OLIGOPOLY IN PAKISTAN AUTO SECTOR

Oligopoly is market structure dominated by small number of larger firms, which are highly dependent on each other. Oligopolies may be identified using concentration ratios, which measure the proportion of total market share controlled by a given number of firms. When there is a high concentration ratio in an industry, economists tend to identify the industry as an oligopoly. Firm in an oligopoly market are highly dependent on each other. They have to see how their decision will affect other firm for example if Toyota starts to give free early checkups for their cars then demand for Toyota will raise at same time demand for Suzuki and Honda will fall. Not only the demand but also the market share will also fall. Another main advantage of oligopolist is the exploitation of economies of scale which is low average cost. There is high barrier to entry in this market for example cost barrier/infrastructure etc. oligopolies may adopt a highly competitive strategy, in which they can go for non -pricing competition which include branding innovative high-quality product. Oligopolist may be dynamically efficient in terms of producing their new product and process development.

Pakistan auto industry is pure oligopoly market having small numbers of firms producing in the market. The auto industry of Pakistan has three main producers which are Toyota, Honda, Suzuki having a market share up to 89% while other local auto makers just have 11% of the market share. Each firm in the industry produce round about same automobile if we talk about the features but brands and quality differ in each other which result in Toyota having highest market share in the industry. For example, Toyota has been dependable on low maintenance and mid-range features and also quick resale while Honda is offering high ended car with better look with more features on other hand Suzuki is focusing on low feature car with lower price tags. Another reason which can prove that Pakistan auto industry is oligopoly market is the setup cost which is around $150 million to $200 million which is a huge cost barrier, which clearly shows that barrier to entry is high which proves that this is an oligopoly market. Another reason which shows that this an oligopoly market is the price of product , those product which have similar features have roundabout same price for instance Toyota corolla gli , Honda city , and Suzuki ciaz have a price tag of around 25 lacs this prove that competition exist there is no monopoly in this market. Another reason which can prove that auto industry is oligopoly market is excessive branding in this market. Each brand has on value in this market and attract that type of people for example Suzuki focus on making cheap product for their consumers

Market Share of the ‘Big Three’ Car Manufacturers in Pakistan as of 2018. Source PakWheels

Pricing Strategies in Oligopolies

Pricing strategy is of utmost importance to companies competing in an oligopolistic market as it is one of the primary factors which contributes to an increase in market share. These companies don’t act independently, but they predict the likely response of their competitors to a change in price and then plan and work out possible options based on their assumptions of how the competitors may react.

The Oligopolistic market players have a number of strategic decisions to take which may include a) to increase, decrease or keep the price constant b) to collude or to compete with competitors  c) to be a ‘first-mover’ and implement a policy or to wait and observe what the competitors do and be a ‘second-mover’

Deep Discounting: It is used by oligopolists to gain an advantage over the existing players and driving them out of the market. This is achieved by setting the price below the cost price or below the average price of a competitor hence attracting their customers and forcing them to lower the price as well: causing loss of revenue and ultimately an exit from the market.

Price Skimming: It’s a common strategy in monopolies and oligopolies in which durable goods i.e. Mobile phones are initially sold at a very high price and when most willing customers have bought, the price is decreased to target customers who are willing to pay lesser

Limit Pricing: This strategy is to eliminate a new player rather than an existing one. Companies lower their prices hence forcing the new entrant to lower price as well. The limited price makes the existing companies a low profit but as for the new entrant, it faces losses – which it isn’t quite ready to face initially – and is forced out of the market.

Collusion: Its when firms unofficially make an ‘under the table’ agreement to fix a certain price of a product so that everyone can enjoy almost equal share of the market

Parallel Pricing: It is a very common practice in oligopolies when companies match the price of a product or try to keep it as close as possible to that of its competitors so that they don’t gain an advantage due to a lower price.

As we can interpret from the graphs, in December 2017 both Civic and Grande cost around 2.5 million rupees and in beginning of the 2020 both companies raised their prices to 3.7 million rupees. Same is the case with their other cars i.e. City and Corolla Gli that during the end of 2017 both were priced at around 2 million rupees but on January 2020 both companies raised the prices to almost 2.8 million rupees. For the compact SUV market same is the case as in Jan 2019 Rush and Vitara were placed at the price bracket of Rs. 4 million but in Jan 2020 are placed at about Rs. 5.5 million. Above given statistics prove that parallel pricing is implemented in the automobile sector where companies price their product at almost the same price as that of its rivals. From the last 2 years, when ever a company raises the price of a car all other companies are very swift to react, and they increase their price as well.