Professional Documents
Culture Documents
INDUSTRY
ANALYSIS OF MARKET STRUCTURE
Submitted to:
Dr. Rupamanjari Sinha Ray
Professor in Microeconomics
Management Development Institute, Gurgaon
SUBMITTED BY:
GROUP-5, NMP29,
SECTION - A
Akhilesh Purohit
Arun Saraswat
Dipesh Kumar
Gagandeep Singh Kalra
Nishu Jain
Sanjay Yadav
29NMP06
29NMP15
29NMP24
29NMP27
29NMP41
29NMP50
Acknowledgement
The report is an exploratory study on the Market structure of the Domestic Gas Industry. It
consists of both qualitative as well as quantitative analyses. It includes study of market
structure, HHI values and others analysis of Indian Domestic Gas Industry.
Group-5 (Section A)
2016
NMP-29
MDI Gurgaon
18th June
EXECUTIVE SUMMARY
The report is an exploratory study on the Market Structure of the Domestic Gas Supply
Industry in the Indian Market. It gives an insight in the history of the market, the growth
experienced over the years and the expectations for the future. It also studies the economic
benefits of a growing Domestic Gas sector in the country. The report gives an in depth
analysis of the Indian market for Domestic Gas Supply. It forecasts the growth of market in
India. Through state-wise price comparisons in the country, the report studies the major
factors that drive growth of the industry. It also shows various schemes by the government
that help in growth of this sector.
Table of Content
Contents
Acknowledgement......................................................................................................................2
EXECUTIVE SUMMARY........................................................................................................3
Market Structures.......................................................................................................................6
Perfect Competition.............................................................................................................7
Monopoly...............................................................................................................................8
Why do Monopolies arise?..............................................................................................8
Effects of Monopoly.........................................................................................................8
Monopolistic..........................................................................................................................9
Oligopoly.............................................................................................................................10
The Five Competitive Forces Model.............................................................................10
Introduction of LPG.................................................................................................................11
Natural Gas and Oil Extraction........................................................................................11
Crude Oil Refining.............................................................................................................11
Most Important Property of LPG.....................................................................................11
Sources of LPG...................................................................................................................12
Where to use LPG..............................................................................................................12
LPG In India Overview.....................................................................................................13
Demand: Past & Future.....................................................................................................13
Market Share............................................................................................................................15
Market Growth Rates........................................................................................................16
Major Players.....................................................................................................................16
Measures of Oligopoly.............................................................................................................18
Herfindahl Index (H).........................................................................................................18
Four Firm Concentration Ratios......................................................................................18
LPG Programs in INDIA..........................................................................................................19
Deepam LPG Scheme.........................................................................................................19
Rajiv Gandhi Gramin LPG Vitrak...................................................................................20
STATE/CITY WISE MONTHLY RETAIL SELLING PRICE OF LPG.................................21
PRICES OF LPG CYLINDERS.......................................................................................22
Competitive Environment........................................................................................................23
Business Rivalries...............................................................................................................23
Inter OMC competition.................................................................................................23
Threat from substitutes..................................................................................................24
Cap on LPG cylinders hikes sales of auto LPG, CNG....................................................24
Kerosene Demand to Dip on LPG use, Rural Electrification.........................................25
GOVERMENT NORMS AND REGULATIONS....................................................................27
Direct Cash Transfer via Aadhar Card............................................................................27
Rural Marketing:......................................................................................................................28
Issues....................................................................................................................................28
Challenges...........................................................................................................................28
CONCLUSION........................................................................................................................30
BIBLIOGRAPHY....................................................................................................................31
Market Structures
Type of
Market
Number of
Firms
Freedom of
Entry
Nature of
Product
Implication of
Demand
Curve faced
by firm
Examples
Perfect
Competition
Many
Monopoly
Monopolistic
Oligopoly
One
Many/ Several
Few
Unrestricted
Blocked
Unrestricted
Restricted
Identical
Unique
Differentiated
Horizontal:
Firm is Price
Taker
Firm has
considerable
control over
price
Railways
Downward
Slope, but
relatively
elastic
Restaurants
Differentiated or
Identical
Downward
Slope, relatively
Inelastic
Wheat,
Carrots
Soft Drink
Perfect Competition
Perfect competition is a market structure in which the following five criteria are met:
1) There must be many buyers and many firms, all of whom are small relative to the
market No single consumer or producer buys or sells more than a tiny fraction of the
total output. A producers market share is the fraction of the total industry output
represented by that producers output.
2) The products sold by all the firms in the market must be identical - An industry can be
perfectly competitive only if consumers regard the products of all producers as
equivalent.
3) There must be no barrier to new firms entering the market - There is free entry and
exit into and from an industry when new producers can easily enter into or leave that
industry. This ensures that the number of producers in an industry can adjust to
changing market conditions, and, that producers in an industry cannot artificially keep
other firms out.
The prices in perfectly competitive markets are determined by the interaction of demand and
supply. The actions of any single consumer or any single firm do not affect the market price.
Consumers and firms have to accept the market price if they need to buy/ sell any product in
a perfectly competitive market.
Price(P)
(Demand)
Quantity(Q)
The demand for a good or service produced in a perfectly competitive market will be
downward-sloping, but the demand curve for the output of one firm in a perfectly
competitive market will be a horizontal line at the market price. Firms in perfectly
competitive markets are price takers and will see their sales drop to zero if they attempt to
charge more than the market price.
Monopoly
A monopoly is a firm that is the only seller of a good or service that does not have a close
substitute. A narrow definition of monopoly used by some economists is that a firm has a
monopoly if it can ignore the actions of all other firms. Many economists favor a broader
definition of monopoly. Under the broader definition, a firm has a monopoly if no other firm
are selling a substitute close enough that the firms economic profits are competed away in
the long run. Compared to a competitive market, a monopoly:
Earns a profit.
4) Economies of scale are so large that one firm has natural monopoly.
Effects of Monopoly
1) Monopoly causes a reduction in Consumer Surplus.
2) Monopoly causes an increase in Producer Surplus.
3) Monopoly causes a deadweight loss, which represents a reduction in Economic
Efficiency.
Because monopolies reduce consumer surplus and economic efficiency, most governments
have policies that regulate their behavior. These laws make illegal any attempts to form a
monopoly or to collude.
Monopolistic
A market structure in which barriers to entry are low, and many firms compete by selling
similar, but not identical products. A monopolistic competition is a market structure in which
There is a free entry into and free exit from the industry in long run.
Horizontal: based on a single characteristic but consumers are not clear on quality.
Vertical: based on a single characteristic and consumers are clear on its quality.
The firms can differentiate through marketing which refers to all the activities necessary for
a firm to sell a product to a consumer. They use two marketing tools to differentiate their
products:
Advertisement
Brand Management
As the term monopolistic competition suggests, this market structure combines some
features typical of monopoly with others typical of perfect competition:
Firms in a monopolistically competitive industry have excess capacity: they produce less
than the output at which average total cost is minimized. The higher price consumers pay
because of excess capacity is offset to some extent by the value they receive from greater
diversity. Hence, it is not clear that this is actually a source of inefficiency.
Oligopoly
A market structure in which a small number of interdependent firms compete. Barriers to
entry keep new firms from entering an industry. The three most common barriers to entry
are:
Economies of Scale
An oligopoly is similar to a monopoly, except that rather than one firm, two or more firms
dominate the market. There is no precise upper limit to the number of firms in an oligopoly,
but the number must be low enough that the actions of one firm significantly impact and
influence the others.
Potential Entrants
Threat from new entrants
Suppliers
Bargaining power of
suppliers
Industry Competitors
Competition from existing firms
Buyers
Bargaining power of
buyers
Substitutes
Competition from substitute
goods or services
Introduction of LPG
LPG is defined as a petroleum product composed of any of the following hydrocarbon
mixtures of propane, butanes (normal butane and isobutene) and butylene. Its actually a
mixture of Butane and Propane added in a fixed ratio condensed to a liquid state at normal
temperature by application of pressure in a particular specification.
Sources of LPG
These substances are generally extracted from natural gas or produced as a by-product of the
refining of crude oil. Based on feedstock, there are three types of methods to produce LPG:
1. Crude oil: At Refineries
2. Natural Gas: At Fractionators / Producers
3. Condensate received with Gas: At Fractionators / Producers
ONGC produces LPG from its fractionators at Uran, Hazira,Ankleshwar and Gandhar.
over 50% in the domestic segment currently accounting for 5.67 million tons of the 11.78
million ton per annum market.
2%
7% 2%
Domestic
Commercial
Industrial
Auto
89%
Third largest consumer in domestic sector in the world after China & USA
MnMT
2000-01
7.02
2001-02
7.73
2002-03
8.35
2003-04
9.3
2004-05
10.2
2005-06
11.2
2006-07
12.2
2007-08
13.45
2008-09
14.8
2010-11
16.35
2011-12
18.1
2012-13
19.95
2013-14
23.84
2014-15
26.06
2019-20
40.7
The presence of LPG for cooking purposes is currently limited to Tier-1, Tier-2, and Tier-3
cities, thus leaving a vast untapped market in the form of small towns and villages. The LPG
demand in the country is all set to grow at a CAGR of around 6.5% CAGR during 20122014. With the rising plunge on pollution-free environment, this sector would receive the
required thrust in near future. It is anticipated that the CNG consumption in the country will
grow at a double-digit CAGR growth during 2012-2014. However, CNG infrastructure is at
the nascent stage of development and still requires huge investments to catch-up with the
international standards. Maharashtra has the highest number of LPG customers in the
country followed by Andhra Pradesh and Tamil Nadu. It is expected that the rising
awareness about fuel qualities and gas companies, expansion strategies along with the
supportive government initiatives will further boost the growth of LPG consumers in the
country, especially in the rural areas. Rapid surge in LPG demand and continuously
increasing number of LPG running vehicles have encouraged the government to import LPG
from international markets, particularly from the Middle-Eastern countries.
The LPG being distributed is in 4 cylinder sizes. Domestic Cylinder 5kgand 14.2 kg,
Commercial Cylinder 19kg and Industrial Cylinder 35kg. LPG Domestic customer is
supplied at a subsidized rate and for industrial and commercial rate is market determined.
This difference in pricing scheme often lead to black marketing but companies are now a
days vigilant enough to inhibit this practice. HPCL as a pioneer is including GPS device in
its cylinders to restrain the fraudulent practice.
Market Share
Segment
Share %
Domestic
86
Industrial
10
Other bulk
Share %
10 4
86
Domestic
Industrial
Other bulk
Sector
Share %
Public
96
Private
Share %
4
96
Public
Private
Region
North
30
West
34
East
12
South
24
Share %
24
Share %
30
12
34
North
West
East
South
5.30%
1996-97-2001-02
18.60%
2001-02-2006-07
9.60%
2006-07-2011-12
10.30%
2011-12-2019-20
9.30%
Major Players
There are various companies in India which are in the business of manufacturing the LPG gas
in India. Most of the companies are under the government authority while some of them are
private organizations also. The several LPG manufacturing companies are as follows:
Bharat Petroleum Corporation Limited: it is mainly known as the BPCL. The company is
very large and mainly a state owned company which is having its headquarters at the
Mumbai. The company deals in lubricants, fuels and mainly the LPG gases. They are in the
field of the manufacturing LPG gases from very long time and have listed themselves in the
fortune 500 lists.
GAIL (India) Ltd.: it is a PSU which can be called as the public sector undertaking that is
the government owned organization which is headed by the government that is they have
51%of the share of the firm. The GAIL is having its central office at New Delhi. They have
gas transmission networks and the gas transferring pipelines which has obtained a very good
response in the market due to their very efficient work.
Hindustan Petroleum Corporation Limited: it is mainly known as the HPCL all over the
world. The company is a state owned organization which is mainly involved in the oil
refinery mainly LPG gases.
Indian Oil: it is also known as the Indian oil corporation which the most famous of all the
oil manufacturing organizations in India. The Indian oil is that much largest company in the
India which is having 10 out of 18 oil refineries in India. It is having its head office at Delhi.
The company is the largest in terms of the sales among all the companies in India.
ONGC: the ONGC here stands for the oil and natural gas corporation limited. The company
is also a PSU which is headed by the state and having its head office in the Dehradun. The
company is involved in
exploration
and
Company
the
the
Share (%)
production,
IOC
38
HPC
17
GAIL
13
ONGC
12
BPC
12
Others
Share (%)
8
12
38
12
13
17
IOC
HPC
GAIL
ONGC
BPC
Others
second
largest
gas
Measures of Oligopoly
Herfindahl Index (H): The Herfindahl index (also known as Herfindahl
Hirschman Index, or HHI) is a measure of the size of firms in relation to the industry and an
indicator of the amount of competition among them.It is defined as the sum of the squares of
the market shares of the firms within the industry (sometimes limited to the 50 largest
firms),where the market shares are expressed as fractions. The result is proportional to the
average market share, weighted by market share. As such, it can range from 0 to 1.0, moving
from a huge number of very small firms to a single monopolistic producer. Increases in the
Herfindahl index generally indicate a decrease in competition and an increase of market
power, whereas decreases indicate the opposite. Alternatively, if whole percentages are used,
the index ranges from 0 to 10,000 "points".
H = Sum of the squared market shares of all firms in an industry
Hi = 382 + 172 + 132 + 122 + 122 +82
Hi = 2254
Since HH index 2000 it is an oligopoly market structure.
designed to measure industry concentration, and by inference the degree of market control.
While there are no "absolutes" when it comes to evaluating concentration, common levels
and corresponding four-firm concentration ratios are presented in the exhibit to the right.
CR4 = 38 + 17 + 13 + 12
CR4 = 80
Since CR4 = 80, it shows an oligopoly market structure.
The High Court directed that the scheme be confined only to white cardholders (i.e.
those below Rs 11,000/year/family).
The lists were given to the LPG dealers of the oil companies, who were also expected
to ensure training of the allotted in the use of LPG stoves.
Results in terms of the number of connections allotted: till March 2002,88% of the
urban target and 91% of the rural target had been met (NIRD,2002)
Government is paying the security deposit of Public Sector Oil Companies viz., Hindustan
Petroleum Corporation (HPC), Bharat Petroleum Corporation (BPC) and Indian Oil
Corporation (IOC) for release of LPG connection on behalf of the beneficiaries selected
under this scheme.
This scheme is however halted by current government stating that The rural LPG
selections, under RGGLV, have been kept on hold by the petroleum ministry as it is
contemplating some changes in the guidelines for the selection of dealers.
City
Apr.
May
Current
Prices
Maharashtra
Mumbai
518.00
535.00
535.00
NCT of Delhi
Delhi
509.50
527.50
527.50
Tamil Nadu
Chennai
521.00
538.00
538.00
West Bengal
Kolkata
536.50
554.50
554.50
Madhya Pradesh
Bhopal
556.00
575.50
575.50
Guajrat
Gandhinagar
518.50
544.50
544.50
Goa
Panjim
520.00
538.50
538.50
Chhattisgarh
Raipur
578.00
596.00
596.00
Gujrat
Ahmedabad
501.00
519.50
519.50
Maharashtra
Pune
533.00
550.00
550.00
Silvasa
530.50
550.00
550.00
Daman
524.00
543.50
543.50
Haryana
Ambala
531.00
549.00
549.00
Chandigarh
Chandigarh
530.50
549.00
549.00
Uttarakhand
Dehradun
548.50
568.00
568.00
Rajasthan
Jaipur
498.00
516.50
516.50
Jammu (W)
561.50
580.00
580.00
Srinagar (S)
616.50
635.50
635.50
Uttar Pradesh
Lucknow
545.50
564.50
564.50
Himachal Pradesh
Shimla
566.00
585.50
585.50
Punjab
Jalandhar
558.00
577.50
577.50
Karnataka
Bengaluru
518.50
535.50
535.50
Telangana
Hyderabad
573.50
592.50
592.50
Andhra Pradesh
Vizag
540.50
559.50
559.50
Kerala
Thiruvananthapuram
529.50
548.00
548.00
Puducherry
Puducherry
521.00
539.50
539.50
Odisha
Bhubaneshwar
543.00
561.00
561.00
Jharkhand
Ranchi
581.50
600.00
600.00
Bihar
Patna
606.00
625.50
625.50
Assam
Guwahati
562.00
589.00
589.00
Nagaland
Kohima
560.00
579.50
579.50
Indane
419.18
Bharatgas
419.15
HP Gas
419
Competitive Environment
Business Rivalries
There are mainly two categories of competitions existing in Indian LPG industry. They are
as follows:
Inter OMC competition
Threat from substitutes
Inter OMC competition
OMCs is Indian is seen as the facilitator to the nations development. Hence, apart from
churning profit for sustainable existence and growth, it has to operate in accordance with the
nations interest. Thats why OMCs are regulated such that to avoid unwanted friction
among themselves and concentrate their whole energy to nations cause. So, there exists a
special type of competition among the OMCs of India.
In domestic segment, OMC has to sell its product at a price decided by the government. So,
there exists no scope of price war, which leaves the OMCs to compete on market share. But,
to avoid unwanted friction and hence deadweight loss to the society, the regulatory body,
MOPMG tries to maintain the optimum number of dealers in an area. In order to that the
number of dealerships of a company is decided by the committee in accordance to their
market share and presence in the region. Hence, chances of competition for market share in
domestic segment are also very limited.
Though, in industrial segment, with lack of price regulation and better scope for margin
there is an intense competition in the form of:
Price
Service
Promptness in delivery
Hours of catering or working hours
This assumes significance as the government-owned oil marketers such as Indian Oil Corp.
Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd posted losses of
Rs.29,262 crore on account of selling kerosene at below-market prices.
As much as 35% of kerosene channeled through the public distribution system (PDS) is
diverted, according to a study by the National Council of Applied Economic Research
commissioned by the oil ministry. Of this, 18% is used to adulterate diesel.
The total loss from selling fuels below cost last fiscal was Rs.1.44 trillion, of which
Rs.80,935crore was due to diesel. The state-owned retailers are compensated by the
government for selling diesel, kerosene and cooking gas at fixed prices that are significantly
lower than the cost of production.
India subsidizes the prices of most fuels and its annual subsidy bill towards this is expected
to be Rs.1.67 trillion this year. Indias oil import bill increased from Rs.4.09 trillion in 200910 to Rs.7.26 trillion in 2011-12.
According to the 12th five-year Plan paper on energy, a key reform in the petroleum sector
involves kerosene supplies to be progressively reduced considering improved electricity
access provided under RGGVY and LPG connections provided in rural areas.
The total amount of kerosene consumed through PDS was 8.92 million tonnes (mt) in 201415, according to the oil ministry. There are 140 million LPG connections in the country, of
which 99.57% are for domestic use, comprising 14.2kg LPG cylinders, according to official
data.
The LPG customer population covers around 56% of the countrys total.
The government recently raised diesel prices and curbed the supply of subsidized cooking
gas to six cylinders per household per year to pare its subsidy bill.
Rural Marketing
Issues:
Challenges:
People not fully aware of the impact of pollution from traditional fuels
Consumption(%)
Source: www.ruralelec.org
Creating LPG awareness- lack of knowledge about product, its application and safe
handling
Creating cost effective distribution channel- high cost of distribution network in rural
markets hinders growth
Enrolling households through micro finance- cooperative banks and Grameen Seva
Sehkari Mandalis
Educating households
CONCLUSION
As we have seen the market of domestic gas supply in India, it acts as a typical oligopoly.
We have few players in the market selling their product(domestic gas cylinder) at different
prices which are equivalent to other player's price. The application of various measurement
indicators such as Herfindahl Index and Four Firm Concentration Ratios shows the domestic
gas supply market shows a typical oligopoly market structure. The Ministry of Petroleum
and Natural Gas looks after this sector. The study shows that demand of domestic gas is
increasing every year and government is playing an active role to effectively meet this
demand. With policies like Deepam LPG Scheme, Rajiv Gandhi Gramin LPG Vitrak,
government is making sure the supply reaches to even the rural and bpl segment of the
country. There are strict measures taken by the government by issuing Guidelines for
selection of Regular LPG Distributorship and Refill Ceiling and restructuring of LPG
distributorships in order to stop any sort of cartel formation in the market.
The domestic as well as industrial uses of LPG are on the rise and hence the LPG imports
are also seen to be increasing, in order to meet the demands. Many fuel and power
companies are also set to increase their infrastructure as well as supply with respect to LPG.
GAIL and Indian Oil are just the few apart from ONGC. But yes, again and again, the point
worth remembering is that LPG is also a non-renewable source of energy and hence proper
care should be taken not to misuse it.
Domestic as well as commercial connections for LPG are also seen increasing with each
passing year. Yet, there has also been a steady rise in the LPG prices since the demand and
popularity of this clean fuel has also increased manifold.
BIBLIOGRAPHY
1) www.indiastat.com
2) www.petroleum.nic.in
3) Ministry of Oil and Natural Gas
4) http://www.financialexpress.com/article/economy/lpg-subsidy-fixed-atr568-price-to-change-after-march/7233/
5) http://timesofindia.indiatimes.com/business/india-business/ONGC-GAILroped-in-to-sell-LPG/articleshow/958971.cms
6) http://ebharatgas.com/ebharat/
7) https://www.indane.co.in/
8) http://www.hindustanpetroleum.com/LPGHome
9) Microeconomics by Glenn Hubbard