International School Market in Shanghai Fit the Market Structure of Oligopoly free essay sample

To what extend does the international school market in Shanghai fit the market structure of Oligopoly? Subject: Economics Essay by Pearl Session: May 2011 Words count: 3639 Hypothesis: My hypothesis is that the international school market in Shanghai is non-collusive oligopoly. CLASSIFICATION OF MARKETS OLIGOPOLY Oligopoly means â€Å"few sellers†(McGee, p. 201). The market which is another structure of non-price competition, lies in-between â€Å" the extremes of perfect competition and monopoly†(McGee, p. 201). The different between Oligopoly and monopolistic competition is small, and many of the markets contain components of both (McGee, p. 201). The diagram below demonstrates concentration of market shares or sales in different market structures of largest 4 firms (CR4) in percentage. [pic] Diagram 1 (Blink, Dorton, p. 119) CR4 is the most commonly used form of concentration ratio. CRx where x represents the number of largest firms. Therefore, CR4 would show the percentage of market share held by the largest 4 firms in the industry. 3 A) ASSUMPTIONS OF MODEL The key feature of the Oligopoly market is that the market is dominated by few large firms. We will write a custom essay sample on International School Market in Shanghai Fit the Market Structure of Oligopoly or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Oligopoly can be defined by the characteristic of number and size of firms, barriers to entry, product differentiation, control over price, selling activity and nature of demand. 1. Number and size of firms A few large firms dominate the market with maybe many other smaller competitors covering the rest of the market. â€Å"Standard economic theory defines an oligopolistic market as one where the four or five largest firms control a major share of the market†(McGee, p. 01). From economicshelp, the market concentration ratio is â€Å"the percentage of total sales in the market taken up by a certain number of firms†. This is used to define market structure and competitiveness of the market. To calculate the concentration ratio, is to divided total sales of an individual firm by total market sales. If the largest 4 firms dominated over 40 percent of the market, usually considered. Markets are highly concentrated, meaning that the most of the sales of product are accounted for by the few largest firms. In the Shanghai international schools market, sales represent by enrollments. 2. Barriers to entry Usually high barriers exist in the oligopoly market. Existing dominant firms are large, have achieved economies of scale(low cost), possess technical knowledge and expertise, and have established high profile in the market place. This is the key difference to the monopolistic competition market structure. New firms entering must have hugh initial capital, expertise, overcoming existing consumer royalty, and they will face large start up costs. 4 From tutor2u, economies of scale are the â€Å"cost advantages† exploited by â€Å"expanding the scale of production in the long run†. The effect is to â€Å"reduce long run average costs† over a range of output. 3. Product differentiation Products may be heterogeneous or homogenous, usually the former. Some may produce almost exactly homogeneous products, and the only the difference is the companies’ names. e. g. petrol (Blink, Dorton, p. 120). Some firms produce highly heterogeneous products such as ice cream. Some firms spend a lot of budgets to promote and persuade that their product is the best or better. . g. face cleanser (Blink, Dorton, p. 120). 4. Control over price Oligopolists can often raise prices to increase revenues and profits, but control over price is limited by the reactions of the others. Prices are often fairly rigid. Price wars are not in the best interests of sellers since with low price elasticity of demand for products, lower price s lead to lower revenues. If Oligopolists raise their prices, competitors are unlikely to follow and the demand of the firm that raises the price is lost. 5. Selling activities Firms in oligopoly markets tend to engage in non-price competition, and compete through many different forms non-price competition such as advertising, sales promotion, reputation (brand names), sponsorships , extra services and more. 5 6) Nature of Demand The price elasticity of a demand for product faced by the individual seller depends on the nature of the product and the reactions of rival firms to a price change. B) IMPLICATIONS OF MODEL Oligopolists compete in non-price forms due the these implications of the model: the goal of profit maximization and the interdependence of the firms. . Profit maximization Profit maximization involves making the most profit possible given the demand, prices and costs, faced by the firm. Profit maximization requires the firm to find that level of output which results in the greatest gap between total revenue and cost. It is generally the goal pursued by firms. (Blink, Dorton, p. 92) Diagram 2 ( Blink, Dorton, 93) Also Oligopolies can earn abnorm al profit in short run and also sustain their abnormal profit in the long run. 6 2) Interdependent of the firms Since each seller in oligopoly market accounts for such a significant share of the market, the actions of one seller can have large impact on other sellers. There is much seller inter-dependence. The sales of the competitors will have an impact from â€Å"a firm that changes the price, or specification of its product†(Sloman, p. 132). For example, if a firm changes their price or amount of advertisement, the competitors may react the same way which is changing their prices or the amount of their advertisement. â€Å"Firms recognize this interdependence. This recognition will affect their decisions†(Sloman, p. 132). ANALYSIS OF THE â€Å"INTERNATIONAL SCHOOL MARKET† IN SHANGHAI The type of market structure of the international school in Shanghai can be analyze by examining the following: Firstly The overall market for international school in Shanghai must agree with the assumptions that I mentioned, which are few firms dominate the market, high barriers to entry, product differentiation, control over price, non-price competition selling activity, and the nature of demand for secondary education. The analysis should also correspond to the implications of the assumptions made. i) Number of firms dominate the market How much concentration of the market can be determined by using concentration ratio. Firstly, Shanghai is a large international city. There are 12 international schools in Shanghai. To narrow the market down, I decided to look at secondary schools only and segment the market by consider these followings: school that teaches in English, non local chinese allows in the school and offer the education from year 7 to year 13 in the British system or grade 6 12 in the American system. 7 Below is the data collected showing the percentage of each school enrollments in the market by dividing total enrollment of secondary school students of an individual school by total market enrollment then times a hundred. Table 1: Percentage each school dominate in the market (see appendix) |International School |Total enrollment of |Percentage dominate in the market | | |secondary students |(%) (2 decimal place) | | |(students) | | |Shanghai American School |1207 |19. 9 | |British International School Shanghai |890 |14. 45 | |Yew Chung International School of Shanghai |860 |13. 96 | |Shanghai Community International School |767 |12. 45 | |Shanghai Singapore International School |600 |9. 74 | |Dulwich College, Shanghai |582 |9. 5 | |Concordia International School Shanghai |530 |8. 60 | |Western international school Shanghai (only age of 15-18) |220 |3. 57 | |Shanghai Livingston American school |190 |3. 08 | |Shanghai Rego International School |155 |2. 52 | |Oxford International College, Shanghai |100 |1. 2 | |Shanghai United School |60 |0. 97 | |Total |6161 |100 | |Concentration ratios (8) |5656 |91. 80 | |Concentration ratios (4) |3724 |60. 44 | The data from table 1 shows the percentage shares in the market of each school in order from the highest percentage. Total number of student in the market is 6,161 students and the Four-firm concentration ratio is 60. 44% which includes Shanghai American School, The British International School, Yew Chung International School, and Shanghai Community International School. These schools are the one that dominate the market in Concentration ratio of 4. Therefore, the market is concentrated with the concentration ratio of 3:2. Eight-firm concentration ratio is 91. 0% which includes Shanghai American School, The British International School Shanghai, Yew Chung 8 International School Shanghai, Shanghai Community International School, Shanghai Singapore International School, Dulwich College, Shanghai, Concordia International School and Western International School Shanghai. These eight schools are the schools that dominate the market in Concentration ratio of 8. The other 9. 20% is cover by 4 smaller schools which are Shanghai Livingston American School, Shanghai Rego International School, Oxford International College, Shanghai and Shanghai United International School. From the result, it shows that the market is pretty concentrated because the concentration ratio is 92 : 8 which is 46 : 4 or 11. 5 : 1. The result is correspond to the assumption of few number of firms dominate the market and small firms cover up the rest. ii) High barrier to entry into Shanghai international school market The difficulty to enter the market of international school in shanghai can be determined by examining the barriers that already existed from the start and the barriers that are built by the firms. Firstly, the entry of the market is more difficult due to the Chinese government regulations (Dang, Stacey. ). There are too many international schools in Shanghai already said Miss Kane, therefore the government is controlling the number of firms in the market. If the firm wants to set up a school, they need to get permission by the Chinese Government and also government of the district where the firm wants to locate the school (Dang, Stacey). There is also a regulation by the Chinese Government that local Chinese are excluded from entering internationals school in Shanghai (Dang, Stacey). All the international schools in Shanghai only accept student who hold an overseas passport. The process of entering the market can be very difficult which makes a barrier to new firms. 9 To build a school there are high set-up costs. The cost of buying up land and constructing or renting the school are very high. This is another barrier since new firm need high initial capital to build a new school and have to wait long term for the capital cost to be recouped in operating profit. Marketing barriers is also another factor for new competitors to enter the market. Because international schools in Shanghai compete through advertising a lot. I am going to mention it later about the form of competing in â€Å"selling activities†. From looking at many advertisements around Shanghai, consumers which are parents perceived difference in their school from other schools to a degree that consumers see its school name as a slightly different type of school. Since the name of the school is seen as a slightly different product, products from existing or potential school competitors cannot be perfectly substituted in place of the established schools brand name. Marketing and advertising is very costly. The already existing international schools pay a lot for advertisement and marketing which make it difficult for new competitor to enter the market or to compete with high-profile schools which have had years to enhance brand loyalty amongst customers. The long run average cost of existing international schools in Shanghai have decreased as school size grown, accepting more students do not impact greatly on average cost. For example, one teacher can teach more than 1 student and one class room can hold more than one student. Increasing output which is students will not add to marginal cost but instead will give more profit the school increases the scale of output. The larger international schools in Shanghai have probably already achieved economies of scale since they have been opened for many years. The high barrier of entry prevent new competitors to enter and capture excess profits from the market. 10 iii) Product differentiation Each school has a different approach. Therefore they provide slightly different education system. Some school provide British system or some provide American. For example, some American system school such as Concordia school has Christian religion offering, where Shanghai American School is also an American system but no religion offering. Because each school has different approach they tend to look at different market segment. For example, Rego specialize in European languages, so they maybe offer less in Geography and Math. This will attract more Europeans more than Asians. Yao Cang has Bilingual program which focus more on Mandarin language. This will attract more Asians in the market. Each school also have different facilities. For example, Dulwich College is the only school in Shanghai that provides rugby field. Also courses are different. Some school offers IB (International Baccalaureate), some offer AP (Advance Placement) or some school like Shanghai American School offer both. So Shanghai American School will attract more students who want to be in an American environment but want to study IB and international qualification. Each school has different exam results, facilities, location. These are the differences of each school that consumers consider when choosing a school for their children. v) Control over price Private Education has a low price elasticity of demand product. They can raise their prices to increase revenue and profit, but the school might lose demand in the market as the price goes up. Schools are not often reduce their prices because one action of one school can make other school react. If they reduce the school fees, other schools might be forced to do the same thing to compete and l ower its price but this is not common since, lower prices in this market will lead to lower revenues for the school. It will end up that both schools stand to lose revenue and profit. So international schools in Shanghai do not change their fees often. Still, there are some school such 11 as Dulwich that rely on their reputation and increased their fees this year. In fact, it is the most expensive international school out of all in Shanghai. This will not effect much because most of parents do not pay the full fees by themselves as I mentioned before. Generally each school does not take into account the fees charged by other schools. v) Selling Activities According the marketing director at Dulwich College, international schools in Shanghai do not compete through pricing. They compete more on reputation and sell promotion. Since education is a service not a good, parents will consider more about location, reputation, facilities, quality of teaching, and accommodations not the school fees. Price is not always the reason to attract people especially for education. This is also due to the fact that most of parents in Shanghai do not have to pay the school fees by themselves. They are foreigners who came from another country because of overseas companies that invest in Shanghai. Therefore, the company pretty much pay for many things include school fees. So the aim of the school is to provide â€Å"quality education†, so it will attract more customers to come to the school. To attract consumers, advertising is very important. International schools in Shanghai compete a lot through advertising in weekly magazine such as Shanghai Talk, and they all have their own websites. I am going to use Dulwich College to illustrate and prove that in this market schools do not compete on pricing. Advertising is the key to attract consumers. According to the Marketing Director, Dulwich College advertises through their own website, by leaflets, by holding events but also on their reputation. The college magazine is used to promote the school life at the end of every month. The magazine includes what is happening in the school, events, media relation and achievements. Jackie Kane is in charge of Marketing and part of her job is to look at other school publication and choose similar publication to publish article to make sure 12 the school can also offer what other school offer. The schools use pretty much the same tactics but different strategies because of different approach (Kane, Jacquie). This is due to their differentiated product. Because Dulwich College Shanghai is a Private Independent profit school, that is why the school need marketing. Some international schools such as Shanghai American School and Concordia are non-profit school. Concordia is a catholic school, so it is related to church. So church members are providing education by using church fund but most international schools in Shanghai are for profit. vi) Nature of Demand International school firms are price setters rather than price takers. They rarely decrease their prices because this will affect their profit. The market is very inelastic because even though the firm put ups their price, there will only be just a small proportion of its sales lost. This is also because pricing is not what consumers consider for education and also most of the consumers do not have to pay by themselves. The fees are paid by the company they work for. So the quantity demand will not change much as price goes up but average cost of production will do down. If the firm increases their price, there will be more total revenue gained by the firm. CONCLUSION In conclusion, from the assumption of oligopoly market, I am quite sure that my hypothesis is right. The market is more likely to be oligopoly because the defining characteristics of oligopoly from the assumptions and my analysis correspond closely. There are some firms which dominate the market and small firms cover the rest of the market. This is known from the concentration ratio in the analysis. The potential entrants face high barriers to entry and today there are barriers to entry in the market because there are many international schools in Shanghai, so the Chinese government 13 restricts entry of any more international schools to the market. In addition, high barriers to entry exist in this market because new firms entering must have huge initial capital, economies of scale and educational expertise. They must overcome existing consumer loyalty, and they will likely suffer from high start up costs. Also the products are differentiated. They are similar but not identical. Each school provides different course and they also have different a approach. They are all international schools but there is much differentiation. For example, there are different type of international schools. Some of them are American school, and some of them are British schools, some are even bilingual. In addition, the oligopoly market in the short run is able to earn abnormal profits, but in the long run as well they are able to sustain abnormal profits due to the barriers to entering and exiting the market. Also the schools do not compete on prices, they compete with advertising not school fees. Some of them do a lot of advertising in shopping centres such as Carrefour or even hand out leaflets, some of them just rely on their long well established reputation. 14 ABSTRACT In this essay I will respond to the research question: â€Å"To what extend does the international school market in Shanghai fit the market structure of Oligopoly? † I shall be analyzing the type of market structure of international schools in Shanghai, that functions as a non-collusive Oligopoly market, examining whether the schools in the market are competing through pricing or not and test whether my hypothesis is correct. The scope for this essay is to examine the assumptions and implications of the model of Oligopoly market theory and then apply the assumptions of oligopoly to the market for international schools in Shanghai . In this essay the assumptions of number and size of firms, barriers to entry, product differentiation, control over price, selling activity and the nature of demand are covered and compared with my analysis of international schools market in Shanghai. Twelve international schools are investigated but the essay mainly focuses on Dulwich College, Concordia, and Shanghai American School in particular for examining the features of product differentiations and selling activities. Furthermore, I also investigate the possibility of economies of scale in the market to judge the impacts on school size of profit maximization and schools interdependence. I analyze the factors that influence the Oligopoly market, including the natural and artificial barriers to entry for the purpose of determining to what extent the school market fits the oligopoly model. I have reached the conclusion that the international school market in Shanghai is definitely Oligopoly with some schools dominating the market, high barriers to entry into the market, product differentiation, with price setting strategies being observed much non price competition and school interdependence. Word Count: 272 BIBLIOGRAPHY Books 1. Mcgee, Matt. Economics in Terms of the Good, the Bad and the Economist 2nd Edition 2009. [S. l. ]: Ibid. Print. 2. Blink, Jocelyn, and Dorton Ian. Economics: Course Companion. Oxford: Oxford UP, 2007. Print. 3. Sloman, John. Essentials of Economics. 4th ed. Harlow, England: Financial Times/Prentice Hall, 2007. Print. Websites 1. Concentration Ratios | Economics Help. Economics Help Helping to Simplify Economics. Web. 03 Web. 2010. . 2. Riley, Geoff. Microeconomics Economies and Diseconomies of Scale. Tutor2u | Economics | Business Studies | Politics | Sociology | History | Law | Marketing | Accounting | Business Strategy. Sept. 2006. Web. 03 Oct. 2010. . Interviews 1. Kane, Jacquie. Head of Marketing Interview. Personal interview. 05 Oct. 2010. 2. Dang, Stacey. Admission Director Interview. Personal interview. 04 Oct. 2010. 15 INTRODUCTION Shanghai has about approximately 48 international schools. They are different in many ways, so most of customers choose the school that would fit their interest the most. In order to reach the goal of this essay, I narrow the market down and concentrate on a sub-market which is â€Å"secondary school market (from year 7-13, or grade 6 12) † as a representation of the international school market in Shanghai. This reduces the number of variables I must consider, in terms of type of consumer, school facilities, enrollment (because for example, some school only have kindergarden), and help me focus on my research. From general information about international school in Shanghai, I predict that it is an Oligopoly market. The central assumption of the theory of Oligopoly is the â€Å"restriction of entry into the market and firm interdependence†, I will respond to my research question â€Å"To what extend does the international school market in Shanghai fit the market structure of Oligopoly? by looking at the components of this assumptions and its implications with regard to 12 international schools in Shanghai: Shanghai American School, British International School Shanghai, Yew Chung International School of Shanghai, Shanghai Community International School, Shanghai Singapore International School, Dulwich College, Shanghai, Concordia International School Shanghai, Western internation al school shanghai, Shanghai Livingston American school, Shanghai Rego International School, Oxford International College Shanghai and Shanghai United School Why I chose this topic: There are many foreigners in Shanghai since it is an international city. Therefore, there are many firms who could see the way to make a profit from it, so there are many schools for people who hold oversea passports. Since I am also a foreigner and also in an international school which is Dulwich College Shanghai, I became interested in how well known my school is. What type of market my school is in, and are there a lot of other international schools out there? What are they? and is the market competitive. Therefore, to what extend does the international school market in Shanghai fit the market structure of Oligopoly? is a topic that interest me greatly and it is related to the work done in my economic course. 1 APPROACH In accessing the extend to which one of the four market structure fit the international school market in Shanghai, I will outline the assumptions and implications of the Oligopoly market. I will examine both the general characteristics of international schools in Shanghai and the behavior of current existing schools. Primary and Secondary research will be made to answer the questions of my extended essay. I will interview my school Marketing Director and Admission Director to find out information about how school behave and extra information about enrollment of schools. I will also observe and look for evidence to concepts prove my selling activities information which are school magazine and leaflet. Textbooks and internet articles are my secondary sources where I can obtain the content of the relevant theory and definition. 2 TABLE OF CONTENTS INTRODUCTION1 APPROACH TO THE QUESTION2 OLIGOPOLY3 Assumptions of the Model3 i) Number and size of firms 4 ii) Barriers to entry4 iii) Product differentiation 5 iv) Control over price 5 v) Selling activities 5 vi) Nature of demand 6 Implications of the Theory6 i) Profit Maximization 6 i) Interdependence 7 ANALYSIS i) Number of firm dominate the market9 ii) High barrier to entry the market 9 iii) Product differentiation 11 iv) Control over price 11 v) Selling activities 12 vi) Nature of demand 13 CONCLUSION 13 BIBLIOGRAPHY 15 APPENDICES 16 As shown in the diagram 2, Profit maximization is where MC = MR. â€Å"The profit-maximizing output is Q and the price is P. The profit per unit of producing Q is the different between AR and AC. Thus the profit per unit is a b. Since Q units are produced, the total abnormal profit is the shaded area. Whether abnormal profit is made will depend upon the position of the AC curve. † (Blink, Dorton, p. 93) b a