Economic Managerial Assessment

Topics: Balance of payments, Supply and demand, Macroeconomics Pages: 13 (4241 words) Published: March 26, 2011
Question 2.
Choose the sector in South Africa Economy, which exhibits the features of Oligopoly.
With more than 30 Million South African mobile phone owners according to data from the “SA Mobile Market “statistical handbook, and since this market is dominated by three companies, which exhibits the features of oligopoly in South Africa. Oligopoly refers to a few sellers with similar products and dominates the market and can influence each other. There are 3 mobile phone service providers, which are Vodacom, MTN and Cell C in South Africa together controlling almost 80% of the market, and their call rates are more costly for their users.

2.1 Evaluate the options of non- collusive competition within the industry. Oligopoly firms operate in the same markets and they are interdependent, that is their behavior and decisions affect each other’s behavior and decisions. Oligopoly exists when there is many buyers and fewer suppliers within a given markets. None collusive competition within the industry refers to suppliers who do not agree on prices or quantities formally. The main key behavior will be the fact that companies in Oligopoly competition must take into account what others within the industry will do and they are always torn between cooperating to increase profits and competing to try gaining competitive advantage. With in the mobile phone industry this is visible in the tariffs charged for call rates and the special offerings over weekend or peak hours they turn to overlap with no much difference, which supports none collusion competition since there is no verbal agreement, but one can notice that the action of another service provider influences the other and they always counter act each other. Non collusive competition which is sometimes referred to as tacit collusion can be reached due to the fact that companies can realized the break out of price war through undercutting and this influenced the competitive behavior. For them to not out compete each other out of the market they will collusively without ever discussing the matter, sustain product price that is above the recommended selling price as a result they both maximize their profits. They also offer possible swapping from one service provider to another without changing one’s contact detail. Non- collusive competition is generally not illegal but in the long run it still does not benefit the consumer due to the lack of perfect competition, this practice lead to the Nash equilibrium and or Cournot Model according to literature illustrating the relevant pay off within a Duopoly e.g. Vodacom and MTN since their the big players (Brickley et al). However it is important to note that Cournot model focus on the output levels and not on maximizing joint profits, as is the case in the Nash model. As indicated above the rivalry with oligopoly’s industries often erupts in price wars as they are trying to differentiate them selves in the market. The mobile phone industry in South Africa these is done through cheaper call rates at certain periods and better call rates within the same service providers etc. Although non-collusive competition can also lead to collusive competition in the long run, but South African Competition board and tribunal keeps a watchful eye to prevent collusion and Cartels as they are illegal and companies can be fine hugely if found guilty. It is always advantageous for companies to trade and compete in a non-collusive manner to sustain their Oligopolistic environment. Even though in a developed market the ideal situation will be a perfect competition which demonstrate; a large number of potential buyers and sellers; product homogeneity; rapid dissemination of accurate information at low cost and free entry and exit from a particular market (MEN Hand book).

2.2 Explain why collusion is prone to instability.
Collusion instability can be influenced by temptations to out compete each other; this is clearly described through what is termed...

References: 1. BERNHEIM, B.D. &WHINSTON, M.D. 2008. MICROECONOMICS. Mc GRAW-HILL IRWIN. 123p; 604p; 703p
4. The World Bank:
9. MEN class presentation notes compiled and presented by Dr Melanie Louw.
10. MEN hand book. Milpark Business School second semester 2010.
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