122 interaction, in which the public estates act as a leader and exert some degree of market
power, while the private companies act as a follower and acts as a price taker.
Market power of the public estates in the Indonesian CPO industry might stem from at least two sources. First is the requirement of high investment, which may create some
barriers to entry. It was estimated that US 2,500–3,500 per ha would be needed for developing a new plantation and US 5 million would be required to build a CPO mill.
On average, the size of an individual plantation is approximately 10,000–25,000 ha, and it is mostly part of larger plantation estates ranging from 100,000 to 600,000 ha. In 1986–
1996, such entry barriers were successfully eliminated by providing the potential entrants with some concessionary credits. On average, each of the entrants borrowed about 77 per
cent of the total establishment cost of the plantation, leading to an increase in the oil palm plantation by almost seven-fold Casson 2000; Potter and Lee in van Gelder 2004, p. 22;
Wakker 2004, p. 10. Second is the existence of trade associations such as the Joint Marketing Office. Clarke 1983 suggests that such associations could facilitate collusion
by allowing oligopolists to homogenise their perceptions of both the market state and other firms’ information.
5.5 Welfare analysis
The market power indices
i
v which is estimated to be more than -1 indicates that market
price is higher than firms’ marginal costs. To test this, three different scenarios reflecting three different conditions in the analysis period were simulated. Given two
dummy variables, referring to the economic crisis and the concessionary credits, the periods of analysis can be divided into period one of 1969-1985, in which
1 2
D D
= =
; period two of 1986-1996, in which
1
D =
and
2
1 D
= ; and period three of 1997-2003, in
which
1
1 D
= and
2
D =
.
Universitas Sumatera Utara
123 Using the first scenario, in which
1 2
D D
= =
, which implies no economic crisis and concessionary credits, the adjustment system can be re-written as
Equation 5.6
1 1 1
2
0.45 0.90 0.05
t t
t
q q
q
+
= +
+
2 1 1
2
0.31 0.25 0.70
t t
t
q q
q
+
= +
+
Given the results of demand function and adjustment system estimations, the difference between the subsidised and competitive prices faced by the public estates will be
Equation 5.7
1 2
0.00071 0.003233 0.000078
s c
t t
t t
p p
q q
− = −
− −
and that faced by the private companies will be
Equation 5.8
1 2
0.00025 0.0002 0.001515
s c
t t
t t
p p
q q
− = −
− −
The relationship between
1
t
q and
2
t
q is obtained by combining Equations 5.7 and 5.8
Equation 5.9
1 2
0.151665 0.4727
t t
q q
= −
Substituting this into Equations 5.7 and 5.8 gives
Equation 5.10
2
0.00120 0.001450
s c
t t
t
p p
q −
= − +
and
Equation 5.11
2
0.00028 0.0014205
s c
t t
t
p p
q −
= − −
Finally, combining Equations 5.10 and 5.11 gives
2
0.32
t
q =
.
Universitas Sumatera Utara
124 Due to the lack of subsidy data, market price data are not the net price data and could be
treated as the subsidised price, hence the average price p was used as an approximation
of
s t
p
see Figure 1. Plug
128120.97 p
=
either into Equation 5.10 or Equation 5.11, to get the competitive price
128121
c t
p =
.
Following the same steps as in scenario 1, gives the same results for the competitive price in scenarios two and three. Therefore, it could
be concluded that the competitive price
c t
p
is likely to be higher than p .
5.6 Concluding comments
