SESSION: IB May 2012 IB CANDIDATE NUMBER:dkz219 (000902-023) SCHOOL: Gandhi Memorial International School, Jakarta, Indonesia SUPERVISOR: Ms. Shweta Sinha WORD COUNT: 4000 Anupama Bhatnagar “To what extent does the market structure of SIM cards sold in Purwakarta, Jawa Barat fulfils the requirements of a Perfectly Competitive Market (PCM)?” Extended Essay in ECONOMICS
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
S E S S I O N : I B M a y 2 0 1 2
I B C A N D I D A T E N U M B E R : d k z 2 1 9 ( 0 0 0 9 0 2 - 0 2 3 )
S C H O O L : G a n d h i M e m o r i a l I n t e r n a t i o n a l S c h o o l , J a k a r t a , I n d o n e s i a
Calls: Indosat Operators Three different rates for different times of the day. E.g – (17:00-24:00) Rp. 240/ 20 sec for first 2 minutes Other Operators = Rp. 240/12 sec
Calls: Telkomsel Operators Four different rates for different regions and time of the day. E.g – (0:00- 5:59) Rp. 200/12 sec in Sumatera. Other Operators = Rp. 900/30 sec
The above information is presented in graphical form:
Average Call & SMS Tariff
Average call tariff/30 sec = Rp. 760.71
Average SMS tariff/per sms = Rp. 130.07
Number of Schemes Offered
Average number of schemes offered = 3
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Mentari IM3 Matrix simPATI Kartu AS Kartu Hallo
Axis
Avg. Call tariff/30 sec
Avg SMS tariff/per sms
0
1
2
3
4
5
6
7
Mentari IM3 Matrix simPATI Kartu AS Kartu Hallo
Axis
No. of schemes offered
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
12
4.1.4 ANALYSIS & EMPIRICAL RESULTS
On comparing the features of different SIM cards implicitly, it can be concluded that the
product is differentiated. The major reason for this is the existence of brand names,
different price systems and schemes offered and the service provided by the various
operators. Cellular phone systems in Indonesia are operated by eight different private
companies, all of whom are partially owned by the government phone company, Telkom.8
Each of these eight service providers offer atleast one prepaid card and one postpaid card.
On comparing the prepaid cards in the above table, we find some of the cards having fixed
tariffs while others having variable tariffs according to the area and hour of the day. Among
the cards with a fixed tariff, Kartu As offers the least prices (Rp. 390/30 sec and Rp. 99/sms
for all operators) and Axis offers the highest prices (Avg Rp. 875/30 sec and Rp. 100/sms for
all operators). However, on comparing the schemes offered by these cards, Axis offers the
maximum number of packages to attract customers.
IM3 and simPATI cards offer variable charges. While IM3 divides its rate according to three
main time-periods in a day, simPATI divides its rate into four different time-periods in a day
and also charges different prices for different areas in Indonesia. The schemes offered are
also divided similarly. Postpaid cards like Matrix and Kartu Hallo work in a different manner.
While, Matrix splits its charges according to the operator, Kartu Hallo splits its charges
according to the net usage. However, Matrix offers more number of packages than Kartu
Hallo.
RESULT:
After comparing a few features of the SIM cards, it can be concluded that firms are selling
slightly differentiated products. One SIM card can be distinguished from another on the
basis of its brand name and the service it offers. Therefore, this criterion does not fulfil the
requirement of a perfectively competitive market. Instead, the market is either an oligopoly
or a monopolistically competitive market.
8 "Hand Phones - Cellular Phones, Mobile Phones, and Blackberry in Indonesia." Living in Indonesia, Site for
Expatriates-Jakarta Indonesia. Web. 18 July 2011. <http://www.expat.or.id/info/handphones.html>.
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
13
4.2 MANY BUYERS & SELLERS
4.2.1 ECONOMIC THEORY
A perfectly competitive market consists of a large number of buyers and sellers. Each firm is
so small, relative to the size of the industry, that it is incapable of altering its own output to
have a noticeable effect upon the output of the industry as a whole. This means that a firm
cannot affect the supply curve of the industry and thus, cannot affect the price of the
product. Similarly, the number of buyers is so large that an individual buyer cannot control
the price by changing or controlling the demand. This is because a buyer’s individual
demand forms a very small part of the total market demand. Hence, both buyers and sellers
are forced to accept the ruling market price and are said to be “price-takers.” This ensures a
single price in the market decided solely by the market forces of demand and supply. The
demand curve for an individual firm is thus, horizontal or perfectly elastic. See Figure 1.1
FIGURE 1.1: DEMAND CURVES FOR THE INDUSTRY AND THE FIRM IN PERFECT COMPETITION
4.2.2 DATA COLLECTION METHODOLOGY
A perfectively competitive market contains a large number of buyers and sellers ensuring i)
only one market price and making ii) all sellers “price-takers”.
To investigate i), the mathematical method of Standard Deviation was used. Through this
method, the price divergence from the mean could be determined. In the case of a perfect
competition, the mean will be equal to the market price and the standard deviation will be
zero, i.e. no divergence from the mean in any case. In the investigation, the lower the
standard deviation, the closer the market is to a PCM.
Quantity of good Quantity of good
INDUSTRY FIRM
Price of
a good
(in $)
D=AR=MR P
0
D
S
Price of
a good
(in $)
P
Q 0
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
14
To investigate ii), the sellers were asked to what extent they are likely to change their price
to follow a competitor i.e. if they are price-takers or price-makers. The author chooses to
utilise qualitative interviews for this investigation. An example of a question asked in the
interview is: “If your competitor changes its price for atleast three different SIM cards or
alters their respective credit rates, will you follow suit?”
The complete interview can be found in Appendix F. The answers to these questions and
their evaluation can be found below.
4.2.3 DATA PRESENTATION
To find out whether firms in this market are ‘price-takers’ or not, the prices of different SIM
cards and their respective credit rates were recorded from over forty retail shops in
Purwakarta. These readings were used to calculate the standard deviation. The numerical
results of this analysis can be found in Appendix B.
Forty sellers were asked questions in order to study the extent to which they are likely to
change their price to follow a competitor i.e. if they are price-takers or price-makers. The
results of this interview are presented below:
QUESTIONS TO THE RETAILERS:
Yes Maybe No Average Answer Q1 – “Are your prices fixed?” 40 - - Yes
Q2 – “ Do you (the shopkeeper) set the prices?”
35 - 5 Yes
Q3 – “Do you change your prices often (once in 3-4 months)?”
27 - 13 Yes
Q4 – “So, if your competitors (3-4 shops on an average) change their price for atleast three different SIM cards or alters the respective credit rates, will you follow suit?”
5 9 26 No
Q5 – “Do you alter your prices according to your cost price (prices offered by the manufacturer/ dealer) ?”
40 - - Yes
Table II – Questions asked to the retailers
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
15
4.2.4 ANALYSIS & EMPIRICAL RESULTS
From the above questions, it is clear that sellers are simply ‘price-takers’, since most of the
retailers refuse to change their prices if their competitors alter the prices for atleast three
different SIM cards and/or their respective credit rates. It is seen that these independent
sellers tend to change their prices slightly (once in a few months) only when their cost price
i.e. the prices offered by their dealers change. Few of the retailers also commented on how
their prices remain stable and they need to alter the prices very rarely. For instance, in one
of the shops named ‘Toko Ponsel’, the price of IM3 (SIM card provided by Indosat) was Rp.
1800 in March 2011 and after six months it was increased to Rp. 2000.
Among these forty shops, three shops were service centres of three main service providers
– Indosat, Telkomsel and XL. These claimed to receive their stock of SIM cards directly from
the manufacturers in Jakarta. Even these three shops had fixed prices which were directly
set by the ‘Centre’. Therefore, even these sellers are ‘price-takers’.
This also explains that in a small city like Purwakarta, the competition is not much and
therefore, the sellers find it less necessary to follow their competitors. Also, most of these
independent shops get their stock of SIM cards from the same dealer and therefore, there is
not much of a difference in their prices. This is confirmed by the lower standard deviation of
these retailers (Rp. 673.52) complying with the criterion.
RESULT:
Having a low standard deviation and the sellers being “price-takers” is in line with the
criterion and it can be concluded that the market fulfils this condition of ‘many buyers and
sellers’. This means that the hypothesis of the market being an oligopoly may or may not
hold true. The market can either be a form of monopolistic competition with many sellers
selling the differentiated goods or a collusive/non-collusive oligopolistic market with price
rigidity.
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
16
4.3 BARRIERS TO ENTRY & EXIT
4.3.1 ECONOMIC THEORY
Firms in a perfectly competitive market are completely free to enter or leave the industry.
They are not restricted by government rules and regulations, start-up costs, or other
barriers to entry and are not prevented from leaving an industry as is the case for
government-regulated public utilities.9 Also, perfectly competitive firms can acquire
whatever labour, capital, and other resources they need without delay or restrictions. There
is no racial, ethnic, or sexual discrimination and there exists perfect resource mobility.
This feature ensures existence of normal profit in perfect competition. When profit is more,
new firms enter the market and this leads to competition. Entry of new firms competing
with each other results in an increase in supply and fall in price. This reduces profit from
abnormal to normal level. When profit is low (below normal level), some firms may exit the
market. This leads to fall in supply. So, remaining firms raise their prices and their profits go
up; thus, ensuring normal level of profit.10
4.3.2 DATA COLLECTION METHODOLOGY
The third criterion was evaluated using two methods. First, the costs of setting up a SIM
card retail store and the costs of leaving the market were examined. Retailers from over ten
different shops were asked, in a detailed qualitative interview, abut their stances on barriers
of entry/exit. An example of a question asked in the interview is: “When starting up a SIM
card retail shop, how difficult is it to find a suitable location for the store?”
The complete interview with detailed answers can be found in Appendix G. The evaluation
of the data can be found below.
Second, the mobile market share in Indonesia was found using secondary sources and the
concentration ratio of the four largest firms (CR) was calculated. CRs are a common
9 "AmosWEB Is Economics: Encyclonomic WEB*pedia." AmosWEB: Economics with a Touch of Whimsy! Web.
"AmosWEB Is Economics: Encyclonomic WEB*pedia." AmosWEB: Economics with a Touch of Whimsy! Web. 19 July. 2011. <http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd>.
"Perfect Competition - Meaning, and Main Features In Economics." KALYAN CITY LIFE BLOG - KCL. Web. 19 July. 2011. <http://kalyan-city.blogspot.com/2010/11/perfect-competition-meaning-and-main.html>.
"Hand Phones - Cellular Phones, Mobile Phones, and Blackberry in Indonesia." Living
in Indonesia, Site for Expatriates-Jakarta Indonesia. Web. 18 July 2011.
<http://www.expat.or.id/info/handphones.html>.
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
28
"HALO Fit - Telkomsel." Telkomsel | Home. Web. 20 July 2011.
The average price of the SIM cards in each shop was calculated to find out the standard
deviation:
Retail shop no.
Avg. Price (in Rp.)
1 4000
2 4000
3 4000
4 4000
5 3000
6 3000
7 3000
8 3000
9 3000
10 3000
11 3000
12 3000
13 3000
14 3000
15 3000
16 3000
17 3000
18 3000
19 3000
20 2000
21 2000
22 2000
23 2000
24 2000
25 2000
26 2000
27 2000
28 2000
29 2000
30 2000
31 2000
32 2000
33 2000
Avg Price (in Rp.) (x)
Frequency (f) x - µ f(x - µ)2
4000 4 1303.04 6791653.0
3000 15 303.04 1377498.6
2000 14 -696.96 6800545.4
Sum: 33 14969697
Calculating Standard Deviation:
52.673.
33
14969697
Rp
Where mean (µ) = Rp. 2696.96
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
33
APPENDIX C
APPENDIX D
Perfect Knowledge: Questionnaire for Consumers
Q1 - Are you familiar with the different SIM card selling shops in Purwakarta?
1 2 3 4 5
Q2 -Are you familiar with the general price level?
1 2 3 4 5
Q3 - Do you know where it is cheapest to buy?
1 2 3 4 5
Q4 - Are you aware of all the different types of SIM cards sold in Purwakarta?
1 2 3 4 5
Q5 - Are you aware of the different types of schemes offered by each of the service
providers?
1 2 3 4 5
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
34
APPENDIX E
Perfect Knowledge: Questionnaire for Producers
Q1 - Are you aware of the general cost of production in the industry?
1 2 3 4 5
Q2 - Are you updated with the latest production techniques in the industry?
1 2 3 4 5
Q3 - Do you keep track of your competitor’s prices?
1 2 3 4 5
Q4 - Are you aware of the different types of schemes/services provided by the your
competitors?
1 2 3 4 5
Q5 - Are you familiar with the expectations of your consumers?
1 2 3 4 5
APPENDIX F
Many Buyers & Sellers: Questionnaire for Retailers
Q1 - Are your prices fixed?
Yes
Maybe
No
Q2 - Do you (the shopkeeper) set the prices?
Yes
Maybe
No
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
35
Q3 - Do you change your prices often (once in 3-4 months)?
Yes
Maybe
No
Q4 - So, if your competitors (3-4 shops on an average) change their price for atleast three
different SIM cards or alters the respective credit rates, will you follow suit?
Yes
Maybe
No
Q5 - Do you (the shopkeeper) set the prices?
Yes
Maybe
No
APPENDIX G
Barriers to Entry/Exit: Questionnaire for Retailers
QUESTIONS SELLERS
Retail Store Location “When starting up a SIM card retail shop, how difficult is it to find a suitable location for the store?”
Not difficult, but expensive. Popular locations on the main-roads
are preferable. Need a side-business since SIM cards
alone are not so profitable. Large start-up costs
( >Rp. 1000 million) On-going costs are manageable.
CONCLUSION: Barrier Storehouse Costs “Evaluate the storehouse costs that you had to bear while setting up this store initially (comment on other costs-capital, labour, resources, etc.)?”
Storehouses need to be in close proximity; are usually an extension of the shop.
Large setting-up costs Size is often limited; expansion in
prime store locations is difficult. Labour costs are manageable.
CONCLUSION: Barrier
Anupama Bhatnagar dkz219 (000902-023)
Economics Extended Essay
36
Advertisement Costs “How large were your advertisement costs when you i) first set-up your store/firm and ii) now, currently? ”
i) No advertisement costs; location is advertisement enough.
Ii) No advertisement costs CONCLUSION: Not a Barrier
Government Policy “How significant are the government policies? How far does license requirements, pollution standards, product testing regulations,etc. limit entry into the market? ”
License required; government policies are not a hindrance.
CONCLUSION: Not a Barrier
Penalty costs “How difficult is it to overcome contract contingencies with suppliers or buyers and any penalty costs incurred from cutting short tenancy agreements?”
Low penalty costs for SIM cards.
CONCLUSION: Not a Barrier
Other barriers to exit “What, in your view, are some other existing barriers to exit in the market? Is it difficult to overcome them? ”
Asset-write-offs: Low expenses associated with writing off stocks of SIM cards.
Loss of business reputation and consumer goodwill: Not a problem; since all retail shops sell almost all types of SIM cards. CONCLUSION: Not a Barrier