Organizations like big Multinational Corporations do not only rely on micro environmental analyses to help them take rational decisions but also pay heed to macro environmental analyses to help them make strategic decisions as to how to compete strategically to achieve organisational goals. Also most MNCs (Multinational Corporations) also rely on governments’ fiscal policies as well as monetary policies in taking bold economic decision in enhancing their business activities either domestically or globally. According to Macdonald (1999), fiscal policy refers to government policies that are aimed at influencing economic activities through variation in the general level of taxation and government expenditure.
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Market forces affect organizational responses in many ways. Market forces include things such as supply, demand, and marketing to consumers. Market prices depend on levels of supply and demand. These levels rise and fall according to a number of factors, and can have a big impact on the success of a business. The central purpose of economic activity is mainly the production of goods and services with the motive to satisfy the ever-changing needs of consumers (Riley, 2012).
Asda part of the Wal-Mart family which has become a global name has decided to move into the Asian Tiger Markets to gain some economic presence in these countries have asked me for my consultancy services of my tacit knowledge, to do due diligence for them. As part of my requisite requirements, I am advised by the higher echelons of Asda to use the following Tasks (1-4) to assist me do my visibilities studies in a detailed manner bearing in mind the factors that influence MNCs across national borders.
TASK 1: BE ABLE TO UNDERSTAND MICROECONOMIC THEORY RELATING TO MARKETS
1.1 Explain the economic problem of scarcity and resource allocation.
“We ordinarily say a good – or a resource – is scarce if the quantity demanded exceeds the quantity supplied at some benchmark price, such as the prevailing one, so that in a competitive market there is an upward pressure on the price.” (Smith 2011)
Scarcity is the state of insufficiency where people are incompetent to achievetheir needs sufficiently. We can say scarcity arises when there are fewer resources in comparison to unlimited human wants and needs. Some of these unlimited wants may be satisfied but soon new wants get to your feet. This is not possible to produce goods and services which can satisfy all wants of people. Thus scarcity is the term which elaborates on theconnection between limited resources and unlimited wants and the problems arising as a result.
Economic problems arise due to the scare goods which can be used to fulfil many needs of the users. For example: a piece of land has many uses like it can be used to construct a building or to make a beautiful park or to raise agricultural crops. So, it is vital to realize the importance of how limited resources can be used otherwise to fulfil some wants of people to get maximum satisfaction as possible. The problem of scarcity is not only seen in developing countries but it is also there in developed countries being the core of all economic problems.
Economic problem of mankind obligate its base from the fact that human wants are several and of different types and the resources to satisfy them are scarce. If the time or resources are unlimited to fulfil all our wants of the people, then no economic problem would have come across at all. The economic problems arise due to the reason that as one want is fulfilled, a new want arises straight away on the scene. Following diagram illustrate on a see saw in which one hand has the limited resources and the other hand has unlimited wants.
With unlimited wants and limited means to satisfy we have to set a priority list in the region of our choice to get maximum satisfaction. So the two basic elements of economics are diversity of human wants and scarcity of resources. The scarcity of resources creates the problems of allocation of resources and elimination of waste. Resources are to be allocated in a way they are best used to attainmaximum satisfaction. This can happen only when we arrange a list of our wants on the basis of scale of preferences. In the scale of preference necessaries are fulfilled first, then comforts and luxuries are at the end.
The second problem is the elimination of waste. In the countries where resources are not fully utilized by the government and they are lying indolent, will mean the maximum satisfaction is not being imitated from the limited available resources which are being wasted for nothing.The resources are not only scared but can be used alternatively after deciding between the uses. We all have to decide to make choices between alternative uses of the resources we have. Even the government in the richest countries distribute their resources in such a way that they can be able to cradle maximum satisfaction with minimum resources.
Continue with your explanation of the above by saying what are production possibility frontiers and propensity to consume and save
Demand of a product comes from the utility of the product. Whether the product is providing pleasure or satisfaction to the customer after consuming a product or service is really important. Total utility of the product or service is the purpose of quantity consumed and the measure of quantity of work done. Possibilities of frontiers utility are additional utilities obtained from consuming one additional unit of a good or service are more relevant. This nourishes the law of diminishing frontiers utility at some point as the frontiers utility will always decrease.
Customers can incline their utility of the product by using up to the point where the frontiers utility is at zero. Consumption is a derivative of disposable income which is equal to gross income minus net taxes. A person’s propensityto consume mainly depends on income because propensity is derived from the change in consumption divided by the change in disposable income. Similarly, a person’s propensity to save is obtained from the change in savings divided by the change in disposable income. At all times,the propensity of a person to consume and to save must be equal to “1.”
The propensity of consumption and saving can be determined by the Wealth. With higher wealth a person will consume more. Expectationsof the customers play animportant role, expectation of bad economic conditions will lead customers to spend less and save more. Household dues represent future consumption gotonward into the present. Finally, taxes and transfers effect consumption in a way that when people are taxed more, the consumption will be reduced, instead higher transfer payments from the government increases the consumption.
1.2 Explain how equilibrium in a market is achieved.
“The basic notion of equilibrium in economics is that of the equality between the quantities supplied and demanded in a particular market.” (TIEBEN 2012)
Demand of the product dependents on the price of the product in the market. Other factors which impact on demand and supply can be income, price of alternatives, price of commendations, customer tastes, population or numbers of customers, etc. The factors that effect on supply of a product or service include price of the product, price of inputs, price of alternatives, available technology, etc.
The demand and supply curves requires understanding of the happening to the demand and supply curves with different events like changes in market conditions, technology, natural disasters, war, etc. These changes in demand and supply curves can moves along the demand or supply curve andShifts of a demand or supply curve. There is a movement along the demand curve, when all factors affecting demand and supply remain the same and only the price changes.
When there is a change in the demand or supply curves, the impact will be the change in the equilibrium price and quantity. The change in price and quantity result in the change in the supply or demand curve changes in different situations. For normal goods, demand of goods increases with the increase in income. Similarly decrease in income will lead to increase in the demand of inferior goods. When demand of a product Increase it shifts towards the right of the graph and the price and quantity of the product increases (Panel A). In the case of decrease in demand the curve of demand shifts to the left and the price and quantity decreases (Panel B). With the increase in supply curve shifts to the right decreasing price and quantity increases (Panel C). When there is an Increase in demand, supplycurveshifts to the left increasing the price and quantity decreases (Panel D).
When both the demand and supply curve shift, then forecast of the direction of the new equilibrium price and quantity is possible. For example, if both demand and supply rises shifting the curves to the right, then the new equilibrium can either be at a point where price falls but quantity rises (Point A), price stays the same but quantity rises (Point B), price rises and quantity rises (Point C)
So unless you know the magnitude of the shifts, it will be difficult to predict the direction of the price and quantity changes in the new equilibrium.
1.3 Evaluate the importance of differing market systems.
Economic system: “Mechanism for tackling the twin problems of scarcity and choice.” (C PASS 2000)
Its means that economic system is making a balance in meeting demands while managing with the problem of deficiency of resources.in the demand and supply role, demand of the society is always very high than supply to that society that’s why it is always very difficult to meet the target of demand. Resources are limited that’s why equal balance of demand and supply is very challenging.
Different types of economic system are defined and explained below.
Command economy: When government has all the authority with all the pricing and supplying matters it is called command economy. Government is responsible for the production and supply of all resources. In command economic government has the decisive power.
Market economy: Market economy is the type of economy where union of demand and supply decides the price of resources. Market economy is considered to be more acceptable. Keeping in mind economy can be fair without government legalisation; there is no interruption of government in market economy.
Mixed economy: As the name says mixed economy is the mixture of both command economy and market economy.in mixed economy both government and market decides about resources
Transitional economy: Transitional economy is the type of economy going through a lot of changes. This is the oldest type of economics that is why it is called as traditional. Products and services produced are the result of their belief, customs, tradition and religion in transitional economics. Many countries of the world are still using transitional economics.
After discussing all the four types of economic we can easily categorise Sainsbury following market economics. Products are produced and how resources are used depend on customer need. In order to gain profit Sainsbury’s determine any changes to the product that customer need and also using most appropriate production method for a better use of resources. Government is not connected to pricing or production of Sainsbury’s.
(Worthington and Britton: 2009)
1.4 Evaluate the role of opportunity costs in determining how economies make decisions.
Opportunity cost is a simple and noteworthy concept of microeconomics. opportunity cost of being involved in a task is the cost of the next most looked-fordifferent task that a person have to stop doing in order to involve in that activity. For example we can say that a student has to choose to spend time on either studying to prepare a very important test or watching a favourite TV show. Here the opportunity cost of watching the TV is the value of the preparation for the test that must be sacrificed, which is very high, and the person is very highly not willing to watch television and is more expected to decide against watching TV. Because of the scarce resources in the world people have to make choices among scarce resources, which involves sacrifice of alternative goods or services so the scarce resources that cannot be satisfied are foregone and are called opportunity costs.
Decision making neglect the importance of opportunity cost and is not considered by the decision makerswhichone of the most common decision is making drawback. Sensible people put in to consideration the cost-benefit analysis of the decision making process. To them action should be taken only when extra benefitsare greater than extra costs, the common problem arises here is that many of the decision makers ignore the long run costs. However, taking forgone benefits into account is vital for a practical and intellectual decision making. Economists proposes that problem of overseeing opportunity costs can be avoided by changing the way of thinking like instead of saying ‘Should I watch the television programme?’ one can say ‘Should I watch television programme or should I study for my test?’However, it is important to take into account thelong runcost, which is the value of the next most desirable activity forgone by watching TV because the short-term cost is not the only cost of going a TV show. Here the cost opportunity is not only the short-run cost of missing a TV show but also the opportunity cost of getting good grades.
Opportunity cost also helps in explaining the fact that people should focus on those activities in which they perform better relative to others for sake of profit maximization. It explains the productivity of the economic systems more based on knowledge and the interchange of goods and services comparative to less dedicated economic systems. The nature of knowledge being so productive because of an economic principle called ‘Comparative advantage’; that is to perform an action, a person has comparative advantage over another person, if his opportunity cost is lower than the other person’s opportunity cost in performing that activity in order to maximize profitability.
In analysing the firm’s profit, the economists subtract from revenue all the opportunity costs (long run and short run both) to measure organization’s economic profit, whereas the accountants just deduct the organization’s explicit costs to compute firm’s accounting profit, that is why the accounting profit is usually larger than the economic profit. From economist’s point of view, for a firm to be profitable its economics profit should be positive and must cover all short run and opportunity costs. The idea of economic profit is of great implication because an organization making positive economic profit will remain in business.
1.5 Assess the importance of elasticity in market interactions.
“Based on the US national institute of standards and technology (NIST) definition of elasticity, Galante et al. define elasticity as the ability of cloud user to “quickly request, receive and later release as many resources as needed.”” (Mahmood 2014)
So from the above text we can conclude that elasticity calculate the change in variable’s sensitivity due to a change in another variable. Elasticity is the amount of change of individuals, shoppers or producers changes their demand or the quantity delivered in reply to price or income changes. It is mainly used to measure the change in shopper demand as a result of a change in a good or service’s price.
Elasticityvaluegreater than 1 indicate the demand for the good or service is affected by the price and a value less than 1 indicate the demand is unaffected by the price. Elasticity is an economic concept counting the change in the collective quantity demanded for a good or service in relation to price movements of that good or service. A product is considered to be elastic if the quantity demand of the product changes drastically when its price increases or decreases. On the contrary, an inelastic product‘s quantitydemanded changes rarely with the change in its price.
Some of the important factors affecting the quantity demanded are the price of the product or service, the price of other products and services, the earnings of the population or person and the first choices of the customers. So, we have several types of elasticity of demand depending on the sources of the change in the demand discussed.
Price Elasticity of Demand is the comparative change in the quantity of demand depending on the comparative change in the price of the product.
Price elasticity of demand = Percentage change in quantity demanded / percentage change in price= ΔQ/Q / ΔP/P
Cross Elasticity of Demand is the comparative change in the quantity of demand depending on the comparative change in the price of an alternative product.
Price elasticity of demand = Percentage change in quantity demanded / percentage change in price of another good = ΔQ1/Q1 / ΔP2/P2
In the graph, the change in the price of alternative product shifts the demand curve to the left or to the right.If the two products are alternatives, the cross elasticity of demand is positive. If the two products are matches, the cross elasticity of demand is negative.
Income Elasticity of Demand is the comparative change in the quantity of demand depending on the comparative change in the earnings.
Income elasticity of demand = Percentage change in quantity of demand / percentage change in the earnings = ΔQ/Q / ΔI/I
Advertisement Elasticity of Demand is the comparative change in the quantity of demand depending on the comparative change in the price of alternative product.
Advertisement elasticity of demand = Percentage change in quantity demanded / percentage change in expenditure in advertising = ΔQ1/Q1 / ΔAd2/Ad2
The quantity demanded increases when the advertising expenses increase. The advertisement elasticity is positive.
The degree of change in demand classifies elasticity into different types.
- Perfectly Elastic
- Relatively Elastic
- Unit Elasticity
- Relatively Inelastic
- Perfect Inelastic
We have identified different types of elasticity according to the function we are analysing, and according to the contributions we are seeing. Now we will comprehend how the supply and the demand can be classified according to the value of the elasticity.
Perfect elastic demand
For Perfect Elastic Demand the elasticity inclines towards -∞.
When the demand is perfectly elastic, it goes down to zero with the appearance of a negligiblerise of price. If the price is the same of below the point where the demand touches the vertical axis, the market will demand all the quantity offered.
Relatively elastic demand, unitary elasticity demand and relatively inelastic demand
For relatively elastic demand the elasticity is between -1 and -∞
For unitary elasticity demand the elasticity is -1
The concept of price elasticity of demand is a degree of change in quantity demanded of a product comparative to a change in its price. When the demand is inelastic, an increase in price results in better revenue and the demand is elastic when increase in price decreased revenue, the demand is elastic.The concept of price elasticity in organization on how elastic they are to a change in price, assuming everything else is held equal.
The income elasticity of demandand elasticity of supply help decide finest prices for the products to achieve organizational income targets.Organizations pay attention to this type of information which is helpful in determining the finest price to sell. On the graphs, there is a part of the line which is elastic, inelastic, and unit elastic. If it is elastic, then increase in production of an organization will decrease in total income. If it is inelastic, then decrease on total production will decrease in income as well. However, when it is unit elastic, then change in production does not change the income. In short, organizations can use price elasticity of demand and supply to determine what quantity of product is to produce in order to maximize profit and total income.
These are the contributing factors to elasticity pricing strategies providinginformation on how much price reduction is essential to increase income to achieve organizational target. How much increase of price will be ideal as extra income from a price rise may be smeared out by decrease in demand. The knowledge of price elasticity of demand is also useful in planning their pricing strategiesand targeting forte segments. An example is a group of individuals whose demand for luxury is inelastic and hence car companies advertise luxury cars to them. On the other hand, budget drivers have an elastic demand and hence are targeted for ‘Standard’ cars.
Explain some of the factors of government interventions during demand and supply
The government intervention in the price mechanism on the grounds of wanting changes the allocation of resources and help achieving what they observe to improve in economic and social welfare. All governments of every political influence intervene in the economy to influence the allocation of scarce capitals among competing uses.
A price ceiling occurs when the government puts a legal limit on maximum pricing of a product which is effective below the natural market equilibrium. With the price ceiling, there is a shortage that’s means quantity demanded is more than the quantity supplied. When price ceiling is set, then there must be a way to allot who gets the low supply of the product. Due to the legal pricing limit it can’t simply be increased. There are several ways to do this without raising the price. Lottery is one of them. The product for which there is a shortage can be distributed through drawing names out of a hat. There can be a high demand to be able to hunt for moose, but the government has a limited amount of permits to give.
Black market arises when some lucky enough demandersget some of the short supply, more likely to sell what they have obtained to the demanders for the sake of getting more benefits. In some cities there have been ceilings put on the apartment rent. While the demand for apartments increases, the rent remains the same. When some tenants are ready to move, they sublease their flat and not end the contract. If they were paying £500, but someone is willing to pay £1000, then the sub-leaser can continue paying $500 and can make a profit of £500 he gets from the tenant.
A price floor is the minimum legal price a product can be sold at. Price floors are used by the government to stop prices from being too reduced. The most common price floor is the minimum wage which is the minimum price that can be cover for labour.
The government can control the production by stopping too many suppliers from producing by introducing production rights or pay people not to produce. Production rights will lead to politicization for the rewarding rights or even bribery. With the government paying people not to produce, more producers will appear for the sake of being paid.
Indirect tax is a tax on the spending on products. Indirect taxes included value added tax (VAT) and duties on tobacco, alcoholic drink and petrol. The consumers of these products do not pay these taxes, but are indirectly paid via the sellers of the products. Indirect taxes dissimilarity with direct taxes (such as income tax) which are paid directly out of people’s incomes.
There have 4 types on incidence of an indirect tax (inelastic demand, elastic demand, inelastic supply and elastic supply). In both inelasticity and elasticity of incidence, the tax pay is same, when price rises, quantity will fall. but the size of increase in price and decrease in quantity differs in each case, depending on the price and elasticity and demand and supply.
Tax being important income allows government to charge tax on every products or services. In order to stop nation to buy some unhealthy product, government may charge higher tax on it. For other products and services, government should charge lower tax on it because lower tax will have higher economic raise.
TASK 2: BE ABLE TO UNDERSTAND THE IMPACT OF MARKET POWER ON AN ECONOMY
2.1 explain the implications of pricing and objectives on the business firm’s operations.
Price is the cost that will buy a definite quantity, weight, or other amount of a product or service. It can be secured by a contract, left to be decided by an agreed upon formula at a coming date, or discussed at the time of dealings between the parties involved.Price is set on the basis of what a purchaser is happy to pay, a supplier is happy to accept, and the rivalry is letting to be charged.
It is a criminal offense to control prices in conspiracy with other dealers, and to give a deceptivesignal of price such as charging for things that are sensibly supposed to be part of the advertised, list, or mentioned price.
Pricing decisions are considered to be the most important decisions for any organization in any kind of market structure. The price is affected by the competitive structure of a market because the organization is a vital part of the market in which it operates.
Barriers to entry in the market are factors that affect the pricing of a product andmake it difficult for new product to enter the market.The existence of barriers for a product to enter the market makes it more expensive and less reasonable. As the barriers to entry are increased market will be less competitive. Barriers to entry are an indispensablefeature of monopolistic markets. Barriers can be Natural / Geographical; here we can take example of Zimbabwe where 85% of the world supply of Chromium is found. When there is no oil in your country, how can you enter the oil market? Geographical barriers can be faced locally as well.
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Economies of Scale are one of the examples of barriers to entry for a product in the market. Economies of scale occur when increased output leads to lower average costs. Therefore new firms, with relatively low output, will find it difficult to compete because there average costs will be higher than the incumbent firms benefiting from economies of scale. The prospect of higher average costs may deter entry. Price limiting is price set by organization to price adequately low to discourage entry. Price limit results in monopoly sometimes even when there is less profit, it prefers to keep prices lower to prevent competition.
Cost production while pricing determine price of product by adding a profit element on top of the cost of making the product. This includes fixing a price by adding a certain amount to the cost of production or buying the product. We can say it as an old and condemned pricing strategy, although it is still widely used. The cost-based pricing is advantageous in a way that selling prices of products can be calculated easily. If the profit margin percentage is used steadily across all the products ranges, then the organization can also forecast more consistently what the overall profit margin will be.
Explain some of the pricing methods used in setting price for organisation (target return pricing, cost plus pricing, value based pricing, psychological pricing etc)
Cost-plus pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach is that the business will know that its costs are being covered. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively.
In Psychological pricing prices are set at an unusual pricing point. For example, why CD’s are priced £10.99 or £11.99? This is because the perceived price barriers customers may have. A customer is happy to pay £9.99 to buy a product, but £10 seems a little too much to him. So reducing price by one pence can make the difference between closing the sale, or not. The psychological pricing target towards making the customer believe the product is cheaper than it actually is. Pricing in this way is intended to attract customers who are looking for “value”.
2.2 Compare how prices are set in different market structures.
Amount of Competition between the producers in the market is called as market structure.
Importance: Market structure is important because it help organisations to decide their strategies and the outcome of those strategies. There are different types of market structures discussed below.
PERFECT COMPETITION: “by perfect competition I propose to mean a state of affair in which the demand for the output of an individual seller is perfectly elastic.” (Robinson 1971:197)
For perfect structure there are a few conditions. The product sold should be homogeneous i.e. all units of the product should be identical, any buyer or seller cannot change price of the product, producer should have perfect knowledge of pricing of other producers also consumer should know price of product. Producer and consumer can be anywhere that mean land, man power and machine can be used from anywhere and consumer can buy from any producer. Doors are open to anyone coming into or leaving the business. This is the most competitive and is quite far from nature.
In perfect completion method Prices of the goods are absolute so there will be no miss selling. If the cost of the firm like wages, rent, raw material and interest etc. are not covered then the firm will be in loss, supply is reduced and prices will rise to regain normal profit. Abnormal profits cannot be gained on long term basis. Stock exchange is good example of perfect competition market.
Monopoly: “The term pure monopoly means an absolute power of a firm to produce and sell a product that has no close substitute.”
In a monopolistic method of economics there is no competition. There is a single producer who produces for the whole market is having control on price and production according to demand. If there are no substitutes available and market obstacles are high then the monopolist will be stronger and can make abnormal profit on long term basis. Monopolists charge different prices to different customers. Airlines are good example for this i.e. for the same service same destination different prices are charged. Monopolist producers can make decisions on their own regardless of depending on anyone. Monopolist producers gain abnormal profit by charging different prices to consumers. There are fewer options to switch on for consumers in monopoly method of economy. British rail, telephone companies and air lines are good examples.
Oligopoly: Mrs John Robinson “oligopoly is the market situation between perfect competition and monopoly in which the number of in more than one but is not so large that the market price is not influenced by any one of them.”
Being more realistic method, Small number of producers with little changes in the product supply to the market in oligopoly. Producers are dependent on each other on pricing i.e. no one can change price in order to not loss share value or to get lose. Selling is more based on advertisement and branding offers or gifts for selling products. Tobacco and soap powder markets are examples of oligopoly.
Monopolistic competition: “monopolistic competition refers to a market structure in which a large number of sellers sell differentiated products which are close substitute for one another.”
Monopolistic competition is quite similar to the perfect competition method but there is one difference i.e. homogeneous goods. Products are changed a bit by advertising branding or by local production and making of the product could b same. Short term abnormal profits are gained which are justified by the new incoming producers.
Duopoly: according to Dr John, “duopoly is the situation of a market in which there are two producers of a product, either perfectly identical or almost identical they are not bound by the agreement regarding price and quality of production.”
(KUMAR, SHARMA: 1998)
In duopoly there are only two producers and sellers of product. Independent price policy is adopted or both sellers agree on same price. There may be competition between both the sellers or they may support each other.
Sainsbury fall in the category of perfect completion market where identical products are being sold by so many retailers. Asda, Tesco, Morrison, Aldi, Lidl, Marks and Spencer etc. are there to serve the customers so Sainsbury have to keep a check on their price. Sainsbury’s main business is on grocery demand of the products of Sainsbury never run out.
(Worthington and Britton: 2009)
2.3 Analyse how the firm’s behaviour is affected by:
The interaction of customers and competitors with the firm affects the organization both positively and negatively. Since small businesses are not strong enough to change the structure of the market, we have to analyse how it affects the firm, identify the negative affect on the behaviour of the firm’s approach to the market to reduce them. The firm can organize business to benefit from the market structure, eradicating effort wastage and improve profitability.
For any firm market structure determines the accessible markets for their business at low cost and consumers who are interested in their products. Corporates can save money by evaluating market structure and concentrating on which of the markets are easily accessible. Within those markets, segmentation of members who are attracted towards buying their products is carried out. For example, dealing with a kids clothing retail outlet in a local mall, the most accessible market is customers living nearby, and the focus should be on the market segment that includes young families. If the aim is inaccessible market and the segmentation is wrong, firm will have lower sales and higher marketing costs.
Two important features of market structure are size and its characteristics. For example, in city, markets are likely to be large and assorted; while in countryside markets are smaller and more same. In both the situations it is very important to focus marketing efforts where they will be the most effective and wastage of resources is minimized. For larger and assorted target market with many segments supporting the business, they aim to target the single segment that best fits with ideal customer. When the accessible market is small, aim is to target several segments to achieve the business volume needed.
The competitive structure of the market and its changes can have considerable positive or negative effects on the business. Business of the firm can attainupper prices and can have operations of more profitably in markets with high barriers to entry and few competitors. Markets which are designed around standard products such as gasoline have low barriers to entry with strong competition. Firms need to take the competitive structure of the market into consideration. Progressing the business strategies to either overwhelm an entry barrier or enter a market with less competition or using a natural cost advantage such as an inexpensive location to make money in a highly competitive market.
Many markets are structured around government regulations and policy influences. If suppliers in a market are pay for or if market prices are regulated, firms need to adjust their business strategies to gain from possible government support and obey regulatory requirements. Whether such impacts on market structure have a positive or negative effect on the business depends on how well the business can support the aims of the public policyresourcefulness. Confirming that operations match government aims for the market help avoid losses.
2.4 Evaluate the impact of regulation on market power in at least 2 different situations.
“Economists define an oligopoly as a market structure characterised by (1) few seller, (2) either a homogenous or a differentiated product, and (3) difficult market entry.” (Tucker 2009)
An example of an oligopoly is the wireless service business in Canada, where three companies – Rogers Communications Inc (RCI), BCEInc (BCE) subsidiary Bell and Telus Corp (TU) – regulate approximately 90% of the market. Public is aware of this oligopolistic market structure and combine the three together as “Robelus,” making them un-differentiate-able. In fact, they are often un-differentiate-able in price. The price for smartphone planes was raised in early 2014 by all three companies in most markets.
All the members in oligopolies have the power to set prices, rather than take them. For this reason oligopolistic markets are well thought-out to be able to increase profit limits above the truly free market. Most authorities have laws against price fixing and collusion. An oligopoly in which members clearlytake part in price fixing is a cartel: OPEC is one example. Tacit collusion, is perhaps more common and difficult to distinguish. A stable oligopoly will often have a price leader; when the leader raises prices, the others will follow.
Another way is that one or more organizations take advantage of the price rise by cutting prices and tapping business away from the business with the highest price. If that happens, organizations can line up in different ways: the bulk can stick to low prices in trying to push the organization with the highest price out of the market; the bulk may increase prices, separating the “cheating” organization and putting it under financial pressure; or they may each go for to undercutting the rest, starting a price war harming them all. The late 19th-century railroad cartel in the U.S. was characterized by obvious collusion and price fixing, scattered with vicious price wars.
The reason why new applicantsrarely come in to dislocate the market is that oligopolistic industries incline to have high barriers to entry. Wireless carriers can either build and maintain towers, necessitating massive capital expenditures, or rent the executives’ infrastructure at vampiric rates. Carriers also incline to have strong, instantly recognizable brands. Even if these brands carry certain negative memories, they provide a distinct advantage over unknown new applicants. Other industries that are thought to be oligopolies also have high barriers to entry: oil and gas drillers, airlines, grocers and movie studios are examples.
The government can regulate monopolies to protect the interests of consumers. For example, monopoly has the market power to set prices higher than in competitive markets. The government can impact the market power of monopolies through price capping, yardstick competition and preventing the growth of monopoly power.
Price capping by regulators RPI-X: government has established regulatory bodies for many private industries, such as water, electricity and gaslike
OFGEM – gas and electricity markets
OFWAT – tap water.
ORR – Office of rail regulator.
These regulatory bodies have the power to limit price increase using a formula RPI-X
Where X is the amount by which actual price is cut.
If inflation is 3% and X= 1%
Then thereal prices can be increased by 3-1 = 2%
For water industry in price cap system is RPI -/+ K, K is the amount investment in water firm needed. Thus, if water firms need money for better water pipes, they can increase prices to get financed.
RPI-X Regulation benefits the regulator set an increase in price depending on the state of the industry and potential competencereserves. In the case an organization reduce costs by more than X, profits can be increased. In the absence of competition, RPI-X is a way to increase competition and prevent the abuse of monopoly power.
Drawbacks of RPI-X Regulation can be it is overpriced and the choice of the level of X is difficult. The danger is when regulators are too lenient on the organization and allow them raising prices and make supernormal profits.
Regulation of quality of service is examined by providing the monopoly. For example, the rail regulator examines the safety record of rail corporations to guarantee that they don’t cut corners. In gas and electricity markets, regulation of quality serviceensure that old people are treated with concern, e.g. not allow a monopoly to cut off gas supplies in winter.
Merger policy: The government has a strategy to examine mergers which could create monopoly power. When there is 25% of market share of the new business established after merger, it is automatically brought up to the Competition Commission. The Competition commission then decide on whether this merger is to be allowed or blocked.
Breaking up a monopoly: government has the power to decide on the monopoly to be vanished because the organization has become too powerful. This rarely happens. For example, the US wanted to breaking up Microsoft, but in the end the action was let fall. This is likely to be seen as an extreme step, and there is no surety the new organization won’t conspire.
Yardstick or ‘Rate of Return’ Regulation: This is another way of regulating monopolies to the RPI-X price capping. Rate of return regulation see the size of the organization and assesses for a reasonable level of profit from the assets base. If the organization is making too much profit compared to their relative size, the regulator may implement price cuts or take one off tax.
Investigation of abuse of monopoly power: In the UK, the office of fair trading put investigation into practice to check the abuse of monopoly power. This may include unfair trading practises such as: Collusion (firms agree to set higher prices), Predatory pricing (setting low prices to try and force competing organization out of industry) and Vertical restraints – prevent retailer’s stock competing products.
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