A market structure dominated by a small number of large firms, selling either identical or differentiated products, and significant barriers to entry into the industry.
This is one of four basic market structures. The other three are perfect competition, monopoly, and monopolistic competition.
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
3. The industry has significant barriers to entry.
The members of an oligopoly change the nature of a free market. While they can’t dictate price and availability like a monopoly can, they often turn into friendly competitors, since it is in all the members’ interest to maintain a stable market and profitable prices.
With four or five large firms responsible for most of the output of each industry, avoidance of price competition became almost automatic. If one firm were to lower its prices, it is likely that its competitors will do the same and all will suffer lower profits. On the other hand, it is dangerous for any single firm to increase its prices since the others might hold their prices in order to gain market share. The safest thing is to never lower prices and only raise prices when there is abundant evidence that the other firms will also raise prices. The largest or lowest-cost or most aggressive firm will often emerge as the price leader. When business conditions permit, the price leader will raise prices with the expectation that the others will follow. The practice of price leadership prevails in many industries:
Competition does not exist in any form. Oligopolies that follow a price leader do not engage in price competition, but they still contest for market share with a variety of forms of non-price competition. Pepsi and Coke each spend billions on TV ads designed to entice the consumer to switch cola brands.
SCALE OF OPERATION
Oligopolistic firms that operate on a national or global scale are also huge in another sense – they are just plain big. Many have several hundred thousand employees and multi-billions of dollars in assets. Size is itself a source of power.
Oligopolies can become unstable when new firms attempt to gain entry. Of course the high cost of acquiring plant and equipment acts as a barrier to entry. It is also costly to enter an industry dominated by a small number of known trade names. Small firms already in the industry present a special problem. Some might try to grow beyond their established niches. The large firm will often simply purchase the up-and-coming small firm. Or the large firm or firms may rely on its established relationships with customers or suppliers to limit the activities of smaller firms.
The new oligopoly is made up of multinational corporations that have chosen specific product or service categories to dominate. In each category, over time, only two to four major players prosper. Starting a new company in that market segment is difficult, and the few that do succeed are often gobbled up or run out of business by the oligopolies.
The large firm is often in a position to create a demand for its own product through advertising. While this sometimes leads to actual product improvement, it can also lead to the production of images rather than truly different products.
A study of the tactics of brand names points out that good brand names are most important for the type of products that are “relatively undifferentiated in terms of product specifications or performance and where consumers are relatively satisfied with existing brands.” One conclusion of the study is that “…on the whole, branding is important only where the character of the product is not.”
Few multinationals aspire to be monopolies. Monopolies attract government regulation and consumer anger (just ask Microsoft). Small oligopolies (such as Coke, Pepsi) make plenty of money and avoid the constant attention of the regulators.
Oligopoly, then, is a compromise – a social adaptation to powerful technological trends. While the rules of perfect competition should both assure that prices reflect the true costs of production and that firms continue to improve their products and production processes, operating under these rules leads to the type of price competition that continually threatens the value of vast holdings of expensive and specialized production facilities. So we have accepted a set of economic rules that limit price competition but still seem to result in competition over product and production process development. Technology forced firms to become bigger, yet that very bigness put them at such risk that they had to become even bigger in order to control prices.
OLIGOPOLY IN BEVERAGE INDUSTRY
In the Indian context, the soft drink market though it may seem to be duopoly is essentially an oligopoly. Barring the two major cola giants Coke and Pepsi, every city also has local competitors and there is a large unorganized flavoured water market. Moreover, bottled water is also a competitor to the cola brands and in this category neither of the two cola companies are market leaders. However, as far as the cola flavored fizzy drinks are concerned there are only two brands, Coke and Pepsi. Under such a situation economists would say there would be intense competition. Unless, the two parties collaborate with each other, which is certainly not the case in the cola market worldwide or in India.
This implies that the primary battle is for market share and hence intensity of competition is high. Each and every move by a player attracts retaliation. 3 things important to be successful in this category (oligopoly of colas) are:
1. HIGH AWARENESS: This has two components-one is media awareness the other relates to point of consumption. The first one really means large advertising spends, and simple messages repeated umpteen times. Eg. lways Coca-Cola?or il mange more? Simple and memorable. The category leader dictates the awareness level. Once that has been established, the number two player needs to find a lever, which will ensure a position close to the leader, with less money spent.
2. EASY AVAILABILITY: Marketers in this category need to find innovative ways of ensuring availability of their brand at different consumption occasions and time.
3. HIGH EMOTIONS: The key differentiation in this category is emotion. Brand personality can make or break the brands in this category.
In an oligopoly, it is foolish to cut price unless one of the two parties have a much lower cost base. That, too, is not the case in India. Both brands, Coke and Pepsi, invest heavily in advertising and in distribution through their franchise and their own systems. However, a great deal of attention is paid by both companies to cost, particularly in the development of a tightly effective supply chain system in which economies are squeezed out and, wherever possible both overheads and working capital are controlled.
As a result it is extremely difficult to reduce prices. Indeed, it is counter-productive, as when prices are reduced in a particular area by one of the cola brands, the second must follow. There have been some examples of price reduction, but this is generally the local franchise or the sales management of a particular area reducing the price. This is, however, generally not the case and prices have only been reduced in the recent past if there has been a reduction in Government taxes, either at the Central or State level.
However, there has been some major initiative on the price front. The first took place some years ago when the brand Coca-Cola came back to India. At that time colas were sold in 200 ml bottles. Coca-Cola launched itself in all major cities in the 300 ml size at the same price as Pepsi, which was then in a 200 ml bottle.
Pepsi was, however, prepared for Coca-Cola to launch in the larger bottle, which became the standard inmost parts of the country, making the price a parity issue between the two brands.
A few years ago, Pepsi launched itself in one litre and 1.5 litre non-returnable PET bottles at a discount in comparison to a 300 ml returnable glass bottle, the traditional packaging in this product category. This resulted in a significant increase in the depth of consumption; amongst the loyal consumers in the larger towns.
Coke followed Pepsi in each of the above moves in order to reduce the cost per glass to the consumer.
The soft drink majors also pioneered a 500 ml non-returnable PET bottle, which was advertised almost totally on the cost of the consumer per 100 ml of cola. The great advantage of PET bottle is that they not only encourage high level of consumer but increased home consumption which was small compared to out of home consumption.
The latest move to reduce price to the consumer was followed by Pepsi in April,2003 when it reduced the price of its 300 ml returnable glass bottle segment from Rs. 8 to Rs. 6 and priced 200 ml bottle at Rs. 5. However, Coke still priced it 300 ml bottle at Rs. 8. Coke wanted to push the 200 ml “Chota Coke” pack in summer since they wanted to gain volumes so they priced 200 ml at Rs 5/-“.
The fresh price war follows an earlier onslaught when both Pepsi and Coke reduced prices by about 20% across the board just before the Union Budget for 2003-04 provided them with excise duty relief.
In the recent past both the companies took aggressive steps and signed on thousands of new retailers in a drive into rural India that has pushed up sales steeply.
Coca-Cola has made its beverages available in 40,000 additional villages in the last three years. As a result, the rural areas now contribute 35 per cent of the company’s sales compared with 25 per cent in 2000. Sales volume jumped over 125% in some rural areas.
In order to service far-flung markets better, Coca-Cola has doubled the number of refrigerators in the market to 500,000 and added 5,000 new autos and light commercial vehicles to its fleet in the last one year. Pepsi also has also doubled distributors, cooling capacity and even the number of vehicles in rural areas.
Thus, the contribution of rural areas to total sales has climbed from below 10 per cent to 10-15 per cent for Pepsi in the last couple of years.
Pepsi has added more than 200 people to drive rural activation programmes and ensure improved coverage and market penetration. In addition, a new “hub and spoke” model has been put in place to drive the rural expansion plan.
Both companies say there is untapped potential in the rural areas that will fuel quick growth in the coming years. e the rural expansion plan.
In a competitive situation such as the one that exists in the cola market, the important thing is not the price; it is the value that the consumer gets. And that always increases in proportion to the ferocity of the battle in the marketplace.
Courtney from Study Moose
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