PARVATIBAI CHOWGULE COLLEGE

OLIGOPOLY-INDONESIA STUDY
REPORT
MICROECONOMICS II
ANOUSHKA DAYS
 Oligopoly Market in Indonesia
An oligopoly is a market structure which is dominated by few large firms while
the other small firms play in the fringe. These firms sell either identical or
differentiated products and the oligopoly industry has significant barriers to entry
which helps them to maintain their dominant position.
A few important features of an oligopoly market structure are:
1. Price maybe relatively stable across the industry.
2. Potential collusion between firms.
3. Behaviour of the firms is affected by what they believe their rivals might do
4. Branding and Brand loyalty maybe a potent source of competitive
advantage.
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. The more concentrated the market, the distinction
between paid by consumers and received by producers for the production of the
goods are getting bigger. Higher concentrated industry means higher market
power; consequently social welfare would decrease. The lower the concentration
ratio, the more the industry reflects the characteristics of monopolistic
competition or perfect competition.
An alternative measure of concentration is found by squaring the percentage
share (stated as a whole number) of each firm in an industry, then summing these
squared market shares to derive a Herfindahl–Hirschman Index (HHI)
In an oligopolistic market structure, there is prevalence of cut throat competition
among the few firms/sellers. These sellers/firms have to make critical strategic
decisions such as whether to compete with rivals, or collude with them, whether
to increase or reduce price, or keep price constant, whether to be the first firm to
implement a new strategy, or whether to wait and see what close rivals do.
Sometimes it pays to go first because a firm can generate head-start profits. The
second mover advantage occurs when it pays to wait and see what new strategies
are launched by rivals, and then try to improve on them or find ways to
undermine them.
Oligopolists may use pricing strategies like the Predatory Pricing where by the
firms keep the prices so low, even lower than the cost of production. This is done
with the aim to force the rivals out of the market. Another strategy that is often
used is the limit- pricing strategy where products are sold by a supplier at
a price low enough to make it unprofitable for other players to enter the market.

The drawbacks of having an Oligopoly market structure.

1. Oligopoly market structure, leads to control of prices and supply of goods
and services and harming the consumers interest as a result.
2. It also causes deterioration in social welfare by oppressing development of
small scale business men.
3. It leads to economic control by a handful of people and harms social justice.
To restrict such negative impacts acts such as the Anti-Trust or Anti-
Monopoly law and protection act for small business men are laid out.

The industrial structure is very concentrated in Indonesia and making it an

oligopolistic market. These highly concentrated markets in Indonesia are
promoted by industrial associations. Oligopoly market structures are Prevalent in
telecommunication sector, Poultry industry, Airlines Industry, Cigarette industry,
Oil and Gas Industry in Indonesia.
The telecommunication industry in Indonesia has been experiencing a robust
growth for the last 15 years. The Indonesian penetration for cellular phone has
reached 91.7%. In Indonesia three large cellular firms namely Telkomsel, Indosat
and Excelcomindo (XL) dominate the cellular industry. These firms are inter-
dependent, which means that they cannot act independently of each other. They
repeatedly interact with each other and are mutually aware of each other’s
strategies and responses over time. These firms take into account the potential
reaction of its closest rivals when each makes its own decisions. For example,
Indosat may wish to increase its market by reducing prices of their services, but it
must take into account the possibility that close rivals such as Telkomsel and
Excelcomindo, may also reduce their price in retaliation. The market share of
these three firms comprise of more than 75% of the market share, and their
services reaching more than 95% of the Indonesian population.

(Telecommunication Operators in Indonesia and their market share in 2017. Source: Indonesian
Telecommunication market size report 2016-2017)

To achieve supra-normal profits and gain dominance in the market, these

oligopolistic firms can create agreements with each other to jointly control the
production of goods and services either through an explicit collusion or tacit
collusion. These collusions can be detrimental to consumer welfare to the extent
that it displaces a more competitive arrangement and results in higher prices,
lower levels of service, lower quality goods, less variety of goods and services
and/or reduced incentives to innovate.
The telecommunication industry in Indonesia is oligopolistic in nature for 3
reasons:

1. Economic scale and service coverage. If one has to invest in the telecom
market, they have to put their high investment in facility, while they have to
sell their product/service around the price offered by the established firms
in the telecom sector.

2. Start-up cost is expensive, and the investor may suffer due to the initial
cost- high fixed and sunk cost.

3. Provision on essential facilities – Here a new firm entering the market has
to lease the existing network, by interconnection, to support their activities.
 4. In Indonesia, the firms in the oligopoly market are able to maintain their
position of dominance by imposing entry barriers on new entrants. It
becomes too costly for these new potential rivals to enter the market after
the imposition of entry barriers.

The beef industry in Indonesia has relatively high concentration ranging from
67% to 71.5% with tight oligopoly market structure, i.e. the price is determined
by fewer sellers in comparison to the buyers. The average growth of productivity
of the four largest firms in the industry (Concentration ratio) is 62.5%. The
market Concentration, Capital intensity and number of business unit have
positive significant influence towards productivity, while intensity of import and
collusion has negative significant influence towards growth of productivity.
Several studies assert that the present structure of the poultry industry in
Indonesia leads to oligopolistic. This is indicated by the presence of

1. Approximately 40 broiler producers in Indonesia, 16 companies of which

include large-scale category. Sixteen large-scale companies that control
75% market share of broiler farming industry.

2. About this large-scale farm enterprises also perform vertical integration.

After the Garuda Indonesia Group acquired operational control of the Sriwijaya
Group (which consists of Sriwijaya Air and NAM Air) in November 2018 there
has been rising concern about oligopoly in the aviation market of Indonesia as
there are now two big players that dominate the market: (1) the Garuda Indonesia
Group (Garuda Indonesia, Citilink, Sriwijaya Air and NAM Air) and (2) the Lion
Air Group (Lion Air, Batik Air and Wings Air). When there exists an oligopoly it
becomes easier for the market leaders to manipulate fares, even though this kind
of practice violates Indonesian Law No. 5/1999 on the Prohibition of Monopoly
and Unhealthy Business Practices. Garuda Indonesia is majority owned by the
central government of Indonesia.
 (Oligopoly market: The three major Airline Operators in Indonesia as per November 2018)

In Indonesia the primary enforcement authority is the Business Competition

Supervisory Commission [Komisi Pengawas Persaingan Usaha (KPPU)], an
independent body with power to investigate and sanction abuses of market
power. KPPU has investigated a variety of conduct which potentially increased
the likelihood that oligopolistic firms would find it profitable to coordinate rather
than compete. These include:

 Mergers that reduce the number of firms in the market and/or raise barriers
to entry and expansion;

 Facilitating practices in oligopoly, including information exchanges,

price/capacity signalling.

To date, the Business Competition Supervisory Commission (KPPU) still

conducts continuous consolidation to establish competition guidelines and has
initiated efforts to examine public complaints in Indonesia.
To prove the existence of oligopolistic practice that may result in unfair business
competition, two conditions have to be met; they are the necessary and sufficient
condition. The necessary condition is one where in two or three enterprises or
group of enterprise control over 75% market share. While the sufficient condition
to be fulfilled is that the activity should result on monopoly practice or unfair
business competition.
The Business Competition Supervisory Commission (KPPU) in Indonesia uses
some common remedies which are laid down in Article 47 of the competition law
which can be applied at the times of violation by the Oligopolists. These
remedies may be as follows:
 An order to stop any activities that are restricted
 Call for the cancellation of an agreement, a merger or acquisition.
 Payments in case of any damage caused
 An order to stop the exploitation and abuse of the enterprises dominant
position.
 Impose administrative fines ranging from IDR 1 billion to IDR 25 billion
In order to overcome the challenges that arise in oligopoly markets in Indonesia,
the need for the hour is to improve the advocacy and dialogue with judges and
other law enforcers such as public prosecutors in the competition law. Workshops
held for judges were the only way for KPPU to introduce newer approaches in
competition law enforcement to the judiciary. It is expected that all judges in
more than 400 regions can recognize the way of competition law proceeding.
Obtaining information about the markets shares of the firms in an oligopoly
market is very difficult and hence poses as a challenge. Even gathering authentic
data and information of the production, distribution and earnings of the firms in
an oligopoly set up is tough. The reason for the lack of information available and
obtained about the various aspects of these firms is because of the poor/weak
databases maintained by the government and the authority of KPPU in obtaining
such information.

In Indonesia all the provisions related to oligopoly market structure are laid down
under the Competition Law (law 5/1999). Article 4.1 under the competition law
states that “Enterprise is prohibited to create agreement with other enterprise to
jointly control the production and or marketing of goods and or services, which
will cause monopoly practice and or unfair business competition”

Article 4.2 under the competition law states that “Enterprise can be suspected or
considered having jointly control the production and or marketing of goods and
or services, when two or three enterprises or group of enterprise control over 75%
market share of a certain type of good or service”
The adoption of Law No. 5 of 1999 concerning the Prohibition of Antimonopoly
and Unfair Business Practices and the establishment of the Supervisory
Commission for Business Competition (KPPU) as the Indonesian Antimonopoly
Authority have marked serious efforts of Indonesian government to conduct
structural reform towards competition regime in Indonesia.

Article 4 of the competition law states that oligopoly agreements are prohibited if
they are detrimental to competition, thus they are not per se illegal. It also
presents the assumption that a market share of 75% held by 2 or 3 business actors
could be suspected to have control over production and marketing. Business
actors are defined as any person or entity which is established in Indonesia or
does business in Indonesia.

Article 11 of Law No. 5/1999 states that “Business Actors are prohibited from
making any contract with other business competitors with the intention to
influence the price by determining production and/or marketing of goods and/or
services that can cause unfair business competition”

The Articles in Law No. 5 of 1999 are largely rule of reason, which require proof
of impact. Rule of reason is a prohibition on an action or a particular act or
practice which will only be prohibited if it brings a negative adverse impact. If
the action or deed or practice has no negative impact then it is not prohibited.

There are three kinds of anti-competitive actions that occur most in Indonesia.
The first are anti-competitive actions conducted by businesspersons as a strategy
to destroy its competitors, such as vertical integration, resale price maintenance,
and market allocation. The second are anti-competitive actions conducted by
businesspersons with the consent of the government, including cartel like
conducts through associations, and monopoly rights granted to individual
persons. The last kind of anti-competitive acts are those that are conducted in
providing of governmental needs, collusion and state owned enterprises (BUMN)
supplies through collusion.

Conclusion:

The industrial structure is very concentrated in Indonesia and making it an

oligopolistic market. These highly concentrated markets in Indonesia are
promoted by industrial associations. Oligopoly market structures are Prevalent in
telecommunication sector, Poultry industry, Airlines Industry, Cigarette industry,
Oil and Gas Industry in Indonesia. In Indonesia the primary enforcement
authority is the Business Competition Supervisory Commission [Komisi
Pengawas Persaingan Usaha (KPPU)], an independent body with power to
investigate and sanction abuses of market power. In Indonesia all the provisions
related to oligopoly market structure are laid down under the Competition Law
(law 5/1999). The Business Competition Supervisory Commission (KPPU) in
Indonesia uses some common remedies which are laid down in Article 47 of the
competition law which can be applied at the times of violation by the
Oligopolists.

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