Final Full Oligopoly

ATHARVA INSTITUTE OF MANAGEMENT STUDIES

ECONOMIC ENVIRONMENT OF BUSINESS Oligopoly(other than cartel) Presented To: Dr. Sarojini Sheth

GROUP MEMBERS ROLL. NO. NAME 09 TARUN KUMAR CHAPANERI 25 NIKHIL KIRTANE 44 PRIYANKA PHONDE 33 ANAND MOHAN 39 SAGAR ASRANI 49 ANUMEHA RAJ 14 ROHIT GANJOO

OLIGOPOLY Oligopoly is a market structure characterized by a small number of large firms that dominate the market, selling either identical or differentiated products, with significant barriers to entry into the industry. Oligopoly dominates the modern economic landscape, accounting for about half of all output produced in the economy. MAIN FEATURES OF OLIGOLPOLY: 1. Sellers are few in number 2. Any one of them is of such a size that an increase and decrease in his out put will appreciably affect the market price. Infact, the size of each sellers output in relation to the total supply is the test. 3. Each seller knows his competitors individually in each market.

Characteristics The three most important characteristics of oligopoly are: (1) An industry dominated by a small number of large firms, (2) Firms sell either identical or differentiated products, and (3) The industry has significant barriers to entry. 

Small number of large firms: an oligopolistic industry is dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This generates substantial market control, the extent of market control depending on the number and size of the firms.

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Identical or differentiated products: Some oligopolistic industries produce identical products, while others produce differentiated products. Identical product oligopolies tend to process raw materials or intermediate goods that are used as inputs by other industries. Notable examples are petroleum, steel, and aluminum. Differentiated product oligopolies tend to focus on consumer goods that satisfy the wide variety of consumer wants and needs. a few examples of differentiated oligopolistic industries include automobiles, household detergents, and computers.

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Barriers to entry: Firms in a oligopolistic industry attain and retain market control through barriers to entry. The most common barriers to entry include patents, resource ownership, government franchises, start-up cost, brand name recognition, and decreasing average cost. Each of these make it extremely difficult, if not impossible, for potential firms to enter an industry.

RULE OF THREE In rule of three oligopoly 3 major firms control of 70 to 90 percent of a particular industry, with the remaining companies being relegated to the level of niche players. To illustrate this, in the 19th century there were more than 200 cars manufacturers in the U.S.A but now there are only 3 major players, viz., general motors, ford and chrysler. Strengths of the Rule of Three:  Rule of thumb.  Identifying the position of a company with respect to competitors.  It helps to find a way to improve or change the strategy if required before companies fall in the ditch.

COLUUSION In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market form of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion for e.g. OPEC countries.

GAME THEORY Soft Drink Advertising

A technique often used to analyze interdependent behavior among oligopolistic firms is game theory. Game theory illustrates how the choices between two players affect the outcomes of a "game." this analysis illustrates two firms cooperating through collusion are better off than if they compete.

The exhibit to the right illustrates the alternative facing two oligopolistic firms, juice-up and omnicola, as they ponder the prospects of advertising their products. 

In the top left quadrant, if omnicola and juice-up both decide to advertise, then each receives $200 million in profit.

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However, in the lower right quadrant, if neither omnicola nor juice-up decide to advertise, then each receives $250 million in profit. They receive more because they do not incur any advertising expense.

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Alternatively, as shown in the lower left quadrant, if omnicola advertises but juice-up does not, then omnicola receives $350 million in profit and juice-up receives only $100 in profit. Omnicola receives a big boost in profit because its advertising attracts customers away from juice-up.

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But, as shown in the top right quadrant, if juice-up advertises and omnicola does not, then juice-up receives $350 million in profit and omnicola receives only $100 in profit. juice-up receives a big boost in profit because its advertising attracts customers away from omnicola.

Game theory indicates that the best choice for omnicola is to advertise, regardless of the choice made by juice-up, and juice-up faces exactly the same choice. Regardless of the decision made by omnicola, juice-up is wise to advertise. The end result is that both firms decide to advertise. In so doing, they end up with less profit ($200 million each), than if they had colluded and jointly decided not to advertise ($250 million each).

THE KINKED DEMAND CURVE The dependency and uncertainty aspect of the oligopoly leads to the indeterminateness of the demand curve. The rigid price in oligopoly leading to Kink in demand curve of an oligopolist was put forward independently by Paul Swerzy, an American economist and Hall and Hitch, Oxford economists. Taking an example of an extremely limited case of oligopoly i.e. a case of duopoly were there are only two firms, we can explain an oligopolists demand curve- known as Kinky demand curve. Fig 1 explains the derivation of Kinky demand curve.

Price

Price

D

Y

D

Y D

T P

T

Da Db O

Quantity

Fig 1

X

Db O

M Quantity Fig 2

There are two demand curve in the Fig 1 DDa of firm A and DDb of firm B. The former is more elastic and latter less elastic. At point T the two demand curve intersects An oligopolist’s demand curve has the shape shown in the Fig 1. At point T it has a Kink. The Td part of the demand curve is more elastic and the TD b part is inelastic. Kinky demand curve is obtained by taking TD part of firm A and TDb part of firm B. In Fig 2 we have OP price at which OM is sold. The price OP is expected to remain without further change hence it is rigid. Let us understand why oligopolies do not like to reduce or increase price of their product. Reduction in price: If the oligopolist reduces the price below OP to have more sales of his product the rivals will be quick in reducing their price in order to not to lose the market. It is possible the rivals may cut price by a higher margin to capture a larger share of a market. In a process a price reduction, finally oligpolists will not increase their individual sale but may succeed in getting a share of increased total sales dye to reduction in price. Each one’s gain will be a marginal one. Such weak response of demand for a charge in price OP makes TDb part of the demand curve DDb less elastic. Increase in price: If an oligopolists increase the price above the prevailing price that is OP, he would loose his customers. The buyer would purchase from other oligopolist as the rival firm would not increase the price due to the fear of loosing the customers and consequent decline in sales. The decline on sales of the firm which increases its price depends on the type of product and availability of product in the market. A substantial

X

decrease in demand for an increase in price above OP makes the DT part of the demand curve less elastic. Now we have the demand curve DDb which can be divided into two parts DT and TDb. The upper part that is DT is more elastic and the lower part is less elastic. The difference in elasticity’s gives a kink or bends for the demand curve at point . Rigid Price : Price charged by oligopolists is expected to cover full cost and also to bring excess profit if possible. The price thus charges remains the same without further changes. A change may come with the collective decision. The fear of loosing market when price is increased not gaining much when price is reduced makes the oligopolist firm to stick to the price which they initially charge, hence the price become rigid or sticky. The demand curve at the point of price has a kink, hence the demand curve is called kinky or kinked demand curve. The degree or extent of kink depends on the change in elasticity’s on the two segments of the demand curves.

OLIGOPOLY AND NON-PRICE COMPETITION: It is viewed with far more equanimity than price cutting and is frequently quite unrestrained. The basic reason is that retaliation is much more difficult against advertising, personal selling or product improvements, etc. than against price-cutting. Patent and know how barriers, long and usually secretive gestation period, and delay in imitation are other important factors, Moreover, the sales effects of a particular promotional strategy are far less clear than the effects of price cutting. The various forms of non-price competition can be stronger and more durable products, product research and development, better quality packing and appearance, easier credit terms, home delivery, after sales service, longer period of guarantee, promotional effectiveness, dealer loyalty, etc. A company’s use of non-price competitive strategy would vary according to the nature of the firm’s product of machine tools would not compete in the same manner as a producer of perfumes. Again, non-price competition takes the form of changing models in the motor-car industry and heavy advertisement in the soap and detergents industry. Due to liberalization of licensing, non price competition is getting more and more popular in India. Several TV manufactures are offering hire purchase/installment facilities. Many companies are discovering the virtue of after sales service. Non price competition may have some benefits to the producer in as much as higher sales induced by non price competition may lead to lower unit costs and production. But there is always a risk that changes in product designs may not be acceptable to consumers. However, from the viewpoint of consumers, non price competition is boon as they may get better quality goods and services.

CUT-THROAT COMPETITION:

The existence of idle capacity and the presence of fixed charge often lead sellers successively to cut prices to a point where none of the can even recover his cost and earn a fair return on his investment. Such situation is characterized by price warfare. Examples of cut throat competition are: 1) A price war was reported between mills producing synthetic fabrics within a month of their agreeing to avoid intra-mill price competition. Due to easy supply position of the polyester fiber in the world markets a leading manufacturer reduced his price from $7,180 a ton to $1,050 in December 1977. 2) In November 1986, Hindustan Computers spring rude shocks on its competitors by having the price of its personal computer, the busy bee from Rs.40, 000 to a mereRs.20, 000. 3) In May 1999, in bid to improve its market share Hewlett Packard India Ltd. Decided to launch the first Pentium-II tenor of computer by sub Rs. 50,000 price tag and decided to slash prices of its Briorange of PCs to below Rs. 40,000 mark. The most common causes of price wars have been: • • • • •

The existence of heavy inventories and resulting competition among sellers accompanying the effort to unload their supplies of merchandise. The attempt by an aggressive seller to elbow his way into the market or to expand his operations, with a resulting counteraction by other sellers striving to protect their share of the market. A decline in demand for a generic or individual firm’s product/service, with resulting tendency towards the granting of price concessions by sellers to gin or protect their sales volume. The use of certain merchandise items (cigarettes or books, for example) as a leader for attracting patronage, and a resulting retaliatory action by rival vendors. The introduction of a technical innovation in a market accompanied by greatly reduced operating costs and resulting pressure on prices.

UNFAIR COMPETITION: The concept of unfair competition is more ethical than economic and its precise content is indeterminate. Unfair competition may be defined to include all of those methods (and none else) which gave one competitor an advantage or place another at a disadvantage which has nothing to do with their comparative efficiency in the production and distribution off good. Their is a general agreement about the unfairness of the following practices to take customers away from a competitor by misrepresenting the quality or the price of one’s goods to interfere with the sales of a competitor by defaming him, disparaging his products, harassing his salesmen, obstructing his deliveries, damaging his goods, intimidating his customers, bribing his purchasing agents, or inducing them to break their contracts with him, or by organizing boycotts against him, etc.

In general, these acts are so designed as to give a competitor an advantage unrelated to his productive efficiency.

PRICE LEADERSHIP Price leadership is said to exist when firms fix their prices in a manner dependent upon the price charged by one of the firms in the industry. The firm which takes the initiative in announcing its price changes is called the price leader. All the other firms in the industry which either match the leader’s price or some variation thereof are termed as price followers. Price Leadership arises due to following circumstances: 1. Lower Costs & Enough Financial Resources : One of the firms has a clear advantage in cost or productive capacity & enough financial reserves to stand the losses of a price war without being seriously crippled. 2. Substantial Share of the Market : Often, although not necessarily, the largest firm becomes the leader because it is presumed to have the greatest stake in the welfare of the industry, greater power to enforce follower ship & the best informed about the industry demand and supply conditions& as such best equipped to determine price policy of the entire industry. 3. A Reputation for Sound Pricing Decisions based on Better Information & more Experienced Judgement than What the Other Firms Have: In fact, price leadership frequently arises as a natural growth within an industry due to the successful profit history, sound management & long experience of the price leader in the marketing matters. The remaining firms accept the leader because of his ability to coordinate the industry’s growth with that of its members. 4. Initiative : Often the company which first develops a product or area retains the price leadership whether or not it retains the largest market. 5. Aggressive Pricing: Often a company may garb leadership through lower prices& thereby snatch large & profitable markets from conservative rivals.

STEEL INDUSTRY Global scenario: The steel industry is often considered to be an indicator of economic progress because of the critical role played by steel in infrastructural and overall economic development. The global steel industry is highly cyclical, very competitive and still fragmented in terms of market share. Currently the industry is at the height of the business cycle and is going through a consolidation phase, which might result in the smaller players being acquired by the larger ones. The total output from the industry exceeds 1.4 billion tons in 2005, most of it augmented by the increase in output from China. This is expected to increase further, making steel output from China among the largest in the world. The steel industry demonstrates a high degree of variability, both in terms of earnings and production. The factors attributable for driving this variability are global economic conditions with a particular sensitivity to the performance of the automotive, construction, capital goods and other industrial products industries. The commodity nature of steel, the producers and consumers limited control on price, and the demand and supply disparity have made steel prices volatile. Significant increases in prices for metals and energy over the past two years have also contributed to increased variability in the industry.

Brief Company Overviews as of FY 2006

Current Scenario: World crude steel output reached 1,343.5 million metric tons (MMT) for the year 2007. This is an increase of 7.5% on 2006. The total represents the highest level of crude steel output in history and it is the fifth consecutive year that world crude steel production grew by more than 7%. While the overall output remains high, 2007 has seen a small slowdown in the growth rate, year-on-year growth peaking at the end of the first quarter. This slowdown in growth was seen in nearly all the major producing countries and regions including China, EU, CIS and the US. The exception was in the Middle East where production growth accelerated during the second half of the year.

China’s steel production in 2007 reached 489 mmt, a 15.7% increase on 2006. This represents a growth reduction from the 18.8% achieved in 2006, 26.8% in 2005 and 26.1% in 2004. The slowdown in 2007 was most apparent during the last quarter, with an 8.6% growth rate. However, China remains the driving force behind the still strong world production figures. Without China world crude steel production would have only grown at 3.3%. Other BRIC countries also maintained relatively high growth, with India and Brazil recording 7.3% and 9.3% increases respectively. In Russia production growth was flat from the end of the second quarter leading to an annual growth figure of 2%. The BRIC share of world production has been growing rapidly since 2000. It has grown from 31% of total in 2001 to 48.2% in 2007.Steel production in the EU (27) from the second quarter remained stable, with year-end figures of 210.3 mmt, a 1.7% growth over 2006. In the US steel production showed negative growth in the first three quarters but showed a turnaround in the fourth quarter with three consecutive months of growth. Total crude steel production for the US was 97.2 mmt, a 1.4% reduction on 2006 figures.

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 ArcelorMittal 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.

Future of steel industry: A demand forecast for the so-called BRIC economies (Brazil, Russia, India, China), which comprise rather disparate outlooks as regards steel consumption. According to the IISI, the BRIC’s will jointly contribute roughly three quarters of global consumption growth in both 2007 and 2008. In Brazil, steel use is expected to expand 15.7% in 2007 and 5.1% in 2008. For Russia, the figures are an astounding 25% in 2007 and 9.5% in 2008. For India the conjectures for the two years are respectively 13.7% and 11.8%, and for China 11.4% and 11.5%.

TELECOM INDUSTRIES Overview of telecom industries The cellular phone industry is one of India's rapidly growing industries. Since the industry came into being in the mid 1990s, its average per annum growth rate has been a phenomenal 85 percent. By the end of 2002, the Indian cellular phone industry had over 10 million subscribers. The industry has undergone a number of changes over the years. The National Telecom Policy 1999 was an important landmark in the development of the cellular telecom industry in India; the tariff rationalization and policy regulation introduced in the Policy helped the industry grow at the pace it did. The years 2001 and 2002 saw an increase in level of competition in the industry with more operators being given licenses, and fixed line providers also entering the mobile market. Central government raising the FDI limit in the Indian telecom sector from 49% to 74% increased foreign investments and global telecom big wigs are due shortly. Telecom Regulatory Authority of India (TRAI) has estimated that the country will need about 350,000 telecom towers by 2010, as against 125,000 in 2007. Growth in the telecom sector can be achieved through focusing on semi urban and rural areas. It is expected that market size of the Indian telecom sector will be around US$40–US$45 billion by 2010, with 500 m subscribers and 20 m broadband subscribers. India added 8.17 million telecom subscribers in December 2007, taking its total telecom subscriber base to 272.88 million at the end of December, according to data released on Tuesday by telecom regulator TRAI. The overall teledensity stood at 23.89% at the end of December 2007, against 23.21% in November. The country had seen addition of 8.2-million subscribers in November and total subscribers stood at 264.77 million at the end of the month. The wireless segment saw an addition of 8.17 million subscribers in the month of December, against 8.32 million in November. The total wireless subscriber base, including GSM, CDMA & WLL (fixed), stood at 233.63 million at the end of December 2007. The wire line segment saw a fall in total number of subscribers. The subscriber base declined to 39.25 million in

December

2007,

against

39.31

million

subscribers

in

November

2007.

Total broadband subscriber base crossed 3 million to touch 3.13 million by the end of December 2007, against 2.87 million by the end of November. Among wireless operators, Bharti Airtel added 2.2 million subscribers in December, taking its total base to 55.16 million. Vodafone Essar added 1.3 million subscribers and its subscriber base totaled 39.86-million at December-end. Idea Cellular, with a total subscriber base of 21.05million at December-end, added 0.83-million subscribers in the month. Reliance’s total wireless subscribers, including WLL (F), stood at 40.96-million after adding 1.57 million subscribers during the month. Among wireline operators, state-run telco BSNL saw its subscriber base decline by 0.14million in December to 31.7 million. MTNL, too, saw its wireline base dip by about 0.02 million to 3.59-million. Bharti Airtel added 0.04 million subscribers in December to take its total wireline subscriber base to 2.17-million

CDMA GSM SubscribersGSM AnnualCDMA Subscribers Annual (millions) growth (millions) growth 2000 3.1 94% 2001 5.05 76% 2002 10.5 91% 0.8 2003 22.0 110% 6.4 700% 2004 37.4 70% 10.9 70% 2005 58.5 57% 19.1 75% Year

2006 105.4 2007 180.0

80% 71%

44.2 85.0

131% 92%

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

bigger pie of the rural Indian market and increase its market share. He also dismissed the argument that Bharti’s foray into the bundled space was driven by its desire to counter Vodafone’s entry into India with ultra-cheap handsets. Lifetime plan Tata Teleservices, which pioneered lifetime pre-paid services in October 2005, saw a rapid increase in subscriber base at a time when it was struggling for stability in the fastgrowing sector. Soon, other operators including Bharti and RCOM too launched such services. In between Airtel has introduced first lifetime plan with installment plan to attract the lower and middle class people which is later on followed by Reliance. Right now Reliance has introduced lifetime plan in 199 which will lead to cost leadership. Roaming rate February, TRAI reduced the roaming charges, as per which, the maximum permissible charge for roaming calls, irrespective of terminating networks and tariff plans, was set at Rs 1.40 per minute for outgoing local calls, Rs 2.40 for outgoing national long distance calls and Rs 1.75 for incoming calls. The telecom regulator had already removed rentals. Telecom major Bharti Airtel has reduced roaming tariffs by up to 56 percent and also scrapped the rental for roaming services. May 22: Starting a price war, Reliance Communications has slashed its roaming rates by about 70 per cent at the lowest 40 paise a minute on some select plans, while incoming has been made just Re 1 per minute. The public-sector telecom operators, MTNL and BSNL, have slashed national roaming charges to Re 1 for incoming calls and Re 0.40 for outgoing calls within any visiting network as part of a new post-paid plan to be launched on June 3. ISD rates to US, Gulf In May, leading private player Bharti Airtel dropped ISD charges to the US and Canada after which an Airtel mobile user could call at Rs 1.99 per minute with the Airtel STD and ISD Calling Card worth Rs 2,245. Rel-Comm also had cut its rates to the US and Canada to Rs 1.99 per minute on its 'Reliance Global Call Card' of Rs 1,900. It had recently cut call charges to the Gulf to Rs 6.99 per minute. Triggering another price war in the ISD segment, state-run telecom major BSNL has reduced call rates to the US, Canada and the Gulf to Rs 1.75 per minute and Rs 6.75 per minute, respectively, slightly lower than the rates offered by private firms.

MOSER BEAR INTRODUCTION Moser Baer is a world leader in the development and manufacture of removable data storage media. Incorporated in 1983, it is today one of India's leading technology companies and ranks among the top three media manufacturers in the world. Based in New Delhi, India, it has a broad and robust product range of floppy disks, compact discs (CDs) and digital versatile discs (DVDs). A pioneer among globalizing Indian firms, Moser Baer has a presence in over 82 countries, serviced through six marketing offices in India, the US and Europe, with strong tie-ups with all major global technology brands. Simultaneously, with the launch of the 'Moser Bear PRO' label in India, the company has emerged as the preferred choice in this burgeoning captive market. Continuous emphasis on efficient and integrated manufacturing, coupled with the Indiaspecific advantage of high-quality, best-value human resources and lower per-unit capital cost has made Moser Bear one of the most successful manufacturers of optical media in the world Fast Facts about Moser Baer • • • • • • •

India-based company with nearly two decades' experience in removable data storage Among the top three media manufacturers in the world (market share of 17.5%) #1 in the fast-growing Indian market R&D-focused company Focused on optical and magnetic data storage media Services the requirements of all the leading storage media brands in the world. Revenue growth at a five-year CAGR of 42%

Summary Financials: For the financial year ending March 31, 2006 Net Sales Operating Profits Net Profit Earnings Per Share

-

Rs. 16641.20 Million Rs. 32.92 Million Rs. 46.44 Million Rs. 0.42

Moser Bear To Go Aggressive on CD-Rs & CD-RWs Moser Bear India Ltd, an OEM of optical storage products, have aggressively market the product in the country. The products are targeted at both the entry-level as well as the premium buyers. Moser Bear has been running a series of road shows,

creating excitement and pull towards the brand by meeting its channel partners and imparting knowledge of its products to both the channel partners and consumers. A senior official of the company said, "Our road shows and advertisements have created enough noise and excitement among consumers and channel partners. Though it will take some time to shift brand loyalty, the process has well begun." Though creating noise and excitement is not enough for brand shifts, the official said, "Our products are of superior quality and we offer 100 percent replacement warranty in case of any manufacturing defects, which no other vendor would provide.”

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). Table below shows projected demand in Automobile Industry is Year

Cars

MUV’s

Scooters

2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

545,026 588,628 635,718 686,575 741,501 800,821 864,887 934,078 1,008,804 1,089,508 1,176,669

131,227 136,476 141,935 147,613 153,517 159,658 166,044 172,686 179,593 186,777 194,248

906,062 97,715 102,601 107,731 113,117 118,773 124,712 130,948 137,495 144,370 151,588

3Wheelers 236,425 262,432 291,300 323,343 358,910 398,390 442,213 490,856 544,850 604,783 671,309

Tractors

Total

188,326 204,334 221,702 240,547 260,993 283,177 307,247 333,363 361,699 392,443 425,801

2,007,066 1,289,585 1,393,256 1,505,809 1,628,038 1,760,819 1,905,103 2,061,931 2,232,441 2,417,881 2,619,615

Key players in Indian automobile industry and their market share are: Maruti (50.37%), Hyundai (19.17%), Tata Motors (17.19%), Honda (5.33%), others (5.73%) In recent years there is increasing number of global players entering Indian market by way of joint ventures, collaborations or wholly owned subsidiary. Sudden interest of

major global players has made Indian auto industry very competitive as India provides twin benefit of ready market and Low cost manufacturing base for them.

Some details about the players in the Indian auto markets are as follows: Maruti Ltd is one of India's leading automobile manufacturers and the market leader in the car segment, both in terms of volume of vehicles sold and revenue earned. Tata Motors Limited is India's largest automobile company, with revenues of Rs. 32,426 crores (USD 7.2 billion) in 2006-07. General Motors India (GM India) is a wholly owned subsidiary of General Motors Corporation, the largest automaker in the world. It offers products under the Chevrolet brand in the country. GM India is confident of achieving 10 % of the market share by 2010. Mahindra & Mahindra is the market leader in utility vehicles in India since inception and currently accounts for about half of India’s market for utility vehicles. Hyundai Motor India Limited (HMIL) is a wholly owned subsidiary of Hyundai Motor Company, South Korea and is the second largest and the fastest growing car manufacturer in India. HMIL presently markets 20 variants of passenger cars in six segments.

CASE STUDY Oligopoly model GLOBAL SCENARIO (During 1980’s) During 1980’s there were three major players in automobile sector, General Motors, Ford and Chrysler. In pricing, GM served for decades as the industry's price leader, setting prices in public utility fashion in order to obtain a predetermined rate of return, with Ford and Chrysler adopting GM's prices as their own. In some cases there is actual identity in price to the last dollar, in the majority of instances the companies are within a few dollars of each other. In one famous example, Ford announced its new prices first, GM followed with a price hike twice that announced by Ford, to which Ford responded by reraising its prices in line with the higher prices set by GM--a mutually-interdependent pattern indicating that "conformity to GM's prices is considered more important to its principal competitor than competitive price advantage." This avoidance of price competition persisted for decades during 1960’s. The three major producers tend to copy each other's price moves. One of

the players initiated the process by announcing its "preliminary" prices, while the others would follow by publicly disclosing their "tentative," "anticipated," or "expected" prices.

INDIAN SCENARIO Price Leadership Modal On 30 December 1998, Indica the passenger car developed by Telco. The standard petrol car was priced at Rs 259,000, and standard diesel car at Rs 285,000. Presenting Indica, Ratan Tata, Chairman of Telco, said, "We started the Indica project with a commitment to develop a car for the Indian market that could be benchmarked against the world's best in terms of features, looks and performance-and yet offers a great value proposition. A car designed for India rather than one adapted for India." Following the TATA Indica announcement on 31 December 1998 Maruti slashed prices to retain lead in ‘middle class dream to own a car a wink away from reality'. Maruti Udyog Limited announced it has slashed prices by 5-12 per cent of its popular, topselling models like Zen, Omni and Maruti 800 small cars. The prices of its largest selling model, Maruti 800, had been reduced by almost Rs 24,000 to Rs 185,000 from Rs 209,000. Maruti's managing Director, conceded that the price-cuts would impact negatively on Maruti's profit margins. He said ``certainly our profits will go down. But we hope to make up for this by increased sales volumes.'' A new model, Maruti 800 EX, was launched with coil spring suspension and radial tyres priced at Rs 209,000. Seeing all these, in Bombay, Telco's chairman Ratan Tata told the gathering at Indica's launch party: ``Even for those who do not own or buy an Indica, there is good news. We've triggered price drops in Maruti, and made the car market a friendlier place for the consumer. We have done our level best to produce the bigger small car, taking into account our concern for him.''

Current Updates TATA has come up with Rs 1 lakh car. This has created price war once again between leading players in automobile industry. Ford India managing director and President said Nissan-Renault combine would develop a $3000 car using India’s “frugal engineering expertise”. Bajaj is also experimenting with the concept of a small car. In near future, due to price war, many car companies will come up with cheap cars that will give competitions to Tata Rs 1 lakh car. FUTURE OUTLOOK The automotive industry is witnessing tremendous and unprecedented changes these days. This industry is slowly and gradually shifting towards Asian countries, mainly because of saturation of automobile industry in the western world and also due to ASEAN free trade area under which the export tariffs are very less. The future seems encouraging for this industry in terms of the expected surge in global demand and

upsurge in investments. Several trends such as over-capacity in developed markets, globalization, technology advances, regulation and environmental consideration, and market fragmentation and product proliferation will result in the rapid growth of this sector. CONCLUSION: Oligopolistic competition can be said to be beneficial as it ensures, that management would keep their organization innovative and efficient over the long run. For example: Tata Nano, consolidation happening in steel industry. Oligopoly also has the tendency to convert the industry into the monopolistic firm because it allows them to retain a degree of competition without ceding too much control.