2. Practice in economic analysis

A case study approach

Exercise 77. Read the following information, fulfill the task in written form, answer each question of the task, justify your opinion in the class.

How far does the theory of oligopoly match with the reality?

In studying market structures one of the most commonly used case study examples explore oligopolies; the reason is because they are so predominant in modern business. Oligopolies refer to a market structure where an industry is dominated by a small number of large sellers. It follows that these sellers are also dominant buyers in the industry too - this is termed 'oligopsony'.

The aim of this Activity is to investigate some examples of oligopolistic markets and to draw some conclusions about how accurate the theory of oligopoly is in reality. The following are all good examples of industries that have an oligopolistic market structure:

• Vehicle market – 6 largest producers⁴ rule 98% of domestically produced lorries and 90% domestically produced cars

• Nickel market – 4 main producers of nickel: Norilskiy nickel, Inko, Falconbridge, WMS rule over 60% of world market. In Russia - Norilskiy nickel and Pechenganickel.

• Mobile phone networks – 3 largest operators – MTS, Megafon, Vimpelcom rule 80% of the market.

• Pharmaceutical products market – 7 largest players: «Protech», «SIA International», ROSTA, «Biotech», «Katren», «Apteka-holding», «Shreia», rule over 50% of market

• Photochemicals – photographic film and photographic paper producers, operating in the Russian market: Kodak (50-55%), Fuji (10-15%), Conica (15-20%), Agfa (10-15%);

• Electrical goods - Sony, Hitachi, Panasonic, Canon, Bush, Fuji

There are of course plenty of others but this gives an idea of the extent to which industries are moving towards oligopolistic structures. It is clear, as well, that many firms are so large that they have significant interests in a variety of markets - each of which may be oligopolistic in nature. Sony, for example, not only manufactures electrical goods of all types but have interests in entertainment with the Sony record label.

Your task:

• Are there any oligopolies in the following Russian markets? If yes, give examples of oligopolists.

• Brewers

• Banks

• Mobile phone networks

• Confectionery

• Soft drinks

• Choose one of the above markets and research the following aspects:

• What is the concentration ratio⁵?

• Consider the nature of the competition in the industry – is there evidence of kinked demand curves⁶, non-price competition, branding and so on?

• Is there any evidence of the collision in the industry?

• Is there evidence that abnormal profits exist in the industry?

• What barriers to entry can you identify in the industry?

• What evidence of independence exist in the industry?

Having collated the information above (some of which will be easier to find the others) present a report (of about 1000 words) on the nature of oligopoly and the extent to which the industry you have chosen reflects the theory of oligopolistic market structure.