31 In summary, since the distribution of the concessionary credits in 1986-1996, the CPO
industry appears to be more concentrated and vertically integrated. This might stem from the high investment requirement for establishing new plantations, mills or refineries.
More recent entrants face even higher costs to enter because concessionary credits are no longer available, and hence the incumbents earn persistently higher profits than the
potential entrant. The increase in market share may provide the incumbents with an ability to influence market price. The incumbents also appear to be more vertically
integrated—from oil palm plantations to CPO mills and cooking oil refineries—creating a further barrier to the new entrants. In addition, having a leeway to sell outputs in both
the domestic and international markets, the CPO might have more ability to influence the domestic market price, hence exert some degree of market power
2.4 Concluding comments
The CPO industry is an important sector in the Indonesian economy. The structure of the industry has undergone a number of changes, becoming more concentrated and vertically
integrated. This condition can increase firm efficiency and profit through economies of scale, leading to an increase in national income. However, the highly concentrated and
integrated market creates some barriers for new entrants; while at the same time may provide market power for the incumbents.
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Chapter 3 Market Power Models: A Review
The previous chapter illustrates that the Indonesian palm oil industry has an oligopolistic duopolistic market structure. Unlike competitive and monopolistic markets, there is no
single general model for an oligopolistic duopolistic market. Each oligopoly duopoly model focuses on certain aspects of the case being analysed to answer a particular set of
the research questions. Therefore, in order to identify the most suitable model to the Indonesian palm oil industry, different models need to be explored. In comparing these
models, this chapter will focus on one main feature that needs to be captured in each one of them, which is the ability of the oligopolists duopolists to respond to their rivals’
actions Gollop and Roberts 1979.
Specifically, this chapter is organised as follows. Section 3.1 illustrates the idea of market power and its well-known measure, the Lerner index. Sections 3.2 and 3.3 explore
models that have been developed to measure market power, using the structure–conduct– performance SCP and the new empirical industrial organization NEIO approaches,
respectively. The first approach is explored in Section 3.2, including related critiques. The second approach, covering static and dynamic models, is then discussed in section
3.3. The static models are grouped into the comparative static and conjectural variations models; the discussion is focused more on the conjectural variations models, as they
appear to have been broadly used in previous studies. The dynamic models cover the repeated-game and state-space game models. Each has different assumptions,
determining the appropriateness of its application to certain cases. Finally, in section 3.4, some concluding comments are presented.
3.1 Market power
One of the main features of a competitive market is that firms behave as price takers and sell their output at prices equal to marginal costs. In an imperfectly competitive market,
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