Exploring Industry Market Structures Economics Essay

Understanding what is Industry market constructions and different types of available industry market structures. Identify the dominant market construction to which the organisation belongs with proper justifications and illustrations.

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In order to carry through aforesaid aims, this assignment carried out an economical analysis for Dialoga„? to place the dominant market construction in which it ‘s runing within.

1.2 Background of the Industry

When sing all industries of Sri Lankan economic system ; nomadic telecommunication industry can be placing as one of major industry with high growing potency. The nomadic phone use has drastically increased in the past few old ages and nomadic phone became indispensable twenty-four hours today equipment in the society. Mobile phones and nomadic telecommunication can be placing as a close complements trade goods. As a consequence high demand for nomadic phones was leads to heighten the growing potency of the Sri Lankan telecommunication industry. Following chart clearly bespeaking how the telecommunication industry dramatically increased from twelvemonth 1992.

Figure 1

( Beginning: Telecommunication Regulatory Commission of Sri Lanka, 2010 )

1.3 Background of the company

Dialog Axiata PLC is state largest telecommunication service supplier with over six million endorsers. Dialog launched its concern operations in twelvemonth 1995 under the name of Dialog GSM. It ‘s a listed company in Colombo stock exchange and it was the state foremost USD one billion market capitalized company. Dialog presently operates on 2.5G, 3G and 3.5G communications webs and it was the first company which screen Jaffna peninsula in Northern Sri Lanka. Furthermore company current portfolio consists of Dialog TV orbiter service, Dialog CDMA, Dialog Broadband. ( Dialog, 2010 )

2.0 Industry Market Structures

2.1 Definitions

Harmonizing Layton, Robbinson and Tucker ( 2005, p. 174 ) selling construction refers to a categorization system for the cardinal features of a market, including the figure of houses, the likewise of the merchandises they sell and the easiness of entry into and issue from the market.

2.2 Types of selling constructions

In economical context there are chief four types of selling constructions available. Those are Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. In each type of selling construction consist of different types of features. Those features of each market industries can province as follows.

2.2.1 Perfect Competition

Harmonizing Layton, Robbinson and Tucker ( 2005, p. 174 ) perfect competition refers to a market construction characterised by ( 1 ) a big figure of little houses, ( 2 ) a homogenous merchandise and ( 3 ) really easy entry into or issue from the market. Some of other charaecterstics of perfect competition includes ;

Horizontal demand curve ( houses act as a monetary value takers )

Both the purchasers abd Sellerss possess perfect cognition about the markets.

No conveyance costs within the markets.

Perfect mobility of factors of production

( Industry market structures [ Handout ] , n.d. , p. 1 )

2.2.2 Monopolistic competition

Harmonizing Layton, Robbinson and Tucker ( 2005, p. 234 ) monopolistic competition refers to a market construction chiefly characterised by ( 1 ) many little Sellerss, ( 2 ) a differentiated merchandise and ( 3 ) easy market entry and issue. Some of other features include ;

Merchandises are close replacements to each other and they are branded ( e.g. soap, spirits etc. ) .

If the monetary value is increased, the house will non lose all its clients.

If the monetary value is decreased, the house will non win all the clients who are with the rivals.

Firms frequently cut monetary values to increase its market portion.

Firms besides use advertisement and particular publicities to derive market portion.

( Industry market structures [ Handout ] , n.d. , p. 2 )

2.2.3 Oligopoly

Harmonizing Layton, Robbinson and Tucker ( 2005, p. 208 ) oligopoly is a market construction characterised by ( 1 ) few Sellerss, ( 2 ) either a homogenous or a differentiated merchandise and ( 3 ) barriers to market entry. Some of other features include ;

Perfect Oligopoly refers to homogenous merchandises such as oil & A ; steel.

Imperfect Oligopoly refers to differentiated merchandises such as Cars.

Firms are mutualist.

If a house increases its monetary value above the market monetary value, the others will non follow and the house will quickly lose gross revenues.

If a house reduces its monetary value below the market monetary value, the others will follow and the house will slowly increase its gross revenues.

Firms will avoid monetary value wars and concentrate on non-price schemes to win market portion. They use schemes such as better merchandise design and coating, betterment of quality, better wadding, after gross revenues services, effectual distribution, advertisement, publicities, warrants etc.

Kinked demand curve

( Industry market structures [ Handout ] , n.d. , p. 3 )

2.2.4 Monopoly

Harmonizing Layton, Robbinson and Tucker ( 2005, p. 208 ) monopoly is a market construction cauterised by ( 1 ) a individual Sellerss, ( 2 ) a alone merchandise and ( 3 ) highly hard or impossible entry into the market.

3.0 Dominant Market Structure of the Company

After sing all aforementioned features of industry market structures, it is identified that the Dialog is operate within Oligopoly Market Structure. This can warrant from the following features of oligopoly in related to Dialog.

3.1 Features of the Oligopoly Market Structure in related to Dialog

There are many features that distinguish the oligopoly market construction from other market constructions ; the behaviour of houses in this market construction besides differs significantly from other market constructions. Those features include,

3.1.1 Few Sellerss in the market

A Harmonizing to the definitions of oligopoly it can be identified that this type of market construction is consist of few Sellerss and its normally runing from 2-10. When sing the Sri Lankan nomadic telecommunication industry, it is clearly can place that there are merely five service providers existed within the market. Following chart shows how the entire gross of the market divides among the five service providers.

3.1.1.1 Concentration Ratio

Harmonizing to Joseph, G. ( 2008, p.199 ) concentration ratio represent the extent of the market supplied by a given figure of houses. For illustration when sing four concentration ratio, its shows the part of market supply by the prima house of the industry. When we apply this into Sri Lankan nomadic telecommunication industry, it is clear that about 95 % of market portion split among chief four providers of the market. ( Dialog, Mobitel, Etisalat, Airtel ) Four concentration ratio theory suggest that if the concentration ratio of major four houses of a individual industry is greater than or equal to 40 % ; that market which the houses are operate in more likely to be a oligopoly market. Since 95 % of entire Sri Lankan nomadic telecommunication supply operate by the major four providers, it can be turn out the fact that the Dialog is operate within the oligopoly market.

3.1.2 Common mutuality of the houses

One chief feature of an oligopolistic market construction is that the houses are mutualist. Each house is affected by its challengers actions, therefore if Dialog decides to prosecute policies to increase gross revenues, so it will be at the disbursal of the rivals. The challengers may so react by taking action to increase their market portion, hence no houses can afford to disregard the actions of the rival houses. It is therefore impossible to foretell the deductions on a house due to a alteration in monetary value without sing the reactions of the challengers.

3.1.3 Barriers to entry

The oligopoly market construction has high barriers to entry. Barriers to entry may include patent rights, Torahs and industry ordinances, high capital investing and etc. The high sunk cost or the high initial capital investing is the major barrier to entry to the nomadic telecommunications market. When sing Dialog, it ‘s operates within an oligopoly market construction where there is high barriers to come in into the market. All the houses operate within Sri Lankan nomadic telecommunication industry should licence granted under Section 17 of the Sri Lanka Telecommunications Act No 25 of 1991 as amend. ( Telecommunication regulative committee of Sri Lanka, 2010 ) This is a important ground for houses in an oligopolistic market construction to gain normal net incomes.

3.1.4 Non-price competition

Firms in the oligopolistic market construction attempts to avoid monetary value competition as monetary value wars may originate. Thus “ trade names ” are established, Dialog is a good set up trade name in the nomadic telecommunication market, which highlights a certain characteristic that create a competitory border for the company. Dialog boasts about the island broad coverage they offer.

Non-price competition may be in the signifier of gross revenues publicities, particular bundles or even better installations or lucidity would count. Dialog GSM besides sponsors many athleticss activities such as the rugger tourney. Innovation is another signifier of monetary value competition ; Dialog launched the first Sinhala/Tamil samarium installation every bit good as 3.5 G installation in there service operations.

3.1.5 ‘L ‘ molded norm cost curves

A

Economic surveies suggest that the mean cost curves of big houses runing in an oligopolistic market construction is ‘L ‘ shaped instead than ‘U ‘ shaped. Reason for this is because big houses face the same norm variable cost regardless of addition or lessening in end product. ( Anderton, 2006, pg.363 )

Figure 3

Beginning: Alain Anderton – Economicss 3rd edition 2006, pg. 363

3.1.6 Kinked demand curve

As mentioned above the demand curve of a normal house is a downward sloping sound line. A house in the oligopolistic market has a kinked demand curve ; this theory was founded by Paul Sweezy from the USA and R. Hall and C.Hitch in the UK. ( Anderton, 2006, pg.363 )

Figure 4

Beginning: Alain Anderton – Economicss 3rd edition 2006, pg. 364

The theory suggests that a house in an oligopoly market, like Dialog must do an premise of how one house ( Mobitel/Etisalat ) might respond to monetary value alterations in the market. The kinked demand curve theoretical account assumes that there will be an asymmetrical reaction to a alteration in monetary value. Thus if Dialog increases its monetary value, other houses will non respond. On the other manus if Dialog reduces the monetary value, so other houses will besides cut down its monetary value to forestall losing their market portion.

In the diagram shown below the net income maximising degree is where the MC ( fringy cost ) curve cuts the MR ( fringy gross ) . Therefore if the MC of the house lies anyplace between MC1 and MC2, the net income maximizing end product will be P1 and Q1. Hence monetary values will stay stable even with considerable alteration in cost. ( Sloman, 2004, Pg 208 ) .

However the kinked demand curve theoretical account has two chief restrictions that must be noted. Although it shows monetary value stableness, it may be due to other reasons- Dialog may non desire to revise monetary values often because it is inconvenient to set up new monetary value list, new accounting policies, and it may upset it clients. Another drawback is that the theoretical account does non explicate how the monetary values are being set in the first topographic point. This is a serious drawback for a house during periods of rising prices, where Dialog like other houses in an oligopoly market will raise monetary values due to increase in cost and demand. This theoretical account suggests that the monetary value will be raised merely, when the fringy cost additions above MC2 which is illustrated in the diagram below.

Figure 4

Beginning: Industry market structures [ Handout/ Course stuff ] , n.d. , p. 3 )

4.0 Decision

From this study it has identified the dominant market construction of the Sri Lankan Telecommunication market with regard to Dialog Company. Therefore by using all relevant theories into pattern, this study has identified Oligopoly as the dominant market construction of Dialog Company.

This fact has justified with illustrations by foregrounding all relevant features of the Oligopoly market construction such as few Sellerss in the market, common mutuality of the houses, barriers to entry, non-price competition, ‘L ‘ molded norm cost curves, kinked demand curve with relate to Dialog Company.

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