COMPETITIVE DYNAMICS MODEL Industry-Based Perspective

The basis of industry-based perspective using Michael Porter’s Five Forces. Here it focus on the rivalry among existing firms in the industry. Due to competition leading to overwhelming effect for the industry, therefore the firms may resort to collusion to reduce the competition.

COLLUSION A. Collusion refers to collective attempts to reduce competition. There is 2 types: 1.Tacit collusion refers to indirect initiative by firms to reduce competition. It occurs when two or more firms agree to play a certain strategy without saying so. Example Maxis and Digi price war in 2005.

This price war hurts the firms revenue. Without announcing publicly, maxis stop the price war by not launching any reduction price of starter pack. Therefore both firms is using tacit collusion.

Explicit collusion refers to direct move by firm to reduce competition. This occurs where industry players directly negotiate on matters pertaining output, pricing and divide market to reduce competition. Explicit collusion is a form of cooperation which may lead to the formation of a cartel. Cartel is an entity consists of existing industry players who agree to fix output and pricing to safeguard market. Cartel e.g. member countries of Organization of the Petroleum Exporting Countries (OPEC) or known as “the seven sisters”. Industry-Based Perspective

Explicit Collusion The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization. Currently, the Organization has a total of 12 Member Countries. OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

COMPETITIVE DYNAMICS MODEL Collusion Possible Collusion Difficult (Competition Likely)  Few firms (high concentration)  Existence of an industry price leader  Homogenous products  Stability of demand, supply, and technology  High-frequency, low-value orders  Friendly social relationships among rival managers  High entry barriers  High market commonality (mutual forbearance)  Many firms (low concentration)  No industry price leader  Heterogeneous products  Rapidly growing demand, supply and technology  Low-frequency, high-value orders  Distant social relationships among rival managers  Low entry barriers  Lack of market commonality (no mutual forbearance)

Industry-Based Perspective B.Prison’s Dilemma Industry key players may agree to set pricing. However, opportunities to maximize profit through price-cutting are luring which may entice one party to dishonour their agreement. This is called Prison’s Dilemma.