Analysis of Oligopoly Market

This report is based on analysis of oligopoly market, where the definition of oligopoly is discussed to identify the features and structure of the market. The main determinants of oligopoly market will also be discussed. The main element of this report focuses to find out how firms make their price and output decision in the oligopoly market, where Saudi Arabia based telecommunication service provider ‘STC’ is selected as an example of the firm operating in oligopoly market in the Kingdom of Saudi Arabia (KSA). First of all, the main economic sectors in oligopoly market are discussed to identify the economic sector to which the selected firm (STC) is related. Moreover, how firms make their price and output decision are also thoroughly discussed. As per Mukherjee (2002, p. 443), “Oligopoly is the form of market organization characterized by the existence of few sellers of a homogeneous or a differentiated product”. There are five main characteristics of oligopoly market, which are; 1) small number of interdependent firms, 2) large numbers of buyers, 3) similar or differentiated services are sold, 4) services price is based on competitors’ pricing and 5) high barriers for new entrants and so market entry is very difficult (Kotler, 2009). In view of the above-mentioned characteristics the main determinants of the oligopoly market are; number of firms, number of buyers, type of services sold, and level of entry barriers in the market for new entrants (Fisher & Waschik, 2005). The market structure of oligopoly is between duopoly and monopolistic competition as small numbers of interdependent firms operate in the market and when one firm lower its prices then the other firms are likely to react to countermove.

Main Economic Sectors

There are three main economic sectors in the market, namely; primary sector, secondary sector, and tertiary or service sector (Fisher & Waschik, 2005). The primary sector is related with production of raw materials such as agriculture output, fishing, and mining (Fisher & Waschik, 2005). Whereas, the secondary sector is related with manufacturing and processing of raw material to produce finished goods such as, factories producing cars, clothing, food, furniture, smartphones, toys, etc. (Fisher & Waschik, 2005). However, the tertiary or service sector is related with selling of services and intangible goods to the customers such as, telecommunication services, retailing, trading, real estate, transportation, personal services, health, education, services operations, food and catering services, and so on (Fisher & Waschik, 2005). The selected firm STC is a telecommunication services provider operating in oligopoly market, which provides prepaid mobile phone and Internet services and so it comes under the tertiary economic sector (Carysforth & Neild, 2002). The STC neither produces raw materials nor manufactures goods but sells intangible services to its customers in Saudi Arabia. The STC operates its business in a tertiary or service economic sector which is an ideal example of oligopoly market as there are few telecommunication services providing companies operating in the KSA, namely: STC, Mobily, and Zain (Business Wire, 2019). STC is better than Mobily, and Zain in Saudi Market because it has largest coverage and service quality.

The KSA telecommunication sector satisfies all the characteristics of an oligopoly and has the same market structure of a differentiated oligopoly. It is because small number of interdependent telecommunication service providing companies operates in the KSA market due to which any of the firms cannot independently set prices or regulate market. This is the reason the prices of the services are based on competitors’ pricing and the STC have to respond in relation with the moves of its competitors in the market (Baines, Fill, & Page, 2011). Moreover, large number of buyers exists that purchase telecom services in the KSA and so the bargaining power of customers is high. The telecom services which are sold by the telecommunication service providers in the KSA are differentiated (as each telecom company offer different packages to customers). Furthermore, the market entry is very difficult in the KSA telecommunication market because there are high entry barriers for new entrants, for instance; the telecommunication industry in KSA is tightly regulated by the government, the competition amongst STC and its rival telecommunication companies is very fierce, and the cost of setting up a new telecommunication company in the established market of KSA is very high (Carysforth & Neild, 2002).

Discussion

How STC and other telecommunication service providers make their price and output decision in the KSA telecommunication service oligopoly market are thoroughly discussed to identify the main determinants of the price and output decision by the firms in the KSA telecommunication sector (Thompson, Peteraf, Gamble, & Strickland, 2013). As there are few interdependent telecommunication service providers competing against each other in the market therefore the firms make their price and output decision based on the pricing strategy and services offered by their competitors (Carysforth & Neild, 2002). The price and output decision can be made using the market forces of price and quantity demand (in terms of number of users).

The telecommunication services have price elasticity and so if the prices of the services are changed, then the quantity of demand of the services will also change. Therefore, STC and other telecommunication service providers tend to keep track of the offers, packages and prices offered by their competitors to prevent customer defection (Carysforth & Neild, 2002). As there is large number of customers and different telecommunication service providers are offering similar and differentiated packages and services therefore if one telecommunication service provider reduces the prices and calling rates then STC and other competing telecommunication service providers would have to reduce their prices and calling rates too otherwise the customers would move to the telecommunication service providers which would be offering the lowest prices or rates, better service, and packages. Moreover, due to strong bargaining power of customers the telecommunication service providers would not be able to increase the prices on their own and hence the firms are price taker in the KSA telecommunication service sector (Carysforth & Neild, 2002).

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Regarding the pricing decision Mukherjee (2002, p. 449) stated that “in differentiated oligopoly, to some extent the specific pricing pattern that evolves over time will depend on the degree of product differentiation that exists”. As STC and other telecommunication service providers such as Mobily and Zain provides unique calling and internet packages along with similar basic telecom services, and are able to achieve differentiation and hence are able to develop slight specific pricing pattern.

There can be various determinants on the basis of which STC and other firms in the KSA telecommunication service sector makes their price and output decision, such as; calling rates charged and packages offered by the Mobily and Zain, seasonality, price and packages offered by the competitors, the demand of the telecom services, consumer behavior, and the goals and marketing strategy of each telecom company. However, as per managerial economic the determinants can be of two types; non-price determinants, and price-based determinants. The non-price-based determinates will include, seasonality, demand of the products, supply of services, consumer behavior, future expectations, market risk, and the goals and marketing strategy of each telecom company. Whereas, the price-based determinants would include; cost of services provided by the companies, price elasticity of demand, market equilibrium, and price, packages and discounts offered by the competitors.

By applying the price elasticity of demand and market equilibrium the price and output quantity can be determined by STC and other firms in the KSA market. The market equilibrium point decides the quantity of service output and prices at which the firms in the KSA telecommunication service sector should sell their services. If the firms decide to increase their prices, then the quantity of demand for their services from the customers will be reduced, while if the firms decide to reduce their prices, then the quantity of demand from the customers will increase (Keat, Young, & Erfle, 2014).

However, if the customer demand increases for the telecom services in the KSA telecommunication sector then the telecommunication service providers would be able to change higher prices (P2) at the new equilibrium quantity (Q2). When the quantity at which the customers are willing to buy decreases, then the price and output quantity of their services will also decrease (Keat, Young, & Erfle, 2014).

Conclusion

Upon completion of this report, it is identified that STC operates in the KSA telecommunication service sector which satisfies all the characteristics of an oligopoly and has the same market structure of a differentiated oligopoly. The firms cannot independently set prices or regulate market, there are large numbers of buyers and so the bargaining power of customers is high. The market entry is very difficult because the KSA telecommunication service sector is tightly Regulated by the Government and so not anyone can enter the market, and the competition amongst STC and its rival telecommunication companies in the KSA is high. There are various determinants of price and output decision, which can be categorized into non-price determinants, and price-based determinants. Where, non-price-based determinates include, seasonality, demand of the telecom service, supply of telecom service, consumer behavior, future expectations, market risk, and the goals and marketing strategy of each telecom company, while, the price-based determinants include: cost of services provided by the companies, price elasticity of demand, market equilibrium, and prices, packages and discounts offered by the competitors.

References

1. Business Wire. (23 Sept, 2019). Saudi Arabian Telecoms Market, Forecast to 2023: In-Depth Analysis on STC, Mobily, and Zain - ResearchAndMarkets.com. Online; https://www.businesswire.com/news/home/20190923005461/en/Saudi-Arabian-Telecoms-Market-Forecast-2023-In-depth
2. Keat, P. G., Young, P. K., & Erfle, S. (2014). Managerial Economics: Economic Tools for Today's Decision Makers (7th ed.). Upper Saddle River, NJ: Prentice Hall.
3. Mukherjee, S. (2002). Modern Economic Theory. New Age International.
4. Thompson, A., Peteraf, M., Gamble, J., & Strickland, A. J., (2013). Crafting & Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases, McGraw-Hill Education.
5. Baines, P., Fill, C., & Page, K. (2011). Marketing. Oxford: Oxford University.
6. Carysforth, C., & Neild, M. (2002). Double Award. Heinemann.
7. Kotler, P. (2009). Marketing Management. Pearson Education India.
8. Fisher, T., & Waschik, R. (2005). Managerial Economics: A Game Theoretic Approach. Routledge.