Introduction
This assignment is a discussion on the topic of marketing. In the discussion, attention is given to the oligopoly industry and its key features. This will be illustrated using the oil industry which comprises firms which do the business of oil and gas. The discussion also looks at the concept of price fixing by exploring the detergent industry especially in Europe and the economic rationale behind not fining Henkel, one of the companies which were found guilty of price fixing by the commission in charge of competition.
Discussion
Oligopoly industry
Oligopoly is a market structure which is characterised by few but big firms. The firms usually know each other very well and they are characterised by sharing the whole market in terms of percentages. For example, if there are four big firms in a certain field, each usually occupies a certain percentage of the whole market in terms of capital base and the number of customers (Vives, 2001).
One characteristic of oligopoly is a cut throat competition. This means that the firms in an oligopoly industry usually compete for the customers but in very unique ways. Some of the ways in which firms compete is through what is referred to as differentiation and positioning.
In marketing, differentiation is the process of distinguishing a product or service from the rest through describing its unique differences and or characteristics. It is done for competition purposes with a view of creating a market niche for that particular product or service. Differentiation seeks to create a good image about a particular product among the targeted consumers so as to ensure that they perceive it as unique and different from other similar products (Armstrong and Kotler, 2009).
Product differentiation makes the targeted consumers not compare a particular product with others; which gives that particular product a competitive advantage over the others. In doing differentiation, marketers or product owners may rely on advertisement, promotions, improved product quality, lowering or increasing the prices as well as the lack of understanding on the part of the consumers regarding the price and quality of the product being differentiated (Armstrong and Kotler, 2009).
A company may engage itself in differentiation of several products at the same time. This makes it have a definitive number of customers, who are sort of owned by it due to the uniqueness of its products or services. This is what is called positioning. Positing entails using various strategies like promotion, distribution of products or services and production of unique products with unique pricing to build an identity of a particular company or organization in the minds of particular consumers (Vashisht, 2005).
Positioning seeks to stabilize and retain the positions of the particular differentiated products for a particular company so as to retain the competitive advantage of the company in regard to those products. For a company to create and maintain a particular position in a market, it needs to do a thorough research and consistent monitoring of market trends so as to modify or readjust the differentiation and positioning strategies for its respective products (Ferrell and Hartline, 2010).
The firms also compete through increasing their efficiency, which entails the maximization of their resources and ensuring that they provide services which are very efficient, reliable and of high quality. Those firms which are more efficient are the ones which use the minimal resources to achieve the maximum results. They can for example engage in what is referred to as human resource development, which entails things like training of employees on various tasks, so that the employees can work on various departments at different times. This makes the firms save on hiring more employees especially on contract basis because their full time employees are competent to undertake various tasks at the same time.
A good example of oligopoly in work is the oil industry, which is controlled by the body known as OPEC. The firms under OPEC usually dominate the oil industry in virtually all parts of the world. The key competitors in the oil industry include Saudi Arabian Oil Company (259,900 million barrels per year), National Iranian Oil (138,400 million barrels per year) and Qatar General Petroleum (15,207 million barrels per year) ( Petro Strategies, 2011).
What this means is that they try as much as possible to beat each other by competing for the customers for oil and gas products. It is usually not possible for one firm, say for example Arabian Oil Company to hike its prices or lower the quality of its products. This is because doing so would make it lose its customers to their major competitors.
In some cases, oligopoly leads to formation of business cartels. This happens when the firms agree to increase the prices of their products beyond the reach of many consumers. They can also decide to reduce the supply of some products so that the demand may go up, which consequently makes the prices to shoot up. This is however illegal and when the firms are detected, they are usually fined heavily by the relevant government authorities (Levenstein, Suslow and Oswald, 2003).
Price fixing
This is a conspiracy between buyers or sellers to control the trade of certain products for their own benefits. This conspiracy usually leads to creation of a cartel, which is usually illegal. Price fixing involves an agreement between the sellers or buyers of a product to have uniform standards, terms and conditions for the supply and demand of the product (Levenstein, Suslow and Oswald, 2003).
Sellers can conspire to purchase a product at a uniform price thus fixing the price at the level which they want. This is because the sellers can easily conspire through various forms of sophisticated communication and fix the prices of certain products. When this happens, the loser is always the buyer. The sellers usually achieve this thorough having uniform costs of production which entail transportation, labour, discounts and bonuses. Their ability to control and coordinate the flow of the goods and services as well as to communicate with each other on what price they should offer on a certain good or service further makes it hard for government authorities to detect their illegal practices (Bonin and Goey, 2009).
Price fixing usually takes place in industries which are dominated by few large firms, a characteristic of oligopoly discussed above. One such industry is the detergent industry in Europe. This industry is usually dominated by three major players namely the Unilever, Procter & Gamble and Henkel. These three giant firms operate in eight countries in Europe namely the Netherlands, Germany, Italy, Spain, Portugal, France, Belgium and Greece (Charyulu, 2011).
P&G is a leading producer of washing powder while Unilever is leading in production of detergents with brands of Omo and Surf. Henkel on its part leads in the production of the Persil brand in almost all parts of Europe. Due to their dominance in Europe, it is very easy for them to avoid stiff competition and engage in a deal to fix the prices of the products, which are very essential for daily lives of many people in Europe (Jones, 2005).
In 2002, the companies came up with a strategy to protect the environment. During the discussion, the companies went astray and constituted a cartel which operated in the eight countries of Europe named above between 2002 and 2005. The cartel was established basically to coordinate prices of products and stabilize the markets for the three companies involved. This is however prohibited by the EU (article 101) and the EEA (article 53) which state that the companies are not responsible for coordinating prices or stabilizing of the markets (Jones, 2005).
After three years in operation, it was Henkel which blew the whistle to the commission charged with regulation of competition in Europe, which swiftly engaged in investigations. The investigation confirmed that the cartel really existed and the companies were fined. P&D was fined 211million euros while Unilever was fined 104million euros.
These fines included a 10% discount because the companies acknowledged that they participated in a cartel. The commission also gave them the discount in fines because by accepting that they were involved in the cartel, the investigations were made easy and no much financial resources were used in the investigations (Blythe, 2006).
Henkel on it parts however received a full immunity from the commission for being the whistle blower about the cartel. The economic rationale behind not fining Henkel was because its act of blowing the whistle saved many customers huge sums of money, which they were to pay as a result of hiked prices of detergent products. The whistle blowing also made it easier for the commission to launch the investigations because Henkel gave it the necessary and crucial links in unearthing the cartel (Blythe, 2006).
The reason why Henkel blew the whistle is however subject to speculation. This is because it was from the start part and parcel of the cartel. Analysts argue that Henkel may have been receiving a raw deal in the cartel and therefore decided to blow the whistle. The case of the three companies in the detergent industry best illustrates how oligopoly works and how the key players put their own interests ahead of the interests of the consumers and those of their competitors (Blythe, 2006).
If Henkel could have gotten a good deal in the cartel, it would not have reported it because doing so would have compromised its ability to maximize its profits. The companies in the case were making what economists refer to as abnormal profits, leaving the consumers at the receiving end due to the absence of other companies which supply detergent products (Blythe, 2006).
Conclusion
This assignment was about the oligopoly industry. In the discussion, it has emerged that the industry is characterised by few but big firms which operate in a very competitive business environment. The firms usually rely on differentiation and positioning as the key strategies in boosting their competitive advantage over each other. The discussion has also looked at the concept of price fixing, using the oil industry and case of price fixing by three big firms in the detergent industry in Europe namely Unilever, P&D And Henkel.
Reference List
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