firms compete for products and
services (Severová et al., 2011). For new companies, there are some entry barriers in an
Oligopoly market. The profitability and monopoly power of oligopoly business organizations
depends on the level of interaction between organizations (Anyesha, Hassan and Aboki,
2016). Technological, legal and economic factors could contribute to the maintenance, and
formation of oligopoly market structure. There are barriers for new business organizations to
enter the market. In the oligopoly market, some companies compete aggressively whereas in
others cooperate with each other. In short, the oligopoly market structure is imperfect in
nature in which few business organizations produce homogenous services/products.
Interdependence, the importance of selling and advertising costs, group behaviour,
indeterminateness of demand curve and price rigidity are main characteristics of oligopolistic
market structure. The profitability of companies depends on the nature of competition among
them. For example, companies achieve lower profits when they compete aggressively in the
market (Dragasevic, 2011). Many of the researchers and practitioners have utilized game
theory in order to examine the nature of competition in a specific industry as the nature of
oligopoly market-related problems depends on strategic reciprocal relationships between
different business participants (Schroeder and Tremblay, 2014). The oligopoly of Indian
telecom industry has been discussed in the following section:
Indian Telecom industry
Bharti, Vodafone, MTNL, Reliance Jio, Reliance, BSNL, Idea, Telenor, Sistema, Tata,
Bharti, Airtel, and Aircel are major key players in the wireless segment which have

dominated an Indian Telecom industry. Presently, the industry has been filled with various
corporate giants who are demanding the business of approximately 1.5 billion people all over
the world. There is no doubt in that each and every corporate giant has imbibed specific
features & qualities which allows its end users to have a strong preference in the business
market. These features mainly involve specific logistic capabilities such as ease of obtaining
post sales assistance, network reception, plans & schemes for corporate & families etc. It has
been observed that Indian telecom business organizations engage in competitive and fiercer
tactics with the introduction of 4G and 3G network. Most of the telecom business
organizations have followed an identical business model but their pricing schemes are
relatively different from each other. There is a strong barrier of entry in Indian Telecom
industry as companies require huge operating expenditure (OPEX) and capital expenditure
(CAPEX) for entering in the telecom industry (Severová et al., 2011). The capital expenditure
cost includes cost for obtaining licences, machinery set up, infrastructure and other fees paid,
whereas OPEX cost includes telecom tax, maintenance charges, corporate tax, advertisement
cost, administrative and operational costs. In the oligopoly market, competitors compete on
the basis of volume (quantity) and the price of products/services. However, the telecom
industry is based on fierce competition model (Sharma, 2017).
Indian telecom industry market share 2018 (Lead, 2019)
By analysing the existing market trends of the industry, it has observed that companies are
independent and act after acting actions of their competitors into account. Moreover, the
recent market nature of Indian Telecom industry presents the characteristics of an oligopoly

market. There are high chances of formation and collusion of cartels in the industry due to
huge market share and limited competition (Satyanarayana and Rao, 2017). The oligopoly
market structure of Indian Telcom industry has been disrupting by Reliance Jio when it kills
the competition in the industry by offering telecommunication services at astonishingly cheap
rate (Sivaraman, 2016). Nowadays, telecom service providers are findings for profits and
market share on the based on differentiated products and prices. Reliance Jio has created such
kind of situation for other participants to slash the cost of their products. Ambani (owner of
Reliance Jio) knew that if he reduces the price of telecommunication services and products,
then all competitors will follow him.
Cartel theory of oligopoly has been applied in order to examine the stability and feasibility of
Jio’s existing price competition (Sharma, 2017). The cartel can be defined as a type of
collaborative agreement for the business organizations to enter in a specific business market
industry. With the use of cartel, the cooperations amongst business organizations can be
defined in an effective way. According to this theory, if organization A enters into a cartel
agreement with organizations C, B, and D, then it is essential for an organization to abide
cartel rules in terms of quantity, price and other aspects of competition. Presently, individual
telecom player is providing more monopoly power to Jio as it reduces their normal level of
profits by offering services at a cheaper rate. In context to the Cartel’s theory, it has been
found that the Cartel receives a profit of 150 when its price is the same as the level of Jio. Jo
has earned greater levels of profits by reducing the price of telecom services and greater
market access. The current market position of jio and its dominant market strategy helped it
to sustain in the telecom market industry.
Kinked demand curve suggests that business organizations reduce their overall prices of
products and services, then demand will be inelastic and relative price change is smaller. In
simple words. The reduction is price strategy during inelastic demand could result in fall in
revenue with no or very little impact on the business market share. In the context of the
Kinked Demand curve, some assumptions have been presented in the following section:
1. The products quality should remain constant and the business organization should not
spend money on product marketing and advertisement.
2. Business organizations produce close-substitutes goods/products.
3. There are very few business organizations in an oligopolistic business market.

As per the kinked demand curve hypothesis designed by Paul M. Sweezy, the demand curve
facing an oligopoly has a kink at the stage of prevailing price because the segment of the
demand curve is highly elastic and above the prevailing curve. When this approach mapping
to the telecom industry of India then it has been found that lower pricing strategy of Jio has
challenged the existing static pricing nature of telecommunication services and products. The
oligopolistic organizations are facing inelastic demand curve in case of low prices. The
possibility of collision is high in an oligopoly market with differentiated services and
products. According to the Kinked demand curve model of oligopoly market structure, the
industry accepts one player as an industry (market) player or leader and other participants
follow it as a pricing setter. In context to it, Jio set prices of telecommunication services and
products below the marginal cost of the incumbent. Moreover, the kinked demand curve also
proved the existence of price rigidity in the market. Jio has reduced the price of its products
in order to stay competitive and attain competitive advantages in the Indian telecom industry.
The chances of losing market share and subscriber base is higher if organizations are using
high product cost pricing strategy. When Jio was emerging in the telecom industry, the
charing price strategy of Bharti Airtel was 1p/second in context to voice calls. The entrance
of Reliance Jio has been changed the traditional business model used by charging consumers
Rs. 149/month for data services, SMS and voice. The consumer base of Jio has been growing
rapidly with time as it provides cost-effective telecom services as compared to other
competitors.

The kinked demand curve (Econfix, 2017)
Conclusion
This report summarized that characteristics of the market structure of the Indian telecom
industry and Indonesian banking industries in a detailed manner. In this report, the PR model
has been used for assessing the behaviour and nature of the banking industry. It has been
observed that it has possessed the characteristics of monopolistic competition industry as
there is now a barrier for participants to enter the market. Monopolistic competition is an
imperfect competition where many of the firms are selling goods and services which have
been differentiated from one another in terms of quality and pricing. When kinked demand
curve hypothesis mapping to the telecom industry of India then it has been found that lower
pricing strategy of Jio has challenged the existing static pricing nature of telecommunication
services and products. In this report, the kinked demand curve hypothesis and Cartel theory
of oligopoly proved the oligopoly nature of the market structure of the Indian telecom
industry. The key findings of this study represented the key differences between oligopolistic
and monopolistic market structure.
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