Today, more than ever before, the business environment is characterized by a multiplicity of market structures that reflects how business is conducted in these markets. One of them is the oligopoly, a form of market structure where there is outright domination of a small number of sellers or suppliers, often called oligopolists (EconomyWatch, 2010).
Organizations in an oligopolistic market set their business strategies by critically evaluating how their close rivals will react rather than how customers will react, and are therefore largely seen as anti-customer and anti-competitive.
The few firms operating in a given market segment may increasingly differentiate their products, which may prove beneficial to some customers, but always come at a price (OECD, 1999).This is usually the case with firms operating in Australia telecommunication sector. It is the purpose of this paper to critically evaluate how such an arrangement affects consumers and the community as a whole.
Although competition laws forbid collusion between firms to increase prices, restrict product or service output, or divide markets, the oligopolistic nature of firms operating in Australia telecommunications market ensures that competitors set their prices through imitating their rivals, thereby harming the welfare of consumers (OECD, 1999).
The Australian Communications Authority (ACA), charged with the responsibility of regulating cellular, landline, internet, and cable telecommunication providers, is required by law to request these companies to publish projected nonbinding price targets as a precondition to allow healthy competition (Cutler, n.d.).
The telecoms providers, however, will go to great lengths to facilitate price collusion not only in Australia, but in other countries as well. In all this, the customers are at the receiving end since they don’t get value for their money as firms behave in the same manner.
There exist various models and graphical representations which firms in an oligopolistic market structure employ to come up with their prices. The Bertrand Model, for instance, operates under several assumptions to project prices (Harris, 2001). The model assumes that if there are two organizations in the market producing similar products, they are likely to produce the products at a marginal cost (MC).
As such, if the organizations select prices PA and PB for the similar products which can successfully substitute each other in the market such as airtime top-up, then sales are split evenly in an oligopolistic market if PA = PB. Therefore, according to the model, the only Nash equilibrium of the price of the airtime top-up product is:
PA = PB = MC
It therefore follows that none of the telecommunication firms competing under the above model will be in a hurry to change strategy since they are more likely to lose clients if the prices are raised (P>MC) or lose money on every product sold to customers if the prices are lowered (P<MC).
The Bertrand equilibrium is attained when P = Marginal costs of the products or services on offer (Harris, 2001). Such an oligopolistic model does not take the interests of the customers at heart since it is only concerned with how other organizations design and price their products or services
An oligopolistic market structure exercise high obstacles to entry (Png, 2002). This means that the firms operating in an oligopolistic market not only have a firm grip over the prices charged to customers, but they also limit entry of new firms into the market. This have obvious ramification on the customers since they are denied the freedom of diversity by the market structure (Sutton, 1991).
Indeed, the customers are forced to use nearly identical products as the companies in the telecommunication sector try to imitate and outdo each other rather than employing innovative and creative ideas to introduce new products into the market. On its part, the community may not benefit from the opportunities that are brought about by new entrants into the market such as employment opportunities and corporate social responsibility projects.
An oligopoly market structure implies a high extent of market concentration, meaning that a large percentage of the market is absorbed by the foremost commercial organizations of a country (Sutton, 1991). Such an arrangement, in addition to facilitating connivance among the firms, locks out other local players from active competition.
This is not good for the community as market forces must be seen to facilitate entrepreneurial spirit which brings choice to consumers. Lack of entrepreneurial spirit only serves to enhance mutual dependence of firms that is so prevalent in Australian telecommunication firms, and results in customers getting similar products with similar prices (Png, 2002).
In most occasions, the prices are set depending on the dominant organization in the oligopolistic market, a scenario called price leadership. In Australia, price leadership was largely evident when Telstra almost singlehandedly dominated the fixed line market. Price leadership arrived at using the above discussed Bertrand Model does not in anyway add value to customers.
List of References
Cutler, A (n.d.). ACA Compliance and Labeling Requirements. Web.
EconomyWatch (2010). Oligopoly. Web.
Harris, N (2001). Business Economics. Oxford: Butterworth-Heinemann OECD (1999). Policy Roundtables: Oligopoly. Web.
Png, I (2002). Managerial Economics, 2nd Ed. Malden, MA: Blackwell Publishing.
Sutton, J (1991). Sunk Costs and Market Structure: Price Competition, Advertising and the Evolution of Concentration. Massachusetts Institute of Technology.