Oligopolistic Market Structure Of Asian Sky Shop

Teleshopping in India has been completely transformed through a past couple of years, yet there is still lack of organization in the industry. For my extended essay I chose to investigate the type of market structure Asian Sky Shop is operating in, thus my research question – “Is Asian Sky Shop in Mumbai functioning as an Oligopolistic market structure?” To narrow the scope of my research in order to provide just treatment to the essay I decided to only focus on the Mumbai market, as I realized that the market structure in which Asian Sky Shop changed with different areas. I interviewed employees of Asian Sky Shop as well as read up about other players in the market. This tremendously contributed to the investigation of the relevant theories. To further provide a just treatment to the essay, I employed a method of elimination where the features of the industry were tested against each type of market structure. Through this approach I found out that my hypothesis on which my research question was based, validated and it was concluded that Asian Sky Shop is indeed operating in an oligopolistic market structure. Interestingly, through the product comparison test I also found out that non-price competition exists instead of price competition as anticipated. Yet there were difficulty obtaining accurate figures; and that would have given a more authentic outlook to the essay. (229 Words)

Teleshopping networks always come with a promise to provide customers with innovative and ‘miraculous’ products such and disease curing teas, unique household and kitchen solutions, exercise equipment and much more. These exclusive products that are sold on television today through teleshopping have always fascinated me. The concept of teleshopping in India was established somewhere through the mid-1990’s and it has transformed ever since. In the beginning when there only existed three players in the market – Asian Sky Shop, Telebrands and TSN; but since then the market has grown and so has the number of firms.

As I’ve noticed, recently, many entrants in the market have flooded the Indian teleshopping industry. The reasons for this are many including changes in the purchasing power of the population, increased consumer awareness, and change in family structure & lifestyle. However, how successful these entrants are in the market is extremely exploratory? And this extended essay is an opportunity to do that. The very nature of the industry that it is dominated by media and marketing maneuvers makes it difficult for small firms to survive in this viable market. Currently players like Home Shop 18, Asian Sky Shop, and Star CJ lead the market. Through this research paper, I would like to examine – “Is Asian Sky Shop in India functioning as an Oligopolistic market structure”?

After gathering all the data, reviewing all the information collected and observations – I found out that only a few firms operated in the market, barriers to entry and exit existed, and concentration ratio -directed towards an oligopolistic market structure. However, to truly determine the nature of the market in which the teleshopping industry in Mumbai, it was of grave importance that it should be tested against each type of market structure. Reviewing these different market structures would help establish the true nature of the industry in which Asian Sky Shop operates without any room for disparity. This method would effectively either substantiate or eliminate the hypothesis leading me to a conclusion to this research paper and possible limitations.

Hypothesis

On the basis of my initial research and observations I hypothesize that Asian Sky Shop and other big firms in the teleshopping industry in Mumbai are functioning in a non-collusive oligopoly because:

There are only twelve firms that operate the market.

There are barriers to entry in the market in terms of patents and copyrights, high advertising costs etc.

As these firms sell both homogeneous and differentiated products, they are likely to compete on price.

Four major firms control the market including Asian Sky Shop.

Through this research paper, I would analyze and evaluate whether the hypothesis turns out to be true or not.

Methodology

In the preliminary stages of my research; my approach was to read up, as much material available on the teleshopping industry in India; which I soon realized, wasn’t much. I used to even watch the infomercials by the home shopping companies, to understand their pricing and marketing strategies. Their websites also provided a pool of information regarding pricing and product variety. It turned out to be quite informative as I realized that these companies sold very similar products, but at vast price differences, in contrary to my hypothesis. Unfortunately, teleshopping industry in India is highly unorganized, and there are no audited figures were available. But access to experts who had been working in the industry for more than a decade was of great assistance. They could provide with estimates on market share of these firms including Asian Sky Shop, which was very essential for my research paper. The range of secondary resources available was also pretty limited. Accesses to primary sources, in terms of interviews by Asian Sky Shop officials did prove to be extremely helpful. People working there had been helping me from the beginning , in understanding the essence of the industry and the competition that existed in the market, which helped me truly determine the nature of the market. Another part of my research was to revisit all the relevant economic theories in context with my research question, which enabled to me make clear distinctions and choices and helped in writing this extended essay.

Company Profile

Asian Sky Shop Limited is a part of the Essel Group of Industries and was the pioneer in the Indian teleshopping industry. Their prime focus lies on Healthcare & Personal Care Products, Fitness Solutions, Toys, Home Appliances and Leisure Products. The company commenced its operations in the year 1995. It started off with a zero inventory model exclusive of any franchisee or dealer network. Asian Sky Shop also has over 200 manufacturers from India and abroad that contribute to their comprehensive product range. Their products command extensive media coverage on the Zee TV network, one of India’s largest and premium media platform. The company has a distribution channel spanning 65 cities including Mumbai; that supports the marketing team and helps the company reach out to the customers, not only in India, but other countries such as United Arab Emirates, Nepal and Bangladesh. In addition to that they also have an online store and a 24×7 call centre facility. In mumbai Asian Sky Shop operates through informercials on the television, their online shopping website and occasional sales.

Evaluation of Applicable Theories

Perfect Competition

Pure Monopoly

Monopolistic Competition

Oligopoly

Duopoly

Monopoly [1] 

Figure 1

A Perfectly Competitive Market

In a perfectly competitive market where each player in the industry is a price taker and no one has the power to influence the price. While in perfect competition there are infinite number of buyers and sellers in the market – it is not the case in the teleshopping industry in Mumbai. There are only 20 players, which operate in the teleshopping arena. Barriers to entry do exist in terms of high operating costs and as well as considerable amount of initial investment, in contrast to a perfectly competitive market where no barriers to exit or entry exist. The teleshopping industry in Mumbai does fulfill two of the features of a perfectly competitive market, but partially. Firms in the teleshopping industry do tend to maximize profits in the long run due to barriers to entry, which prevents new firms to enter the market and incarcerate excess profit. Teleshopping industry mostly sells differentiated products, but in some rare cases they do sell products of a similar third-party manufacturers and compete on homogenous goods from the same brand.

Monopolistic Competition

The characteristics of a monopolistically competitive market are similar to perfect competition, except with one difference – in a monopolistic market the goods sold are differentiated. There are few barriers to entry and exit in a monopolistically competitive market; high barriers exist in the teleshopping market in Mumbai. Therefore, monopolistic competition is ruled out as a possibility.

An Oligopolistic Market

An Oligopoly is a market structure found lying in-between the extremes of perfect competition and monopoly. It is another form of non-price competition; oligopoly, meaning ‘few sellers’. The defining line between monopolistic competition and oligopoly can be very thin and many of the markets have in fact elements of both. Oligopoly markets are increasingly common in the real world [2] .

The characters of an oligopolistic market are as follows –

There are only 20 players in the industry including Asian Sky Shop.

The firms are interdependent on each other for pricing and investment decisions in this type of market structure because there are few sellers, each oligopolist will be aware of the others’ action. Hence, there is perfect knowledge in terms of costs and demand functions. The decision of a single firm influence, and are influenced by, the decision of other firms. Therefore, firm’s strategic planning should be done keeping in mind the likely reactions of the other players in the market. There has been instances where Asian Sky Shop has kept in minding competitor’s pricing, before setting their own prices. [3] 

The company sells branded products; which are close-substitutes, homogenous like the Mp3 Player by Apple Inc. – Apple iPod, which is sold by both Asian Sky Shop and Homeshop 18 or differentiated like the Vegetable Slicer, which is sold by Asian Sky Shop, Telebrands and Homeshop 18, but with slight differentiation in features and under different brand names.

Barriers to entry exist, especially for smaller firms; copyrights or patents could act as entry barriers as some of the products are unique only to one firm, like the Fat Free Express [4] – A unique product only sold by Telebrands in the country. Government regulations and economies of scale as Oligopolistic firms are able to advantage from economies of scale that reduce their production costs and prices. Because of these firms being large, they can “mass produce” at a low average costs; access to expensive and complex technology, even high initial set-up costs could prove to be a barrier. Because of India being a country with many cultures and many languages, even media and advertising costs are much higher as they need to advertise the same products in different languages on different channels to reach a large customer base.

The firms in the teleshopping can earn abnormal profits in the long-run scenario as high barriers to entry prevent nonessential firms from entering the market and capture extra profits. Oligopolists produce where marginal revenue equals marginal costs, thus maximizing profits as seen in the diagram below.

Figure 2

Productive and Allocative Efficiency: For achieving economic efficiency – Price = Marginal Cost = Minimum Average Total Cost. Oligopolies do not satisfy this; yet sustain satisfying profits year after year.

Oligopolies often sustain economic profits. They produce where price is greater than average total cost, therefore not being productively efficient. They also produce where price is greater than marginal cost, meaning firms neither produce in the least costly way nor produce the accurate amount of product according to demand of the society. At this price, their output is below the output at which minimum average total cost is reached. Therefore, there is under-allocation of resources.

The firms are price makers and price takers as few firms control the pricing decisions.

The company faces competition both from home-shopping companies with a strong corporate backing such as Home Shop 18 and Star CJ Homeshopping as well as other players such as Telebrands, Telebuy, Global Telemall, WWS Sky Shop, TVC Sky Shop and a host of other smaller entities. During the inception of teleshopping in India, there were hardly a couple of players besides Asian Sky Shop, Telebrands and Teleshopping Network, although TSN stop its operations, and now only trades through their online portal. The number of television channels was also pretty limited at that time. However the mushrooming of television channels in the late 1990’s saw many small payers also hitching on the teleshopping bandwagon. However, it is only recently that corporate giants such as Network 18 and Star TV have ventured into the teleshopping arena. Companies like Home Shop 18, which is a part of Network 18, have their products aired on a 24-hour channel on the DTH (Direct to Home) platform. Today across the various channels, there must be over 20 different payers in the teleshopping league. The company’s competition today is not only restricted to Teleshopping companies but also online selling portals and hypermarkets (supermarkets). Although the competition is changed through time, the company believes that there is no significant change in the market share. People of Middle and Upper-Middle Class backgrounds comprise of the majority of their customer base.

There can be numerous types of oligopolistic competition. In some situations, there can be collusion to raise prices and restrict production, very similar to a monopoly. But there are legal restrictions to such kind of collusion to exist. But no collusion exists between firms in the industry and competition is fierce among market players, with relatively low prices and higher sales. Oligopolistic firms have the power to influence their rival’s profits by a change in the pricing strategies. Each firm’s profit depends on their pricing strategy in relation to the rival players’. Therefore the company takes decisions based on the analysis of likely reaction from the rivals; but not always.

Firms in an oligopoly compete for market share in several ways. However, there is an important distinction between price and non-price competition. Price competition involves discounting products in terms of price to increase the demand. Therefore, I conducted a product comparison test, where five different products were taken by three major firms operating in the teleshopping industry to see if they were competing on price. Star CJ, which is one of the four largest firm in the market could not be included in this comparison as the company is yet in the stage of developing their website, therefore therefore, there was no data available on product range and pricing.

In this case, all three firms are selling a differentiated product – kitchen appliance. There prices vastly differ from each other. Homeshop 18 and Asian Sky Shop both are giving discounts and charging no delivery expense where as Telebrand’s Slicer is the costliest of the three and is charged a fee for delivery.

Here both Asian Sky Shop and Homeshop 18 are selling a homogeneous product by a third-party manufacturer – an MP3 Player. Both of them are selling the same product yet with a slight difference in price. There is again disparity in how these firms are stated the retail price of the product and the discount they are giving. Telebrands apparently does not sell any third-party products.

Again two out of the three firms sell this differentiated tool set. There is a vast difference is price, and only Telebrands is charging for postage and handling; where as Homeshop 18 is offering a 50% discount.

All three firms are selling a differentiated fitness product. Very vast price differences and only Homeshop 18 is offering a discount.

Non-price competition emphasizes on other strategies except price. These strategies for Asian Sky Shop in particular include mass media advertising and marketing, internet shopping, home delivery, easy payment options, customer loyalty cards and schemes, financial incentives for shopping at off-peak times like the current week long sale that they are conducting. As Asian Sky Shop engages more into non-price competition, what they compete is on advertising and promotion. Advertisements unlike price cuts that can be quickly matched with are not easy to duplicate. Because Asian Sky Shop is a part of a large television network, they have enough resources to aggressively advertisement their products. Although, there are both positive and negative effects of this. For consumers, advertising provides a low-cost and convenient method to obtain information on a product, saving time and effort. Advertising also diminishes any monopoly power because there is information available on competing goods and services. Can increase demand by persuading consumers, altering their preferences and changing their expectations. Advertising also means that the product will reach a large potential consumer base. But, it also acts as a barrier to enter the market with high costs of advertising. Especially in India, where they are many cultures and therefore many languages. Asian Sky Shop and other firms have to produce commercials in different languages for the same product, which increases their advertising costs automatically. Advertising also helps Asian Sky Shop build a brand name and establish customer loyalty, which has a positive effect on sales in both short-run and long run scenarios and also increases market share over time.

The purpose of my essay was to determine the type of market structure in which Asian Sky Shop operated. It was a challenging task, no previous research had been done on the industry, therefore there was a lack in availability of resources. Although focusing on Asian Sky Shop; other firms were included in the study as to determine the type of competition that existed.

Hence, data collected and research showed that hypothesis to an extent proved to be true and the industry features indicated towards Asian Sky Shop being in a non-collusive Oligopolistic market structure. All functions in an oligopolistic market turned out that the firm focused more on non-price competition contrary to the initial hypothesis where it was expected that price competition. It was also evident that Asian Sky Shop was neither efficient in allocating resources nor was productively efficient. Market Share estimates and concentration ratio indicated that the four major firms – Asian Sky Shop, Telebrands, Homeshop 18 and Star CJ hold a major chunk of the market share. It was also evident that Asian Sky Shop’s market share has deteriorated and it has gone from a duopoly to and oligopolistic structure as new firms entered the market over the decade.

The figures collected are on the basis of experience of industry experts and are not audited by any authority, therefore they are bound to be incorrect to a certain degree. Also there are a lot of small entities in the industry in Mumbai which are not accounted for and barely have any data available – yet there operations and market standing does contribute to an effective analysis. Also more data in terms of sales figures would have helped me determine the profit trend – which also could have helped to determine the nature of the market in an effective manner.