FINAL PAPER

Economics for Business

Case Study:
Oligopoly in Indonesian Cement Industry
By:
Group II
Ahmad Syakbani
Ari Susilo Nugroho
Primus Waskito Jati Widodo
Nurul Baiti
Indra Lesmana

BRIEF CONTENTS
CHAPTER I: PREFACE...... 2
1.1. Background ..... 2
1.2 Identification Problem....................... 3
CHAPTER II: BASIC CONCEPT AND CHARACTERISTIC .............................. 4
2.1 Basic Concept of Oligopoly .................................. 4
2.2 Models of Oligopoly Competition ........................................ 4
2.2 The Advantages and Disadvantages of Oligopoly Competition ....................................... 5
CHAPTER III: ANALYSIS ..................................................................................... 6
3.1 Oligopoly of Indonesian Cement Industry .................................................................... 6

3.2 Competition in Indonesian Cement Industry ................................................................ 9

3.3 Pricing Strategy in Oligopoly ......................................................................................... 10
3.4 Government Policy .......................................................................................................... 11
CHAPTER IV: CONCLUSION AND RECOMMENDATION ............................... 13
4.1 Conclusion .................................................................................................................. 13
4.2 Recommendation ........................................................................................................ 13
REFERENCES .......................................................................................................... 14

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CHAPTER I
PREFACE
1.1 Background
Cement is a strategic industry in Indonesia as this industry is a feeder for construction,
housing, and infrastructure sectors, which keep growing in Indonesia. For this reason, Indonesian
government set up the first cement plant in 1957 known as Semen Gresik and the next
installation was Semen Tonasa in 1960. Totally, in 1970 Indonesia had three cement plants
located in West Sumatra, East Java, and South Sulawesi. As the rapid growth of this country at
that time, the new cement plants were set up between 1970-1980 by private companies such as
Semen Nusantara, Semen Cibinong (now Holcim Indonesia), Indocement, and Semen Bosowa.
The cement production is divided per region, such as Semen Tonasa, Semen Bosowa, and Semen
Kupang for East Indonesia; Semen Gresik for Java island; and Semen Padang for Sumatra island.
In 2011-2012, Indonesia cement industry posted double-digit growth, even it grew
slightly below national economic growth in 2013. But overall, there is excess between the total
capacity of ASEAN cement industry and the cement consumption. During 2013, the total
installed capacity was 256,35 million ton while the consumption was 190,45 million ton,
resulting 65,9 million ton excess. Thailand and Vietnam are the countries with the big production
excess, 27,6 million ton and 29,5 million ton respectively. Consequently, these countries will be
more aggressive in seeking export markets. Some countries such as Myanmar, Laos, Cambodia,
Singapore, and Malaysia, which are geographically located near Thailand and Vietnam, totally
need 0,4 million ton extra of cement supply. Up to this point, the total unabsorbed excess of
Thailand and Vietnam cement production is 56,7 million ton. Due to the distance between
Vietnam and Indonesia, Vietnam aggressively sends its cement excess to Indonesia.
In 2013, Indonesia explored 575,000 tons of cement and clinker (source: Indonesian
Cement Association) which strengthened the supply of cement in domestic market to be more
than enough. However, in order to support the future growth of cement investment and to
facilitate the business competition climate, Indonesian government allows this industry to import
clinker for cement milling in Indonesia. Indonesian Cement Association data also informs that in
2012, total cement consumption in Indonesia reached 54,96 million ton.
The current Indonesia cement industry is considered as an oligopoly since this market is
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dominated by only few producers whereby each has control over the market in industries with
high level of market concentration. The big three Indonesian cement manufacturers are PT
Semen Indonesia (formerly Semen Gresik) (43.8%), Indocement (30.6%), and Holcim Indonesia
(16%). By having 3 dominant producers to control 90% market, it is obvious that cement market
in Indonesia is an oligopolistic market structure so there is behavioral tendency, which adjusts to
each other between cement producers.
This paper is aimed at studying the oligopolistic market in Indonesia cement industry as
well as its competition pattern and its effects.
1.2 Problems Identification
This paper discusses some issues in Indonesia cement industry as follows:
a.
b.
c.
d.
e.

The oligopolistic market structure of Indonesia cement industry and its competition pattern.
The effects of oligopolistic market in the Indonesia cement industry competition.
The reasons why some cement producers fail to enter the oligopolistic market competition
The pricing strategy in oligopoly market of cement industry.
The disadvantages of oligopoly for cement consumers.

CHAPTER II
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BASIC CONCEPT AND CHARACTERISTICS

2.1 Basic Concept of Oligopoly
Oligopoly is a market structure in which there are only few firms, each of which is large
relative to the total industry (Prince, Baye. 2013). Generally the amount of company more than
two but less than ten. An oligopoly composed of only two firms is called duopoly. The product
the firms offer may be either identically (as in a perfectly competitive market or differentiated (as
in a monopoly competitive market).
Oligopoly requires strategic thinking, unlike perfect competition, monopoly, and
monopolistic competition. Under perfect competition, a company faces a well-defined demand
curve for its output, and should choose the quantity where Marginal Revenue (MR) = Marginal
Cost (MC). The company does not worry about how other company will react, because either the
company negligibly small, or already a monopoly. But under oligopoly competition, a company
is big enough to affect the market. The company must responds to his rivals choices, but the
rivals are responding to companys choices. The techniques of game theory are used to solve for
the equilibrium of an oligopoly market. Its technique often to analyze interdependent behavior
among oligopoly competition, and to illustrate how the choices between two players affect the
outcoes of a game.
Companies in an oligopoly competition attain and retain market control through barriers
to entry. The most common barriers to entry are patents, network effects, resource ownership,
government regulation, high set-up costs, and brand name recognition. Each of those criteria
makes it extremely difficult, if not impossible, for potential firms to enter an industry.
2.2 Models of Oligopoly Competition
Market Oligopoly is a form of interaction between demand and supply where there are
several companies that dominate the entire request. There are four models in oligopoly
competition; (Prince, Baye. 2013)
a. Sweezy Oligopoly
- Companies produce differentiated products.
- Each company believes rivals will cut their prices in response to a price reuction but will
not raise their prices in responce to a price increase.

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b. Cournot Oligopoly
- Companies produce either differentiated or homogeneous products.
- Each company believes rivals will hold their output constant if it change its output.
c. Stackelberg Oligopoly
- Companies produce either differentiated or homogeneous products.
- A single company (the leader) chooses an output before rivals select their outputs.
- All the companies (the followers) take the leaders output as given and select outputs that
maximize profits given the leaders output.
d. Bertrand Oligopoly
- Companies produce identical products at a constant marginal cost.
- Companies compete in price and react optimally to competitors prices.
- Consumers have perfect information and there are no transaction cost.
2.3 The Advantages and Disadvantages of Oligopoly Competition
The two most noted advantages from oligopoly are developing product innovation adn
economies of scales. Of the four markets structures, oligopoly is the one most likely to develop
the innovation that advance the level of technology, expand production capabilities, promote
economic growth and lead to higher standards. Technology development and innovation are
encouraged in order to maximize the efficiency of management is intended that the company
enjoys profits above normal and the company considered that compete in technology and
innovation is more likely than at competing in the field of price.
Companies are also able to take advantage of economies of scale that reuse production
costs and prices. As large firms, they can mass produce at low average cost. Its competitions
among the company could give benefits to consumers in terms of price and quality of goods.
Besides the disadvantages experienced by newcomers, namely the barriers and high startup cost. There is the possibility of collusion between the companies in the market that can form
monopolies or cartels that harm society. Cartel is a group of independent producers that aims to
set prices for the supply limit competition.

CHAPTER III
ANALYSIS

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3.1 Oligopoly in Indonesian Cement Industry

In modern era, cement is strategic commodity for Indonesia. Increasing in Indonesian
property sector leads cements as absolute goods in construction industry. Furthermore, expansion
of Indonesia Infrastructure Project, named MP3EI, will expand the cement industry in the next
few years. The infrastructure project likely contributes about 25% to 30% of the total
consumption of cement. The rest of the consumption percentage dominates for residential and
the other properties construction. In connection, the government must anticipate impeding
scarcity (shortage) of cement to meet domestic demand.
Table 1: Production Capacity of Indonesian Cement Manufacturer

According from the statistic data of National Cement in 2013, production capacity of
domestic cement amounted 65.8 million tons per year, but the consumption rate of domestic
cement amounted 61 millions tons per year. This consumption rate expected to rise between 6%
to 8% every year. From those data, there will be a slight surplus on domestic cement. However, if
there is no new factories expansion or the new investment in cement industry to increase
production capacity, Indonesia will experience shortages of cement. For that, government
intervention plays great role in encouraging new investment in Indonesian cement industry. It
can also avoid an excessive import in domestic cement market. Furthermore, Indonesian cement
industry can be categorized as an oligopoly market.
The first characteristic of oligopoly market is the homogenous-marketed product. Cement
in general is a similar product and can be categorized as generic product for construction.
Especially in Indonesia, every cement product from different company must label with SNI
(Standar Nasional Indonesia) as a part of Indonesias law regulation. The only difference
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between cement products is the branding itself. In terms of quality, every cement product
depends solely in application. If you want strong quality of concrete, you need a bigger
proportion of cement other than water and aggregate.
Second characteristic is the number of buyers in the market. Developing country can be
seen from the indication of property sector. Property sector needs cement commodity to start a
construction. In 2013, Indonesian Property Residential Price Index rose by 7.4%. This is the
biggest rose since Bank Indonesia reported its data from 2008. In result, Indonesian cement has
many buyers in the market, especially the residential and infrastructure contractors.
The third characteristic is the barrier to entry the market. In the development of cement
industry in Indonesia, consumers loyalty to specific cement product is very strong. In result,
new product from new players is very difficult to compete with the circulation of strong product.
In addition, very large capital investment must be allocated in order to compete in this industry.
The fourth characteristic is only 2 (two) to 10 (ten) players in the existing industry. There
are only 3 (three) majority players that dominate market share in cement industry in Indonesia,
which are Semen Indonesia (formerly Semen Gresik), Indocement, and Holcim Indonesia. The
other players are Semen Andalas, Semen Baturaja, Semen Bosowa and Semen Kupang. These
players only contribute around 10% of market share in total from cement industry. The only new
player is Semen Merah Putih from Wilmar Group, which began operation in 2011.
According to Stackelbergs Oligopoly Theory, where one firms acts as a leader, and the
other firms act as a follower. A leader company usually has a strong influence and contribution in
the specific industry. This company has an authority to determine the price and the amount of
output produced for its maximum benefit. According to the leaders policy, the followers firms
will apply those authorities in order to survive and achieve maximum benefit in that industry. As
an example, when the leaders raises price of its product, the others will continue to interpret the
market by raising their prices. Actually, oligopoly in Indonesian cement industry is not derived
from the agreement, but only rather the adjustment behavior of each firm in the cement business.
3.2 Competition in Indonesian Cement Industry
Currently, there are less than 10 (ten) firms who dominate cement industry in Indonesian
market, and 1 (one) new player who compete in 2011. Composition of market share in this
industry is as follows:
Semen Indonesia (formerly Semen Gresik Group) controls 43.8 percent;
Indocement controls 30.6 percent;
Holcim Indonesia (formerly Semen Cibinong) controls 16 percent;
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 and, others player dominate 9.6 percent.

According the statistic data above, Semen Indonesia dominates most of the market share
of domestic cement industry, because this company is combination of several cement producers,
which are Semen Gresik, Semen Tonasa, Semen Padang, and Thang Long Cement Vietnam. In
addition, the consolidation of Semen Indonesia comes from Semen Gresik who already have big
market share in the market. Furthermore, this holding company is state-owned company who had
unlimited resources of funding to expand its operation.
Judging from the market share, there are two manufacturers who dominate the market
and can be categorized as a market leader, which are Semen Indonesia and Indocement. There is
a mutually adjusted behavior among cement manufacturer within the industry. According to
Antara News (28 June 2007), this behavior reflected when SGG (Semen Gresik Group) budgeted
funds of US$645 for new factory construction. However, the realization of building new factory
can be likely to occur in 2008 while waiting for stakeholder decisions in next Extraordinary
Stakeholder Meeting. In contrast, Holcim Indonesia decided to postpone the construction of new
cement factory in Tuban, East Java due to optimization and efficiencies of the current factories.
This company focused in developing an alternative energy such as palm kernel shell in the next
few years. In addition, Indocement plans to increase its production capacity with setting up a
new factory in 2009. But, the company prefers to optimize the utility of its current factory than
building a new factory. The reason behind of these two firms is quite reasonable, because the
utilization of current factory of Holcim and Indocement are below 10% of SGG. In other words,
cement manufactures strive to maintain balance between supply and demand that leads in
maintain their profit levels, respectively.
Based on production capacity in 2010, Indocement has the biggest production capacity
amounting 18.6 million tons/year. The second rank is owned by SGG amounting 9.1 million
tons/year. While, the third rank owned by Holcim Indonesia amounting 8.3 million tons/year. In
the other hand, Indocement constantly looking for new land for expansion of its production line.
Holcim Indonesia doubled its factories capacity to 3 million ton/year. In the terms of production
capacity, these three cement manufacturer who dominate the market share has large production
capacity compared to others.
In terms of ownership of foreign companies who owned cement manufacturers,
Heidelberger controls 60.6% of shares portion in Indocement, Holcim owned 68.11% shares in
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Semen Cibinong (now Semen Holcim Indonesia) and Lafarge controls 71.7% shares in Semen
Andalas. Meanwhile, the only manufacturer controlled by Indonesian government is Semen
Indonesia. According to KPPU, there is several indication of international cartel in cement
industry in Indonesia because the price of domestic cement relatively higher than other countries.
Actually, the high price of cement in domestic market is due to multi-layered chain length such
as distributor, sub-distributor, retailer, and customer. Luckily, Indonesian government who owned
Semen Indonesia still can controls price of domestic cement.
This oligopoly market conditions makes cement manufacturers regularly meet and
discuss about pricing of their product. Oligopoly on this sector always favorable on cement
producers, because their product will always sold regarding of the price. On the other hand, the
disadvantages will be on the consumers and small capacity producers side. If the small capacity
producers cant follow the action of big player, so this firms can suffer big financial loses and
could lead to bankruptcy.
3.3 Pricing Strategy in Oligopoly
Pricing strategy is an important thing in the market. Producer must start from determining
the price for a new product to re-determine the price of the old product. In addition,
manufacturers also need to have a good strategy in marketing their products in order to take
profit in the market. A company needs to know what methods should be used in determining the
price of its competitors, because of its affects whether these companies follow the rules in the
industry or even deviate from the rules of the industry.
In oligopoly markets, changes in prices by one member of the oligopoly will cause a
reaction from the other members, because the changes in price, some members will lose its
market. So, most of the firms in the oligopoly market avoid this price changes.
In determining the price, a producer must optimize the benefits. In order to maximize
benefit, a company needs to adjust its cost of production equal to last sales revenue. (MR = MC).
If MR> MC, then just by increasing the number of sales will be able to increase profits, but if
MR<MC, then the losses can be reduced by reducing production quantities.
Most of the pricing decisions taken in a market environment characterized by pure
competition or monopoly. In an imperfectly competitive market, producers who acts as market
leader is responsible for the pricing and he must have a clear view of the competition. If a
producer knows the pricing objectives, it means that it is ready to set a base price of a new
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product in the market. The price for a new product that has been set high with the goal to win the
market, where the demand curve is relatively inelastic when the manufacturer requires a quick
profit.
Pricing objectives are important for the company because of:
a. Pricing is used to achieve a target return on investment,
b. The balance between price and margin,
c. Pricing is used to aim to reach a target market share (mastery of the market),
d. Pricing to tackle and prevent competition, and
e. Pricing aims to maximize profits.
Price competition (price war) in oligopoly markets could result in a sharp drop in prices,
so some companies that are not competitive will be out of the industry. It is not acceptable for the
manufacturer, then to prevent it, companies in oligopoly should cooperate with the government
to set a minimum price (ceiling price) above the marginal cost. As example, cement industry will
compete with the quality, design and service. With the increase of this service may be able to
make the price of cement can be increased and exceeds the minimum price. So the price ceiling
can make the price go up because of the non-price competition.
3.4 Government Policy
Government functions as a regulator of public service provision and development have a
responsibility towards the economy of a country, because it is influenced by policies or rules
made and applied to businesses in various industries. In the cement industry, government should
implement UU No. 5/1999 on Larangan Praktek Monopoli dan Persaingan Usaha Tidak Sehat.
According to Article 4 (2) of UU No. 5/1999, businesses can be assumed jointly controlling the
production and or marketing of goods or services, if there are two or three companies or a group
of companies control over 75% market share. According to Indonesian Cement Association
(ASI) in 2008, three major cement producers controlled approximately 89.6% of domestic
cement market, which are Semen Gresik Group, Indocement, and Holcim Indonesia. With this
current condition, these companies have potential for jointly controlling the production.

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CHAPTER IV
CONCLUSION AND RECOMENDATION
4.1 Conclusion
Indonesian cement manufacturers who compete in the domestic market has some
following characteristic:
1. The homogenous-marketed product;
2. The barrier to entry the market related to consumers loyalty of well-known brand.
3. Only three (3) majority players that dominate market share, which are Semen Indonesia,
Indocement, and Holcim Indonesia.
Those three major cement producers controlled more than 85% of cement domestic
market, which makes them have the potential for jointly controlling the production and setting

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the price. This current market conditions makes disadvantages for consumers and small capacity
producers. Consumers can be charged at higher prices and the small capacity producers who
cant follow the action of big player can suffer big financial losses.
4.2 Recomendation
Indonesian cement industry can be indicated as an oligopoly market. Therefore, there is a
chance of cartel behavior to occur. This behavior could harm the domestic customer.
Cement industry in Indonesia can be categorized as oligopoly market whereas there is
less than ten companies compete in the industry. In addition, cement production in Indonesia
dominated by three large producers (Semen Indonesia, Indocement and Holcim) who controls
more than 89% of the cement market share.
This can lead to the formation of the price cartel between cement producers which can
cause it leads to production of cement that too low and prices are too high, this behavior can
harm consumers in Indonesia and increase barriers to entry for new producers who want to enter
the cement industry
The government has a very important role as regulator of development and the provision
of public services, as well as having responsibility for the community's economic growth and
consumer protection government can apply some rules or policies that may be represented by the
KPPU.
Commissions duty is conducting surveillance and monitoring in order to prevent price
formation set up by cement manufacturers based on UU No. 5 / 1999 on Larangan Praktek
Monopoli dan Persaingan Usaha Tidak Sehat. An indication of price formation can be seen
when there is disparity between the prices of cement manufacturers which have uniform prices,
is not affected by supply-demand balance prevailing in other markets, the increase in prices when
demand increases could also indicated the formation of prices by the cartel.
After conducting the monitoring process and ensuring no cartel happens in the domestic
market, Commission could release the price of cement in the domestic market according to
equilibrium price at that time. In order to support local cement producers, government can
intervene by providing regulations and infrastructure for this industry
Cement producers can create an association in order to prevent cartel in cement industry.
This association can inform government if there is formation of a cartel by the major
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manufacturers.

REFERENCES
Baye, Michael R. Managerial Economics and Business Strategy. 8th Ed. McGraw-Hill,
International Edition. 2013
http://www.semenindonesia.com/page/read/semen-indonesia-pertahankan-pasar-153
http://www.bumn.go.id/semenindonesia/berita/973/Kontribusi.Industri.Semen.bagi.Pembanguna
n
http://bisnis.liputan6.com/read/789352/semen-indonesia-merajai-pangsa-pasar-penjualan-semendi-indonesia
http://bisnis.news.viva.co.id/news/read/30873-industri_semen_akui_praktik_oligopoli
http://www.hukumonline.com/berita/baca/hol21671/delapan-produsen-semen-terindikasi-kartel

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