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Part - IV

What does division of area mean?

All the ground water extraction equipments have their pre-specified capacities that essentially translate and define their maximum command area within which the equipment can supply ground water. In simple terms, if it is considered that the equipment is fixed at the origin of an imaginary circle, then the circle is its command area. The sellers need to divide their area of operation simply because their equipments' command areas overlap with each other. This means that an oligopolistic market is in existence where firms (the investors in ground water extraction equipments or the sellers of ground water - both are synonyms here) are operating with under utilization of capacity within collusion.

Sunk costs

In this market of ground water irrigation, sunk costs remain in two forms: -

• Investment in high capacity machines and equipments. The higher the capacity the more the economies in later stages.

• Electricity costs - Investors have to bear the cost for electricity while setting up the equipments. The reason for such a burden on the investors is specifically because of the location of the equipments from the nearest transmission point. The respective parties (investors) will have to make arrangements to set up the poles and wires for the transmission of electricity.

Barriers to entry

There exist associations (informal) for the investors in such a market and there is already a collusive economy in operation. Any new investor in the market would have to comply with the rules and regulations as set by the association and likewise enter into the collusive system as an automatic phenomenon. It has to be noted, that the associations are localized and the specific investor would have to negotiate with the respective association of his locality.

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* Contributed by: -
Riddhi Dutta,
MBA Finance, Leeds University Business School, UK,
Sourav Dey,
MA Economics, Jadavpur University, Kolkata, India.