Features Of Oligopoly And Case Study Hotel Oligopolies Economics Essay

An Oligopoly is a market with a small number of large players (David Begg and Damian Ward 2009). In an Oligopoly kind of market all the players are interdependent. This kind of market arises where there exists a small number of relatively large firms which are constantly wary of each other’s action regarding price and non price competition. As stated above in Oligopoly all the major players are interdependent, their competitive strategy is also interdependent in terms of pricing of product, advertising strategies, new product development etc. The nature of products marketed by Oligopolists is homogeneous e.g. Oil but the product range may be differentiated also e.g. Automobile manufacturing industry.

Normally Oligopolists are trend setters rather than trend followers in terms of pricing of products. Most of the times competition between Oligopolists leads to different outcome. In some situations the firms may employ restrictive trade practises (collusion, market sharing etc) to raise prices and restrict production in much the same way as a monopoly (www.wikipedia.com, accessed on 21-11-2010). Some of the countries make a formal agreement for such collusion and such kind of formal agreement is termed as ‘Cartel’. The most common example of cartel is ‘OPEC’ i.e. the Organisation of petroleum exporting countries.

Key features of Oligopoly –

Entry Barriers – Entry barriers can be defined as” an obstacle to firm’s ability to enter an industry” (Pg.129 David Begg and Damian Ward 2009).

The types of entry barriers can be of following types viz.-

1) Innocent / structural barriers – Innocent or structural entry barriers can be defined as type which is exogenous in nature and does not occur knowingly by the companies. Innocent / structural barriers occur due to change in technology, consumer affinity towards the goods or govt interference

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The Minimum efficient scale (MES) is the minimum scale of operation that is needed in order to operate at lowest cost. If the MES is very high, it can act as barrier to entry”. (Source – Pg.129 David Begg and Damian Ward 2009). MES can be high because of cost of investment on facilities or it can be created by means of brand building

2) Strategic/ behavioural barriers – Strategic or behavioural barriers are endogenous in nature and can be defined as the “behaviour by incumbent firms to make entry less likely” (Pg.160 Economics by David Begg).Interdependence among the firms – As mentioned earlier also that Oligopolists are interdependent so as to maximise their profits. Interdependency between two companies is a must to maintain oligopoly as if one company takes any independent decision that can harm both the companies in terms of profit making.

Concentration ratio – When we talk about oligopoly we should always keep the things in mind that Oligopoly includes a highly concentrated industrial structure where the whole competition is limited between a small numbers of competitors.

Determination of concentration ratio can be done by determining the total market share of N number of largest firms operating in area.

Game theory – Game theory depicts the competitive behaviour between two market players. If both the players will collaborate with each other then only they will get the long term goals. But in short terms if player A will do cheat with player B then he will definitely get benefitted and for the short term gains Player B should also compete in this manner only to get benefitted. Nash equilibrium is a phenomenon which occurs when each player does what is best for them, given what their rivals may do in response (Pg.137, David Begg and Damian Ward).

Oligopoly is of two types VIZ – Collusive and Non collusive oligopoly

Collusive Oligopoly – Collusive oligopoly can be defined as “when Oligopolists agree (formally or informally) to limit competition between themselves. They may set output quotas, fix prices, limit product promotion or agree not to poach each other’s markets. (Pg.237 John Sloman and Mark Sutcliffe). e.g. – Cartel.

Source – www.tutor2net.com

The cartel leads to maximisation of profits if its behaviour will be like Monopoly. Graphical illustration of this condition is as follows

Above cited, market demand curve is shown with the corresponding market MR curve. The cartel’s MC curve is horizontal sum of the MC curves of its members. Profits are maximised at Q1 where MC=MR. The cartel must there for set a price of P1 (at which Q1) will be demanded.) (Source– Pg.237 John Sloman and Mark Sutcliffe)

Non Collusive Oligopoly – When Oligopolists do not undergo any kind of formal or informal agreement the condition is known as non collusive oligopoly.

Theory involves the study of rational strategies in small group situations (Pg. 105, Graham Donnelly). Game theory involves the behaviour in strategic situations, or games, in which an individual’s becomes successful by the steps or choices taken by others.

Kink demand curve : Kink demand curve reflects the pricing behaviour . It explains that if one market player increases the price then it is not necessary that others will follow the same trend by increasing the price resulting into serious profit minimisation to the player with inflated cost.

On the contrary if one market player decreases the price then everybody will follow the same trend so as to keep the customers.

http://www.economicshelp.org/images/micro/kinded-demand-curve.jpg

Game theory – Game theory depicts the competitive behaviour between two market players. If both the players will collaborate with each other then only they will get the long term goals. But in short terms if player A will do cheat with player B then he will definitely get benefitted and for the short term gains Player B should also compete in this manner only to get benefitted. Nash equilibrium is a phenomenon which occurs when each player does what is best for them, given what their rivals may do in response (Pg.137, David Begg and Damian Ward).

Assessment of the extent to which the industry is an oligopoly and the extent to which the industry could support price fixing.

Oligopoly in Hotel Industry (U.K. Scenario) –

Introduction –

In continuation with oligopoly in U.K hotel industry we can say that there are wide varieties of hotels in U.K. offering different types of hospitalities. A hotel can be defined as an establishment that provides different type of facilities right from fooding to lodging to the customers.

U.K .hotel industry is a well developed industry. To understand the phenomenon of Oligopoly we should have the idea of market share of top hotels in U.K. With the help of our understanding about various other factors as market share of top hotels, concentration ratio etc we will discuss the features of oligopoly in existing U.K. hotel industry. This part of assignment will also consist the various characteristics such as profit maximising conditions, ability to set price, entry and exit barriers, profits etc.

Market share – As per the definition of Oligopoly says that it is a market with a small number of large players. If we go through the big market players in U.K. hotel industry we can very well watch the following bigwigs –

Best western, Whitbread, Compass, Six continents, Corus and Regal, choice, Hilton etc.

Oligopoly in U.K. Hotel Sector –

Source -www. tutor2u.net( Accessed on 22-11-10)

Concentration ratio — Concentration ratio in Oligopoly includes a highly concentrated industrial structure where the whole competition is limited between small numbers of competitors.

Determination of concentration ratio can be done by determining the total market share of N number of largest firms operating in area.

By accessing market share data of hotel sector we can very well determine the concentration ratio.

3 firm concentration ratio = 20.2+18.5+10.7 = 49.4

5 firm concentration ratio =20.2+18.5+10.7+10.2+6 = 65.6

7 firm concentration ratio = 20.0+18.5+10.7+10.2+6+5.1+4.9 = 75.6

Entry barriers – Entry barriers in hotel industry have a very major role to play as high entry barriers restrict other firms to enter and thus existing firms make a good profit.

High entry barriers for new firms are very much beneficial for existing firms as if there will be high entry barriers it would be somewhat difficult for new entrants to come inside that circle.

For new players entry barriers are very stringent existing players also have a very tough exit barriers because of high capital investment, sunk cost etc.

Some of the entry barriers for newcomers in hospitality industry are as follows –

Advertising – Advertising is a type of entry barrier which is a must for a new entrant and since a huge cost is involved in advertising it becomes difficult for a firm with low advertising budget to survive.

High capital investment – In today’s world where every new project requires a very heavy capital investment, new entrants found difficult to cope with the high capital requirement.

Government regulations – Stringent government regulations are mandatory in hospitality industry thus government regulations act as entry barrier for a new firm.

Land resources – It is very essential for any business to concentrate on a good land resource or place to ensure convenience to footfall of customers.

Existing market players can also do some mischief for the budding businesses as to play with the price variably, conniving with regulatory authorities to create hurdles for new businesses etc.

Collusion – In U.K. hotel industry there cannot be any formal agreement between two conglomerates which is illegal and known as cartel.

Tacit collusion – This is type which involves an informal understanding between two market players to control the things and finally barometric price leadership will occur in which for the benefit of whole industry one player will take initiative and rest will follow the trend. .

The demand of hotels in terms of number of customer footfall will follow Kink demand graph. As one player increases the cost it is not necessary that every player will follow the trend and as a result the first player will be a sufferer in terms of loss of profits and on the contrary if one player decreases the cost every other player will also do the same.

Conclusion – Hotel industry is a typical oligopolistic industry. Once again in the conclusion part if we go through the definition of Oligopoly that clearly states that Oligopoly is a market with a small number of large players, hotel industry is an industry with a small number of large players. They are small in number due to high entry barriers and high exit barriers.

Concentration ratio in hotel industry is high which proves the condition of Oligopoly among the industry.

Hotel industry follows kink demand graph which is prime characteristic of oligopoly.

Finally hotel industry do not follow cartel but tacit collusion occurs between the players so it has been proved that hotel industry is a typical example of Oligopoly.

References

Begg, D, Ward, D 2007, economics for business, 2nd edn, McGraw-Hill, Berkshire

Oligopoly, www.wikipedia.com,viewed 21-11-2010

Begg D, Fischer S, dornbusch R (2000). Economics 6th edition McGraw-Hill Berkshire

Sloman J and SutcliffeM ( 2001) Economics for Business 2nd edition Pearson education Essex

www.tutor2net.com viewed 21-11-2010

Donnelly G( 1991) A foundation in economics ,Stanley Thornes Publishers Ltd.Cheltenham

Nellis JG and Parker D(ed) (1992) The Essence of Business Economics, Prentice hall Hertfordshire