The Different Types of Markets in Economics

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Economics is one of the few topics that allow us to clearly see the interaction between the world and humans as well as allowing us to see the interactions humans have with each as a collective society. Those who practice economics combine theory along with real-world data in order to explain and gain insight into the behaviour of people when they try to buy, sell and produce goods and services. The variety of different situations in economics prevents any one economist from having models and theories for every single iteration of a market, however economic theory is still one of the main building blocks in the field of economics.

This essay will be focusing on the concept of markets in economics as well as what characteristics determine the different markets (Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly). In macroeconomics, it is always important to not only account for economic data but to also account for social and economic context as it is those that provide the backbone for what is being analyzed. This analysis became an opportunity to further understand global markets and the impact that they have on the world.

This essay examines the Indian smartphone market which is one of the fastest growing and one of the most rapidly shifting markets in the world due to the high amount of population living in the country as well as the race of smartphone technology nowadays making the market highly enticing yet risky for potential investors. This essay will be trying to determine to what extent the Indian market is an oligopoly and it will attempt to do so by analysing various factors that compose markets, and in particular, oligopolies, such as the number of producers, ease of entry and exit to the market and finally the differentiation of products in the market.

The Indian smartphone market has had a lot of influence from Chinese companies such as Huawei, Xiaomi and Jio, each of whom dominate the market due to appealing the public by selling products at extremely cheap prices(How Chinese mobile phones took over the Indian market), which lends credence to the idea of a Chinese oligopoly over the Indian smartphone market. However, there are several factors that dispute this statement as well as several pieces of data that supports this statement, all of which will be discussed later in this essay. The market saw growth of approximately 14% with a total shipment of 124 million units in 2017 as well as China-based vendors obtaining a collective market share of 53% in 2017 over the 34 % they had acquired in 2016 according to the IDCs report( Indian smartphone market sees 14% annual growth; Chinese vendors grab 53% market share: IDC) thus lending credence to the idea of a Chinese oligopoly. However, a data factor that contradicts this is Mukesh Ambani’s Gio which rose very quickly in the smartphone market, quickly rising due to it employing successful tactics of aforementioned companies like Jio, such as low prices and easy accessibility as well as a large coverage area which disputes the idea of a Chinese oligopoly. Another counterpoint to this statement is the company Samsung who currently are dominating the Indian smartphone market with 25.1 per cent stock in the Indian smartphone market during the month of August in the year 2016(‘Indian Smartphone Market Sees 14% Annual Growth; Chinese Vendors Grab 53% Market Share: IDC.’ ICT Monitor Worldwide). Furthermore, at the same time, Reliance Jio gained more stock, increasing its stock to 12.3 per cent(“How Mukesh Ambani Shook up the Phone Industry, in Charts.” The Economic Times,) thus lending more credence to the idea of the Indian smartphone market being a regular oligopoly instead of a Chinese led oligopoly.

How Was the Data Collected

All of the data for this Extended essay was collected by third parties surveying citizens of India/surveying smartphones sold in India by company. All the data was verified by the international community thus authenticating the data collected. Furthermore, all data about the Indian stock market was verified by the author as well as all company based data was verified by cross-referencing other articles covering the same data and topics. all data relating to sales mannerisms was also verified by the author who looked over previously aforementioned data in order to find any form of causation, thus verifying if, for example, price drops increased sales in the Indian subcontinent or if larger coverage made certain products more enticing to the general public thus granting more power to certain companies which in turn would lead to oligopolies.

Concentration Ratios and Number of Producers

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The Indian smartphone market is an oligopoly due to firms in the market having a lot of power, whether it is power over the prices of the goods in the market, power of the companies to influence legislation in the Indian smartphone market, or if it is the purchasing power of each firm/ brand. A method of figuring out whether or whether not a market is an oligopoly is via examining the market’s concentration ratio in accordance with the theorized concentration ratio of an oligopoly. A concentration ratio attempts to quantify the density of market power held by a certain number of firms. It is expressed as CRX, where X is the number of firms controlling a certain percentage of the market. For example, CR5 would tell us what percentage of the market is controlled by the top 10 firms. The higher the percentage, the greater the market power. In most scenarios, CR4 is used as the guideline measure for determining what type of industry the market is, whether it is a perfect competition, monopolistic competition, oligopoly or monopoly.

For a market to be an Oligopoly, the top 4-7 producers in the market must have control of around 50-80 per cent of the market (Reck, Martin. ‘The Formal and Systematic Specification of Market Structures and Trading Services.’), thus allowing the producers vastly more market power than the producers in monopolistic competition as the combined producers control more than 50 per cent of the market allowing them to override most other firms in the market due to the other firms not possessing enough market power to oppose the decisions made by the top 10 or so firms.

The top 7 producers in the Indian smartphone market are Samsung Electronics, Xiaomi Technology, Reliance Jio Infocomm Lt., Vivo Mobile, Intex Technologies, Transsion Pvt Ltd. and Lava International Ltd, who combined have around 69.4 per cent of all company shares of mobile phones in India, which lands the top CR7 in the range of an oligopoly. Another piece of data that bolsters this statement is that the top CR4 in the Indian smartphone market has around 51.5 per cent, which keeps it in the range of an Oligopoly as demonstrated by Figure 1. These two pieces of data corroborate the claim that the Indian smartphone market is an oligopoly due to how the top CR4 – CR7 control over 50-89 per cent of the market. This data also implies that there are relatively few firms in this market, another sign of an oligopoly, due to the implication that since the top firms controlled so much of the market there would be significantly fewer firms filling the remaining shares and even though companies would have to be large in order to cater to 1 billion people currently residing in India. Figure 2 also supports the hypothesis that the Indian smartphone market is not a Chinese company led oligopoly and instead is a regular oligopoly with just a large influence from China, which is to be expected as China and India are geopolitical neighbours who regularly invest in each other’s economy in order to boost trade.

The two countries lack of separation could also be another reason why Chinese brands are prominent and have such impact on the Indian smartphone market as they do not need to use that many resources in order to transport smartphones to India.There are flaws though in assuming that the Indian smartphone market is an oligopoly to a great extent just due to this data and that is because these graphs do not account for barriers to entry or the number of producers. Since this graph solely looks at the concentration ratio and the market power for the top firms, it cannot accurately depict if this market is an oligopoly to a great extent. For example in the Agricultural market, the top firms( Cargill,Monsanto, etc) dominate due to various factors which grants them high CPR. However, the Agricultural market is a perfect competition due to the fact that it has very low barriers to enter/exit the market, as well as the fact that all the products are the same. Thus we cannot neglect other factors that make a market an oligopoly when evaluating to what extent a market is an oligopoly. For example, most smartphones are extremely similar, each sharing features such as screens and built-in speakers, something that is indicative of a monopolistic competition. In addition to that starting, a smartphone company is not that hard as one only needs a few million dollars, which is minute when compared to the costs required when one is setting up an airline company. This is also indicative of a monopolistic competition as the barriers of entry are relatively easy to overcome thus we need to evaluate all the characteristics of an oligopoly in relation to the characteristics the Indian smartphone market shows in order to determine to what extent the Indian smartphone market is an oligopoly. Next, the data from Figure 2 proves that India is not, to a great extent, a Chinese oligopoly as only 2 out of the top 7 firms are in fact Chinese. Instead the data supports the idea that the Indian smartphone market is to a small extent a Chinese oligopoly as the majority of the firms are non-Chinese, which is surprising due to the Chinese firms having cheaper transport costs ( due to the proximity of India and China) which results in them able to reduce cellphone prices far beyond average, thus making the brands (Xioami, Vivo)cellphones more appealing to the average consumer which in turn would increase their sales and their power in the market.

Barriers to Entry

Another factor via which we can determine the extent that Indian smartphone market is an oligopoly is by examining the barriers to entry in the market. Oligopolies are characterized by high barriers to entry. These barriers are similar to those enjoyed by monopolies : high initial fixed costs, access to resources, legal barriers such as licences and patents,(Maley, Sean, and Jason Walker. Economics. Pearson, 2011) as well as the network effect. Licenses and patents help companies differentiate their product, an important step necessary for survivability in a market, where as access to resources help a company to grow and dominate the market they are in, which in this case is the Indian smartphone market. The network effect on the other hand refers to the idea that if a strong network already exists in the market, it might limit the chances of new companies to gain a sufficient number of users and thus enter the market. A lower initial fixed cost and the lack of licenses and patents would suggest that the market is to a lesser extent and oligopoly whereas the opposite would suggest that the market is, to a greater extent, an oligopoly. In the case of the Indian smartphone market an example of the network effect would be that some Chinese brands offer Rs 150 per unit sold as an incentive. This could go up to above Rs 200 per unit, depending on how expensive the phone in question is. Thus a consumer would be more likely to go with the cheaper option that has been established for a long time rather than trying out a new brand(‘How Chinese Mobile Phones Took over the Indian Market.’ Lexis Nexis, November 2, 2018.) thus implying that the Indian smartphone market is to a great extent. A factor which is closely linked to this is initial fixed cost as it is also a cost that is very high thus implying an oligopoly in the Indian smartphone market. This is due to the fact that in general most consumers and families already have phones.

In the past few years there have been an enormous amount of mobile phones which have been sold in the past few years which in turn saturated the market. This reduces consumer’s demand for more phones as newer phones would either be too expensive for the family, evidenced in part by the low prices of the Chinese brands such as Xiaomei and Huawei, or are not useful at all due to the similarity of products in the market, an aspect both of monopolistic competition and oligopoly. This ultimately forces the initial fixed cost to be higher as any company entering the market would have to wait a long time before finding a customer base due to the lack of demand in the Indian smartphone market. This too implies that the INdian smartphone market is to a great extent an oligopoly. A counterpoint to this is that although each company that operates in India have patents on their designs, ultimately phones are goods that are very similar. For exampleCMR Lead Analyst (Telecoms Practice) Faisal Kawoosa says “Although we see a huge market ‘hype’ around smartphones, the fact remains that the India mobile handset market is still dominated by shipments of feature phones. On the other hand, smartphone shipments are growing fast’ which implies that there is a great similarity between phones of different companies for now, though that may change in the future. Thus if we were examining the market structure of the Indian smartphone market solely according to the products of each company we would find that the market would be, to a very small extent, an oligopoly.

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