Chinese Wine Market Analysis

In China, three companies: Great Wall, Changyu and Dynasty control the majority of domestic wine market. According to a report from China Wine Industry Association (CWIA) in 2009, Great Wall controlled 21.24% share followed by 20.19% from Changyu Company and the third was Dynasty which got 10.67% share (China.com, 2010). As it revealed, three wineries dominated 52.1% market share. This market structure can be defined as oligopoly. The initial feature of an oligopolistic market is there are few firms existing in market and total share they dominated is more than 50%. When three wineries reach an agreement to refrain from competition in some Chinese provinces, they will form Cartel which acts as monopoly and achieve monopolistic outcome. However, wine market is still under oligopoly market structure. This essay will firstly illustrate the key features of oligopoly market and then analyses the market structure after three firms collude together.

Great Wall, Changyu and Dynasty share more than half of domestic wine market. According to CWIA, the total share of three companies was 52.1% and their total revenue ratio was up to 67% .The rest of domestic wine market was dominated by other 50 wine companies. Hence, Chinese domestic wine market structure is an oligopolistic market defined as ‘a market structure with only a few sellers, each offering similar or identical products' (Mankiw, 2009:346). Oligopoly has several features distinguished it from monopoly and perfect competition. The first essence of oligopoly is that there are only few sellers in the market. The reasons generating this situation are listed below illustrated by the example of domestic wine market: Initially, oligopoly mostly occurs in a market with limitation in aspects of raw material, technology and capital. In the process of wine production, grape is the most essential part. Admirable grapes merely can be planted in certain areas which lie in north latitude 30-45 of China with sloping land, abundant sunshine, plenty water and optimum temperature(Li, S.H., 2000) Because of the strict limitation in raw material growing, large firms can take charge of sources of raw material. If a firm wants to enter in wine market, it must find another exclusive producing area with large amount of money in research and development. Secondly, original firms will integrate together to reject a new firm by the means of political convention or lower-price strategy.

The second feature is that oligopolists are price setters which are defined as large companies which are able to dictate price in the industry. In perfect competition market, both consumers and suppliers are price taker because this structure has a large amount of buyers and suppliers and the goods to be sold by different suppliers are largely identical. Hence, both sides have to accept the price the market determines. Unlike perfect competition market, there are only few firms in oligopolistic market. As a result firms have competitors to some extent but do not face so much competition that they are price takers (Mankiw, 2009). In Chinese wine market, three main suppliers mainly control market price, for example, the inferior one would sale at 30-40 RMB and the top-notch wine over 2000 RMB. This price just has slightly difference between three firms.

The third character of oligopoly is a high entry barrier because of economic scale of market. Production scale is restricted by present market scale. A relatively small market will get a high average cost when there are a lot of competitors. When an enterprise wants to join in, it must undertake high average cost and form a large production scale at the beginning in order to compete with existing ones. In China, most people are accustomed to white spirit and beer and wine mostly appears in superior restaurants. At present, domestic wine market is relatively small to contain many suppliers. In another word, domestic wine market is already saturated.

The forth point of an oligopolistic market is interdependence (Bernheim and Whinston, 2008). Since there are few sellers in the market thus the actions of any one seller in the market will make a great impact on the market. So firms have to behave strategically. An oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. For example, in October 2010, against the background of increasing production cost, wretched climate and fierce competition from foreign brands, Great Wall firstly raised its price by 10% at the beginning of month and Changyu took the same action subsequently, just one day afterwards.

If three oligopolists make an agreement to refrain agreement in some Chinese provinces, they are still under the oligopoly market structure but behave like a monopoly in the market. Such an agreement among firms over production and price is called collusion and the group of firms acting unison is called a Cartel. Once a Cartel is formed, the market is in