PUdaily, Shanghai– As a rookie in the industry, I often hear from predecessors that the MDI market is dominated by oligarchs. But what are the features of an oligopoly market? Driven by curiosity, I specially referred to relevant books. Next, some of the points in the books will be reviewed and presented as below.
First, we offer the definition of some typical market forms in economics:
(1). Perfect competition: There are many sellers of homogeneous products in the market. No seller or buyer is able to control the price. The barrier to entry is low and resources can be transferred from one user to another freely.
(2). Monopolistic competition (also known as imperfect competition): there are many manufacturers selling similar but not identical products in the market.
(3). Oligopoly market: a market structure in which there are only a few sellers offering products with similar or identical structure.
(4). Complete monopoly: there is only one company selling the products in the market, and there is no similar substitutes for its products.
It is obvious that the MDI market is an oligopoly one because it has the features of an oligopoly market:
(1). There are only a few manufacturers in the market, each of which has a significant impact on the market. Currently, there are only 7 major MDI manufacturers in the world, including Wanhua Chemical,BASF, Covestro, Huntsman, Dow Chemical, Tosoh and Kumho Mitsui Chemicals.
(2). The barriers to entry, technical, capital or other aspects, are high. For the production of MDI, the technical requirements are strict, and the industrial chain is long. Therefore, the technical and capital barriers are high.
(3). The sellers offer products with similar or identical structure. That is, their products are highly replaceable.
Therefore, the key feature of such a market is the conflict between cooperation and seeking self-interest. Specifically, the profits of any one company in oligopoly market depend not only on how many products it produces, but also on how many products other companies produce. If the oligarchs work together and act like a monopolist—producing a small number of products and charge a price that is higher than the marginal cost, the best situation would be achieved. However, because each oligarch only cares about its own profits (and because of legal restraints), it is hard for the alliance to maintain their cooperation. So in general, the result is a oligopoly price that is lower than the monopoly price while higher than the competitive price.
Finally, is oligopoly market a market structure that favors or hampers the development of the industry? According to The Logic of the Market, a book written by Zhang Weiying, a famous economist, he has a tendency toward believing that oligarchy competition is a market structure that is most suitable for innovation. A well-functioning market is often dominated by a small number of branded companies. Increased industry concentration is often accompanied by rapid increases in output and sharp falls in prices, just like what we’ve seen in the automotive, computer, mobile phone industries. This reminds me of the massive investment in technological innovation made by Wanhua and BASF. From this perspective, the oligopoly market is a market structure conducive to the development of the industry.