Oligopoly

Oligopoly is a common market form. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage.

Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil.

Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and didn't compete directly with each other.

The welfare analysis of oligopolies suffers, thus, from a sensitivity to the exact specifications used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of product differentiation indicates oligopolies might also create excessive levels of differentiation in order to stifle competition.

Oligopoly

An oligopoly describes a market situation in which there are limited or few sellers.   Each seller knows that the other seller or sellers will react to its changes in prices and also quantities.   This can cause a type of chain reaction in a market situation.   In the world market there are oligopolies in steel production, automobiles, semi-conductor manufacturing, cigarettes, cereals, and also in telecommunications.   Often times oligopolistic industries supply a similar or identical product.   These companies tend to maximize their profits by forming a cartel and acting like a monopoly. A cartel is an association of producers in a certain industry that agree to set common prices and output quotas to prevent competition.   The larger the cartel, the more likely it

will be that each member will increase output and cause the price of a good to be lower.   The majority of time an oligopoly is used describe a world market; however, the term oligopoly also describes conditions in smaller markets where a few gas stations, grocery stores or alternative restaurants or establishments dominate in their fields.   A distinguishing characteristic of an oligopoly is the interdependence of firms.   This means that any action on the part of one firm with respect to output, price, or quality will cause a reaction on the side of other firms.   Many times an oligopoly leads to price leadership between many firms.   A price leadership is the practice in many oligopolistic industries in which the largest firm publishes its price list ahead of its competitors.   Then these competitors feel the need to match those announced prices so they lower their prices.   This is also termed a parallel pricing. Oligopolies tend to be broken down into one of two distinguished groups.   These groups are either a homogeneous or differentiated oligopoly.   Homogeneous oligopolies have a standardized product and which include industrial, with petroleum serving as the standardized example, and also...

Oligopoly and its Dual Features

Introduction

A market system refers to an organized system that enables several

market players to operate. Generally, this is a system that allows both bidders

and sellers to communicate and conduct business deals. In the field of

economics, this can be explained clearly through various market forms. Some of

the most common examples of these market forms include perfect competition,

imperfect competition and monopoly. Basically, these market forms have distinct

features based on the amount of consumers and producers in the market, the

types of goods or services offered as the level at which information can freely

flow. Each of these market systems has their own advantages and drawbacks.

Nonetheless, one market form, specifically oligopoly, has the features of

competition and monopoly systems, allowing it to optimize the gains of both

market forms. In this brief discussion, the monopolistic and competitive features

of an oligopolistic system will be identified.

Oligopoly

Oligopoly is one of the prevailing market structures in the business field.

This market system is also the dominating market structure in modern economies

(, 1997). In this market structure, only a few firms dominate a specific industry (,

2000; , 1999). Businesses within an oligopolistic system may either produce an

identical or differentiated product. When the competing firms produce identical

goods or services, the competition level is only limited to the price aspect.

However, when differentiated products are involved, rival firms would have to

compete on various aspects including product quality, price and marketing

strategies (2004). In oligopoly, each member is subjected to sufficient inter-

company rivalry, which in turn prevents others from owning the market demand

curve.

The players of an oligopolistic system are referred to as oligopolists. 

Since there are a few members or participants in this market form, each member

is interdependent of the actions of other members. This type of market is mainly

characterized by interactivity.  In this market structure, all the members’ decision

is mainly influenced by other members in an oligopoly.  Moreover, in this type of

market form, the responses of other members towards strategic planning are

always taken into consideration so as not to create internal conflict (, 2001).

Under oligopoly, the structure of the industries as well as the behaviors of the

business firms may vary. As mentioned, they may produce virtually identical

products like sugar, metal or chemicals. However, most oligopolists market

differentiated products.

These descriptions of an oligopoly explain how this market system has

both monopolistic and competitive features. Although, a single company

dominates a specific industry in a monopoly, the oligopolistic system is

dominated by a few major companies; having great business control over an

industry makes oligopoly similar to the monopolistic setting. Among these few

dominating companies, strict competition is observed. While in most instances,

the price aspect dictates the competition level, the production of differentiated

products further increases the competition among these few companies. Having

these dual features allow the oligopolistic system to be more efficient and

beneficial compared to monopoly and competition. The following section

identifies the efficiency gains that oligopoly has due to its dual character.

Dual Features

            In a monopolistic environment, the barriers to entry are very high that no

other companies can operate in the industry. However, as other yet few

companies can enter an oligopolistic system, barriers to entry are not as high.

Barriers to entry pertain to the degree to which new business entrants is

restricted or controlled within an industry. There are a number of barriers of entry

observed in the business field. One of which is called absolute cost barriers.

When firms operating within an industry are highly capital intensive, especially if

the business require significant commitment or capitalization to sophisticated

equipment, new business entrants tend to hesitate to enter the industry due to

high start up costs.

Other entry barriers like time and patience are also required in order for

the business to reach a high level of profitability. The presence of entry barriers

then help in regulating competition within the system, directly benefiting the

business operators. When firms become successful in an oligopolistic system,

dominant market presence and established reputation are achieved. Market

share is also concentrated to only a few competing firms. This makes competition

even harder for new and smaller companies to enter the industry ( 2001).

Keeping a semi-monopolistic environment in an oligopoly can cause

significant market failure; since the limited operating firms have considerable

market shares, the production of goods or provision of services can be affected,

especially in terms of quality. Without the presence of a driving force for quality

production, oligopolists will only focus on the profitability aspect of business. If

this environment will be considered, production is likely to be less efficient due to

lack of competition, causing market letdown. This then makes the competitive

factor an important feature of an oligopoly as it helps in balancing out the system.

As the limited number of companies compete with one another, business

organizations are more efficient in responding to various performance pressures;

moreover, they tend to work extra hard in preventing slack in inputs. In turn,

resource allocation becomes more efficient; specifically, companies are more

after cost-effective strategies that will allow efficient capital allocation. In addition

to this, resource allocation is also enhanced in competitive market forms as

business organizations become more innovative. The objective of the companies

within a competitive market environment is to provide the best to the consumers;

this in turn is achieved through innovation. With this strategy, companies will be

able to make their products stand out in the market and eventually overcome

threats of rivalry. Consumers are given with quality goods, resulting to efficient

resource allocation ( 2002). Aside from innovativeness, efficient resource

allocation is also achieved through competitive market reform by means of

diverse products and services that consumer can benefit from.

With this dual feature, oligopoly also has access to yet another important

aspect; by means of establishing a balance between total control and competitive

factors of business, oligopoly allows operating companies to be interdependent

of one another. With this market system characteristic, oligopolists depend very

closely upon the actions of the others operating in the same market. Their

behavior is necessarily influenced by the realization of mutual interdependence

( 1996). The economic theory of interdependence is based on the tendency of

competing firms to follow the actions or strategies of their rivals. One example of

interdependence among oligopolists is the issue on price. In oligopoly, each firm

knows that in initiating price changes, other firms will also react to them. In

assessing the net effects of a price change, it must take account of the probable

reaction of others. If a firm decides to change the price of its goods, the company

considers not only the general market situation and its own financial and stock

position but also the probable behavior of its principal competitors. Within the

oligopolistic environment, raising or lowering prices as well as implementing new

marketing strategies will most likely be copied by rivals.

The case of AT&T, the telecom giant, can be cited as an example to

explain this tendency. Back in the early 1990s, major carriers in the United States

had experience a major growth reduction for the first time in the domestic long-

distance market. This diminished growth in turn, led to the rise of strong negative

commentaries from the financial community. The telecommunication companies

must then act fast on this issue as this could lead to major adverse impacts on

their capital costs. In response to this, AT&T decided to implement an end to end

customer service to tie all of its customers, especially governmental and large

industrial buyers (1994). As the telecom company operates in an oligopolistic

environment, its major competitors Sprint and MCI followed the same strategy in

the United States and in other foreign markets. In order to implement this in the

international setting, both companies had established joint ventures with foreign

firms (, 1995). This example then stresses the observance of interdependence

among oligopolists.

While members of an oligopoly compete by reacting to ones actions, their

interdependence to one another also allows them to establish business

agreements. An oligopolistic situation is frequently accompanied by market-

sharing arrangements between a number of producers or firms. Oligopolists

involved in mutual interdependence find it convenient and profitable to coordinate

their policies and strategies together. Considering that the number of

interdependent firms is minimal, cooperation is easier (1996).

Conclusion

            Oligopoly is a market system wherein few companies operate and

compete in a certain industry. Compared to other market forms, oligopoly has

dual features of both monopoly and competition systems. Through its

monopolistic features, oligopolists are able to operate with less rivals; this in turn

allow them to obtain considerable shares of the market. This also helps in limiting

the level of competition observed in the market, making business progress faster

among limited firms. The presence of competition on the other hand, helps in

preventing oligopoly from market failure. Although the power to operate is only

distributed to a few oligopolists, the competition factor encourages them to

produce quality goods and services. This also drives them to become innovative

and customer-oriented. The efficiency gains of an oligopolistic system is then

concentrated on the fact that both operators and consumers benefit from this

type of market system. In turn, the presence of both monopolistic and competitive

features in oligopoly creates a balanced system, making it an ideal market

structure.

Introduction

A market system refers to an organized system that enables several

market players to operate. Generally, this is a system that allows both bidders

and sellers to communicate and conduct business deals. In the field of

economics, this can be explained clearly through various market forms. Some of

the most common examples of these market forms include perfect competition,

imperfect competition and monopoly. Basically, these market forms have distinct

features based on the amount of consumers and producers in the market, the

types of goods or services offered as the level at which information can freely

flow. Each of these market systems has their own advantages and drawbacks.

Nonetheless, one market form, specifically oligopoly, has the features of

competition and monopoly systems, allowing it to optimize the gains of both

market forms. In this brief discussion, the monopolistic and competitive features

of an oligopolistic system will be identified.

Oligopoly

Oligopoly is one of the prevailing market structures in the business field.

This market system is also the dominating market structure in modern economies

(Chrystal & Lipsey, 1997). In this market structure, only a few firms dominate a

specific industry (Cabral, 2000; Sloman, 1999). Businesses within an oligopolistic

system may either produce an identical or differentiated product. When the

competing firms produce identical goods or services, the competition level is only

limited to the price aspect. However, when differentiated products are involved,

rival firms would have to compete on various aspects including product quality,

price and marketing strategies (Parkin, 2004). In oligopoly, each member is

subjected to sufficient inter-company rivalry, which in turn prevents others from

owning the market demand curve.

The players of an oligopolistic system are referred to as oligopolists. 

Since there are a few members or participants in this market form, each member

is interdependent of the actions of other members. This type of market is mainly

characterized by interactivity.  In this market structure, all the members’ decision

is mainly influenced by other members in an oligopoly.  Moreover, in this type of

market form, the responses of other members towards strategic planning are

always taken into consideration so as not to create internal conflict (Sloman &

Sutcliffe, 2001). Under oligopoly, the structure of the industries as well as the

behaviors of the business firms may vary. As mentioned, they may produce

virtually identical products like sugar, metal or chemicals. However, most

oligopolists market differentiated products.

These descriptions of an oligopoly explain how this market system has

both monopolistic and competitive features. Although, a single company

dominates a specific industry in a monopoly, the oligopolistic system is

dominated by a few major companies; having great business control over an

industry makes oligopoly similar to the monopolistic setting. Among these few

dominating companies, strict competition is observed. While in most instances,

the price aspect dictates the competition level, the production of differentiated

products further increases the competition among these few companies. Having

these dual features allow the oligopolistic system to be more efficient and

beneficial compared to monopoly and competition. The following section

identifies the efficiency gains that oligopoly has due to its dual character.

Dual Features

            In a monopolistic environment, the barriers to entry are very high that no

other companies can operate in the industry. However, as other yet few

companies can enter an oligopolistic system, barriers to entry are not as high.

Barriers to entry pertain to the degree to which new business entrants is

restricted or controlled within an industry. There are a number of barriers of entry

observed in the business field. One of which is called absolute cost barriers.

When firms operating within an industry are highly capital intensive, especially if

the business require significant commitment or capitalization to sophisticated

equipment, new business entrants tend to hesitate to enter the industry due to

high start up costs.

Other entry barriers like time and patience are also required in order for

the business to reach a high level of profitability. The presence of entry barriers

then help in regulating competition within the system, directly benefiting the

business operators. When firms become successful in an oligopolistic system,

dominant market presence and established reputation are achieved. Market

share is also concentrated to only a few competing firms. This makes competition

even harder for new and smaller companies to enter the industry (Gershon,

2001).

Keeping a semi-monopolistic environment in an oligopoly can cause

significant market failure; since the limited operating firms have considerable

market shares, the production of goods or provision of services can be affected,

especially in terms of quality. Without the presence of a driving force for quality

production, oligopolists will only focus on the profitability aspect of business. If

this environment will be considered, production is likely to be less efficient due to

lack of competition, causing market letdown. This then makes the competitive

factor an important feature of an oligopoly as it helps in balancing out the system.

As the limited number of companies compete with one another, business

organizations are more efficient in responding to various performance pressures;

moreover, they tend to work extra hard in preventing slack in inputs. In turn,

resource allocation becomes more efficient; specifically, companies are more

after cost-effective strategies that will allow efficient capital allocation. In addition

to this, resource allocation is also enhanced in competitive market forms as

business organizations become more innovative. The objective of the companies

within a competitive market environment is to provide the best to the consumers;

this in turn is achieved through innovation. With this strategy, companies will be

able to make their products stand out in the market and eventually overcome

threats of rivalry. Consumers are given with quality goods, resulting to efficient

resource allocation (OECD Economic Outlook, 2002). Aside from innovativeness,

efficient resource allocation is also achieved through competitive market reform

by means of diverse products and services that consumer can benefit from.

With this dual feature, oligopoly also has access to yet another important

aspect; by means of establishing a balance between total control and competitive

factors of business, oligopoly allows operating companies to be interdependent

of one another. With this market system characteristic, oligopolists depend very

closely upon the actions of the others operating in the same market. Their

behavior is necessarily influenced by the realization of mutual interdependence

(Trebing, 1996). The economic theory of interdependence is based on the

tendency of competing firms to follow the actions or strategies of their rivals. One

example of interdependence among oligopolists is the issue on price. In

oligopoly, each firm knows that in initiating price changes, other firms will also

react to them. In assessing the net effects of a price change, it must take account

of the probable reaction of others. If a firm decides to change the price of its

goods, the company considers not only the general market situation and its own

financial and stock position but also the probable behavior of its principal

competitors. Within the oligopolistic environment, raising or lowering prices as

well as implementing new marketing strategies will most likely be copied by

rivals.

The case of AT&T, the telecom giant, can be cited as an example to

explain this tendency. Back in the early 1990s, major carriers in the United States

had experience a major growth reduction for the first time in the domestic long-

distance market. This diminished growth in turn, led to the rise of strong negative

commentaries from the financial community. The telecommunication companies

must then act fast on this issue as this could lead to major adverse impacts on

their capital costs. In response to this, AT&T decided to implement an end to end

customer service to tie all of its customers, especially governmental and large

industrial buyers (Keller, 1994). As the telecom company operates in an

oligopolistic environment, its major competitors Sprint and MCI followed the

same strategy in the United States and in other foreign markets. In order to

implement this in the international setting, both companies had established joint

ventures with foreign firms (Estabrooks & Trebing, 1995). This example then

stresses the observance of interdependence among oligopolists.

While members of an oligopoly compete by reacting to ones actions, their

interdependence to one another also allows them to establish business

agreements. An oligopolistic situation is frequently accompanied by market-

sharing arrangements between a number of producers or firms. Oligopolists

involved in mutual interdependence find it convenient and profitable to coordinate

their policies and strategies together. Considering that the number of

interdependent firms is minimal, cooperation is easier (Varian, 1996).

Conclusion

            Oligopoly is a market system wherein few companies operate and

compete in a certain industry. Compared to other market forms, oligopoly has

dual features of both monopoly and competition systems. Through its

monopolistic features, oligopolists are able to operate with less rivals; this in turn

allow them to obtain considerable shares of the market. This also helps in limiting

the level of competition observed in the market, making business progress faster

among limited firms. The presence of competition on the other hand, helps in

preventing oligopoly from market failure. Although the power to operate is only

distributed to a few oligopolists, the competition factor encourages them to

produce quality goods and services. This also drives them to become innovative

and customer-oriented. The efficiency gains of an oligopolistic system is then

concentrated on the fact that both operators and consumers benefit from this

type of market system. In turn, the presence of both monopolistic and competitive

features in oligopoly creates a balanced system, making it an ideal market

structure.

References:

Cabral, L.M.B. (2000). Introduction to Industrial Organization. Cambridge, MA: MIT Press.

Chrystal, K.A. & Lipsey, R. (1997). Economics for Business and Management. Oxford: Oxford University Press.

Estabrooks, M. & Trebing, H. (1995). The Globalization of Telecommunications: A Study in the Struggle to Control Markets and Technology. Journal of Economic Issues, 29(2), 535+.

Gershon, R. (1997). The Transnational Media Corporation: Global Messages and Free Market Competition. Mahwah, NJ: Lawrence Erlbaum Associates.

Keller, J.J. (1994, December 8). AT&T Arranges Pact on Increased Role in Europe. Wall Street Journal, B-13.

Parkin, M. (2004). Economics. 7th Ed.  Ontario: University of Western Ontario.

Product market competition and economic performance. (2002, December). OECD Economic Outlook. Retrieved May 15, 2006 from www.findarticles.com

Sloman, J. & Sutcliffe, M. (2001). Economic for Business. England: Pearson Education.

Sloman, J. (1999). Economics. 3rd Ed. Prentice Hall.

Trebing, H. (1996). Achieving Coordination in Public Utility Industries: A Critique of Troublesome Options. Journal of Economic Issues, 30(2), 561+.

Varian, H.R. (1996). Intermediate microeconomics. 4th Ed. New York: W.W. Norton.

What is an Oligopolistic Market ?

An oligopolistic market is the one which is dominated by some large suppliers. In an oligopolistic market, the leading firms account for a large percentage of market share. Firms manufacture branded products and high competition among them results in tremendous advertising and marketing spends by these firms. Leading forms are able to make abnormal profits in the long run, as new firms have numerous entry barriers. As all firms in an oligopolistic market are interdependent, they need to consider impact and reactions on other firms while determining their own pricing and investment policies. Homogeneous products, mutual interdependence, few large producers and high entry barriers are oligopoly characteristics prevalent in such markets.

The car automobile industry is a very good example of an oligopolistic market. There are various competitors in this market but the dominant ones include General Motors, Honda, Chrysler, Toyota and Ford. Entry barriers prevent other entrants and pricing is mostly by competition and mutual understanding between top manufacturers.

What are the Characteristics of Oligopoly?

The three most important characteristics of oligopoly include:

Industry dominance by few large firms Products sold by these firms are either differentiated or

identical in nature Various entry barriers depending upon the industry

Few Large FirmsThis is a very crucial oligopoly characteristic which states that these markets include few large firms which are dominant in existence, and each one of these firms is comparatively larger than the market size. This particular oligopoly characteristic ensures that all large firms have a fair amount of market control, not seen in a monopoly market. In spite of there being other smaller firms in the market, the major ones account for more than half of the total industry output. For example, in a hypothetical telecommunications market, out of the 25 firms doing business the top 5 firms are responsible for 65% of the total industry sales, while the figure shoots up to 80% if the top 10 firms are taken into consideration.

Homogeneous or Differentiate ProductsCertain industries in an oligopolistic market manufacture homogeneous products, like in a perfect competition market, while others manufacture differentiated products like in an monopolistic market. It can thus be inferred that oligopolistic markets are found in two separate categories:

1. Homogeneous Product Oligopoly: Industries in these markets produce intermediate goods which are use by other different industries later on for manufacturing their products. Examples include – steel, petroleum and aluminum industries.

2. Differentiate Product Oligopoly: Goods manufactured in these kinds of markets are for personal consumption.

Consumers need a variety of products, as they have different needs and wants. Examples include – computers, household products and automobile industry.

Entry BarriersEntry barriers helps existing firms to exercise market control. Government restrictions, copyright issues, huge setup cost and undivided resource ownership are common barriers to entry. This particular feature also helps in differentiating an oligopolistic market from a monopolistic market, as new firms can enter a monopolistic market and reduce dominance of the large firm. For example, if a new firm tries to enter the hypothetical telecommunications market discussed earlier it will have to compete against already existing brand names, set-up a manufacturing unit without any initial sales or income from the business and will also need to come up with innovative production techniques to sustain it self in the long run. All these barriers make it difficult for the new entrant to enter the oligopolistic market, irrespective of the product.

Apart from this, few other oligopoly characteristics include – tendency to keep price rigid, practice of non-price competition, inclinations towards mergers or collaborations and decision making through mutual consent.

DEC 17 — Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah recently made a speech that received a lot of attention. Early in it, he shared that the government is looking to increase the private sector’s contribution to the domestic economy. This particular point would have been exciting if it was not for three reasons.

One, he is not the first person to say this. Two, the last time somebody important in the government expounded the idea, the size of government expanded considerably instead. Three, as the minister said, the government means to see this through via government-linked companies. The third point is noteworthy because government-linked companies hardly qualify as part of the private sector.

It is instructive how the definition of a word or a phrase changes over time. Invasion is termed as liberation. Loss of innocent human lives resulting from military action sanctioned by the state is called collateral damage. George Orwell probably drives home the point best with the statement “war is peace, freedom is slavery and ignorance is strength.”

The term private sector is supposed to describe the sector within the economy that is not owned by the state, where private individuals make private choices with private resources for private gains or losses. Any enterprise owned by the government, and therefore largely utilises public resources, is part of the public sector. While the break may not be clean because the link between the two sectors in some cases is inevitable, their difference in Malaysia now is far too blurry for it to be meaningful within the context of the speech. The cause of that is years of government intervention in the market.

These interventions come in many ways. Bailouts of failed enterprises by the government are one way where excessive presence of the state in the market can be introduced. Another is through the government’s expressed intention of participating in business that is mostly due to political and not business considerations.

During the Abdullah administration, multiple fully-owned government-linked companies were established as part of the government’s focus on the agricultural sector, as well as its love affair with centrally planned economic corridors. During the Mahathir administration, the focus on manufacturing brought upon the birth of – for example – the state-owned Proton. How the protection of Proton has prevented Malaysia from becoming a regional automotive hub driven by foreign but essentially private sector is well known and needs no further elaboration.

Even when an import substitution policy was all the raged in the early history of Malaysia, the government helped create what eventually became favoured oligopolies in multiple sectors. These oligopolies continue to exist until today. The creation of a monopoly is not exactly a healthy way to enhance the private sector’s contribution to the economy because most monopolies have the incentive to maintain the status quo. They do this by discouraging adoption of new technology that is crucial to improving productivity and ultimately challenging their dominance to the benefit of society at large. Without improved productivity, it is hard to see how the private sector could increase its contribution to the economy.

Due to those interventions, the understanding of the term private sector has gradually but surely shifted to assume its opposing definition. Observe how strongly linked the domestic economy, specifically the supposedly private sector, is to Khazanah Nasional Berhad, Perbadanan Nasional Berhad and even the Employees Provident Fund, among others.

To label entities strongly linked to these organisations as part of the private sector is tenuous because, like it or not, the government has a strong say in the management of those entities. With that, the government essentially controls the direction of these companies. Given the vast resources available to the government despite its massive fiscal deficit, the government unfairly competes with the true private sector. This unfair competition discourages the creation of new entrepreneurs for the inculcation of competitive market, to limit space for the true private sector.

Considering all that, how exactly does the government plan to increase the true private sector’s contribution to the domestic economy through government-linked companies will be interesting.

Does the government intend to instruct its government-linked companies to increase activities in the market and then label such contributions to the economy as privately-driven?

Or does the government plan to increase activities of government-linked companies to increase opportunities for entities from the true private sector?

This creates only a culture of dependency. In times when the government seems intent to reduce dependency on the state, this contradicts the effort.

The best way to increase the true private sector’s contribution is to embrace the original meaning of the term. To do that, the government or really, the state, needs to reduce its participation in the market. Bad regulations protecting monopolies and state-owned entities meanwhile require dismantling in order to give true private sector space to expand in a largely distortion-free environment.

The first step to take is for the government of the day to stop overestimating its capability in managing the economy. Humbleness is the key in getting the private sector to improve its contribution to the local economy, especially in a sustainable manner. Rather than trying to

expand the role of government-linked companies, the government should focus on building credible institutions capable of accommodating expansion of private sector.

In other words, the government must refocus on its original purpose. That original purpose of a government, without being ideological about it, is governing, not doing business.

Let the true private sector do its work properly without excessive government interference either directly from the government itself, or via government-linked companies

MALAYSIA--The slow uptake of broadband services has led the Malaysian government to revise its earlier optimistic penetration targets, prompting industry observers to call for market reform.

The government had previously set a target of 75 percent adoption rate by 2010, but only 11.7 percent of Malaysia's 5.5 million households currently have broadband access, up from 7 percent in 2005.

This disappointing state of affairs recently prompted a Cabinet Committee chaired by Deputy Prime Minister Najib Tun Razak to revise the target down to 50 percent by 2010.

However, the Association of the Computer and Multimedia Industry of Malaysia (Pikom) said the government should instead use an internationally recognized benchmark in establishing the broadband penetration target.

It is proposing the government sets a goal to achieve at least 3.0 broadband subscribers per 100 inhabitants by 2010. Compared to comparable economies, Malaysia lags behind its peers in terms of broadband subscribers per 100 inhabitants.

"A broadband service provider reported that its total broadband customer base was 864,000 in 2006," said Pikom chairman David Wong, in an e-mail interview with ZDNet Asia. "Against a population of 27 million, this is mathematically insignificant and works out to 0.32 broadband subscribers per 100 inhabitants."

In contrast, developed countries such as Denmark, Finland, Sweden and Korea have at least 26 broadband subscribers per 100 inhabitants. "Malaysia fares poorly even when compared against economies like Greece, Turkey and Mexico. Greece has 4.6 broadband subscribers per 100 inhabitants, Turkey has 3.8 and Mexico 3.5," Wong said.

To improve the quality of broadband services, Pikom said telcos in Malaysia should follow the lead of countries such as South Korea and Japan, in upgrading to fiber networks.

Wong explained: "Fiber-to-the-home (FTTH) and fiber-to-the-building (FTTB) subscriptions have gain prominence. We are not seeing FTTH being rolled out here. Instead, it would be fair to say our copper infrastructure is being stretched."

Pikom is also concerned over repercussions of the Malaysia's costly, yet poor-quality broadband services. The Association has proposed that the cost of broadband usage for consumers be reduced immediately to create a critical mass of broadband users.

Wong said Malaysia's Internet industry is stunted because of the nation's broadband shortcomings. "The greatest segment harmed by our broadband inadequacies is electronic commerce, online service-based providers and online content segment of the ICT industry," he said.

"Malaysians are frustrated when they click to watch a streaming video and are forced to wait while buffering repeatedly takes place, and this is [just] one of many examples," he noted.

Much of the brickbats concerning broadband services have been directed at Telekom Malaysia (TM), which has 94 percent of Malaysia's broadband subscriber market or a base of more than 1 million subscribers.

At a recent media briefing to outline initiatives to improve its broadband services, TM Malaysia Business CEO Zamzamzairani Mohd Isa made an appeal: "We are doing things to improve our service. But we seek your patience."

Calls to open market

Industry observers say some of the problems may stem from TM's dominant market position, and the apparent protection the telco enjoys as a government-linked company, especially on issues such as the unbundling of last-mile access.

Pikom argued that the current "oligopolistic, monopolistic situation for telecommunication backbone and broadband services will doom us all".

In a discussion with government officials last April, Pikom urged the Malaysian government to open up the telecommunication and fiber-optic pipelines owned by government-linked telcos and make the network accessible to all technology providers. This, it said, will reduce the cost of broadband services for consumers.

Hafriz Hezry, an investment analyst with TA Securities Holdings, said: "I believe de-monopolization plays a critical role in furthering the development of a technology, as this would lead to a more market-driven and commercial-based industry."

In an e-mail interview with ZDNet Asia, Hafriz said the introduction of WiMax could resolve, to some extent, the problem of the last-mile access which TM seeks to protect.

"WiMax provides an alternative to existing services. Increased industry competition, be it in the form of a substitute product or direct replacement should benefit consumers," he said.

In March this year, the Malaysian Communications and Multimedia Commission ignored the country's top telcos such as TM and Maxis, and instead awarded WiMax licenses to four lower-tier telcos. The licensees have until the end of 2007 to roll out their WiMax services to 25 per cent of the population, in the areas allocated.

However, there are indications that this target may be too ambitious. Hafriz pointed out there has not been much development in the WiMax deployment so far. "For example, [one of the licensees] Green Packet is currently facing trouble in securing sites for their transmitters, hence the delay in rolling out its services," he added.

In his Budget Speech 2008, Malaysia's prime minister outlined several new initiatives to help spur the country's broadband penetration rate, including investment allowance, import duty and sales tax exemptions on hardware equipment.

Lee Min Keong is a freelance IT writer based in Malaysia.

CASE STUDY Mittal taking over Arcelor:

On the consolidation front, the steel industry was focused on Mittal’s bid to gain control over

Arcelor. Mittal’s victory in the battle for global steel industry control is giving the steel industry

a new direction. The world’s number one and two producers have combined and this will go

a long way to push consolidation. The now combined Arcelor- Mittal would produce more 10

percent of the world output, close to 100 million tons of steel. This would give an increased

pricing power for producers and suppliers, and decrease the fragmentation. Arcelor-Mittal

have become the largest steel maker in the world by turnover as well as by volume. The new

steel company will have about 334,000 employees’ worldwide, and revenues close to $70

billion. Arcelor-Mittal is more than three times larger in terms of production of and revenue

from steel, than its nearest rival Nippon Steel Corp. of Japan. The combined company will

now have a significant advantage in setting prices and negotiating the terms of various

contracts with key customers.

Tata taking over Corus:

When the news came out that Tata is taking over Corus it was not accepted by the public or

rather the investor in a positive way. The stock price fell by around 7% in 15 days time. The

deal was finalized at about 18.2 billion dollar. This proposed acquisition represents a defining

moment for Tata Steel and is entirely consistent with the strategy of growth through

international expansion This made Tata the 5th largest steel producing country in the world.

The sales have increased to Rs 63,587/- crores for the first half of FY08. Price reduction undertaken by Tata Steel (Aug 23, 2004): Tata Steel cuts price by Rs 2,000 per tone. "It is expected that this price reduction by Tata

Steel will, in turn, contribute in arresting or moderating the pressures on price increases by

major users on their products," company chairman Ratan N Tata said in a statement. Hoping

that other steel manufacturers and members of the steel trade would also display a sense of

corporate responsibility by rolling back their prices in the interest of curbing inflationary

trends. Only Ispat Industries came out in support, admitting there was a case for a reduction

in prices in the domestic market to control inflation Global market demand and supply:

Demand rose from 850mmt in 2000 to 1060mmt in 2005 to 1155mmt in 2007 whereas

supply rose from 840 in 2000 to 1070 in 2005 to 1185 in 2007 the main reason for this

change is due to the rising demand for the steel all over the world. The main reason is due to

the rising demand for steel in China other Asian countries.

CASE STUDY: Handset-driven expansion strategies:

Reliance Info com Ltd. (Reliance), India's leading postpaid mobile services provider, entered

the prepaid mobile services segment by offering subscription schemes that allowed

customers to make use of a digital mobile phone service at an affordable price. For a price of

Rs. 3,5003 for a CDMA enabled Motorola handset, a subscriber could get a free Reliance

India Mobile (RIM) prepaid connection and recharge vouchers worth Rs. 3,240. This

connection was valid for six months with a grace period of another six months during which

the subscriber could receive SMS and incoming calls without having to recharge the account.

Similar subscription offers were made on other RIM handsets also. If a subscriber purchased

an LG handset worth Rs. 6,500, he/she got a free RIM prepaid recharge voucher worth Rs.

6,480 valid for six months. The prepaid subscription offers were seen as a revolutionary step

towards making communication and data services affordable to a wider range of customers.

Apart from their price, these offers included several value added services like three way

conference call, national roaming, SMS based data services, STD and ISD facility, call

forward and voice message service at local mobile rates, etc. Also, RIM prepaid was the only

prepaid mobile service in the country that provided data applications and internet

connectivity. Commenting on the innovativeness and superiority of these services, S P

Shukla, President, Wireless Products and Services, Reliance, said, “RIM Prepaid raises the

bar for innovation, quality of service and value added services in prepaid segment of mobile

telephony market.” Industry observers felt that by providing high-end services at affordable

prices, Reliance was creating value for its customers...

Currently Reliance Communications (RCOM) recently launching ultra budget handsets with

prices starting at Rs 777, While CDMA players like RCOM and Tata Teleservices have

adopted handset-driven expansion strategies to drive up subscriber base, this is the first time

that a GSM player is venturing into this space on a pan-India level.

Bharti joins race, to bundle handsets with connections on 22 Jun, 2007. In a major shift in

strategy, India’s largest mobile operator Bharti Airtel is set to bundle handsets with mobile

connections. This means that the company will provide a handset with a new connection at

partly subsidized rates.

Vodafone Essar, which will spend nearly Rs 250 crore on a high-profile brand transition from

Hutch to Vodafone being unveiled on Thursday, is poised to launch cheap cellphones in

India under the Vodafone brand. It will also launch co-branded handsets sourced from major global vendors. Bharti’s move follows the recent announcement by its main competitor in the GSM space Vodafone. This said it will launch a series of ultra low-cost bundled handsets to get a

CASE STUDY Moser Baer’s DVD Play Ignites Price War:

There is a price war happening on the home video front. Following Moser Baer’s

aggressively priced DVD entry into the home entertainment marketplace; its competitors

too are not taking chances. Moser Baer priced its DVDs at Rs 34 for a pop while VCDs at

Rs 28. The company also recently launched some 75 Hindi titles, besides hundreds of

titles in regional languages. Now the competition has responded. T-Series has cut DVD

prices to Rs 45 on select movies and is offering a package of three films for Rs 75. Ultra

has brought down the price of its old catalogues from Rs 300 to Rs 45 even before Moser

Baer started the war. Another company Shemaroo Entertainment says it may follow suit

Another company Shemaroo Entertainment says it may follow suit. Taurani, managing

director, Tips Industries, says he will see how the response to Moser Baer pans out, and will

decide a future course of action. Moser Bear's Pricing Strategy: The New Anti-Piracy Model:

Moser Bear, an Indian leader in digital media manufacture (DVD's and VCD's) is helping

change the piracy paradigm. In a laudable initiative, they are acquiring copyright licenses

to a wide range of movies and selling DVD's/VCD's for rock bottom prices. A normal

DVD version of a movie costs around Rs 200 (USD 5) or upwards in India, whereas the

version sold by Moser Baer costs around Rs 30-50 (USD 1).With such low margins,

pirates will find it hard to survive!!

"Pulling down prices may curb the price-sensitive piracy-a movie being copied and sold

for 10-20% of the original price.But what will be hard to tackle is the time-sensitive

piracy, which happens because, according to law, there has to be a time lag between the

theatrical and home-video release of a film." Moser Baer would have to work with movie

producers and film distributors to shorten the time to market a new movie release and

allay their fears that the home video market could affect their business. Moreover, Moser

Baer could find it difficult to provide low prices for the latest movie releases as the rights would be costlier when compared to old movies.

AUTOMOBILE INDUSTRY GLOBAL AUTOMOBILE INDUSTRY The global automotive industry is a highly diversified sector. It is considered to be highly

capital and labor intensive. It comprises of manufacturers, suppliers, dealers, retailers,

original equipment manufacturers, aftermarket parts manufacturers, auto electricians etc. It is

one of the important industries in the world, which provides employment to 25 million people

in the world. Top five automobile manufacturing nations are : United States, Japan, China, Germany and South Korea The United States of America is the world’s largest producer and consumer of motor vehicles and automobiles. It represents nearly 10% of the $10 trillion US economy. It has a market share of $432.1 billion Size of the automotive industry The automotive industry occupies a leading position in the global economy, accounting for 9.5% of world merchandise trade and 12.9% of world export of manufacturers. Leading automobile manufacturing corporations are:-

Leading automobile companies and their market share are General Motors (24.1%), Ford

Motor Company (17.1%), Toyota (14.9), Daimler Chrysler (14 %) others (29.9%). These

corporations have their presence in almost every country. Major Segments Of Automotive Industry Four Wheelers industry is one of the largest segments of global automotive industry

that produces different type of four wheelers namely cars, passenger cars, jeeps, vans etc.

The key manufacturers of four wheelers in the world are General Motors, Toyota, Ford,

Volkswagen AG, Daimler Chrysler AG, Nissan Motor Company Ltd., Honda, and PSA

Peugeot. Two wheelers industry comprises of four broad segments i.e. scooters, motorcycles, mopeds and bicycles. Japan, India and China are the largest producers of two wheelers in the world. India produced 7600801 two wheeler in 2005-06.

Commercial Vehicles industry comprises of units engaged in manufacturing and selling

of commercial motor vehicles. The commercial vehicles include light commercial vehicles,

rigid vehicles, articulated trucks, buses and non-freight carrying truck. United States, Japan

and China are the largest manufacturers of commercial vehicles in the world.

Utility Vehicles industry consists of units engaged in manufacturing and selling of Sports Utility Vehicle and the Multi Utility Vehicles. The key utility vehicles manufacturing regions of the world are North America, Europe, China and India. INDIAN AUTOMOBILE INDUSTRY India is on every major global automobile player's roadmap. •

India is the second largest two-wheeler market in the world •

Fourth largest commercial vehicle market in the world •

11th largest passenger car market in the world •

Fifth-largest bus and truck market in the world (by volume) •

Expected to be the seventh largest automobile market by 2016 and world's third largest by 2030, behind only China and the US. Spurred by a huge demand due to increasing purchasing power, new product launches,

coupled with attractive finance schemes and booming exports, the Indian automobile

industry has been growing at a frenetic pace. During 2006-07, it produced a wide variety of

vehicles including over 2.06 million four wheelers (passenger cars, light, medium and heavy

commercial vehicles, multi-utility vehicles such as jeeps), and over 9 million two and three

wheelers (scooters, motor-cycles, mopeds, and three wheelers).