Market Power Price Discrimination and Allocative Efficiency in Intermediate Goods Market - Essay Example

? Market Power, Price Discrimination and Allocative Efficiency in Intermediate-Goods Market: A Critical Analysis Market Power, PriceDiscrimination and Allocative Efficiency in Intermediate-Goods Market: A Critical Analysis Market power, price discrimination as well as allocative efficiency in intermediate-goods market are all aspects of monopoly and as such, monopoly can be said to be a situation whereby an individual or an organization exists in the market as the single supplier of a specific product or service. According to economists, market power can be referred to the ability of an organization to hike the price of a commodity or a service over marginal cost in a manner resulting to profitability (Degraba 2000). Organizations, which have market power, are mostly referred to as price takers or markers. Such firms are usually said to have the capabilities of affecting either the standing market price or the total quantity of products within the market single handedly. Price discrimination is described as a situation whereby identical goods from the same organization exist in the market but sold at different prices. This mainly occurs in monopolistic or oligopolistic markets. With reference to the guidelines given, this paper will critically analyze the Market power, price discrimination, and allocative efficiency in intermediate-goods market while thinking about it in an economic way. In addition to this, the paper will aim at establishing how this topic will be a motivation to the marketing manager of an organization (Katz 2007). The party that would be interested with this topic is the marketing manager of an organization that has a command in the market. By getting plentiful information concerning this topic, the marketing manager will be able to come up with strategies that will enable his company to increase effectively, the monopolistic undertakings of his company where it is the only company with a command with regard to certain products or services within a certain market segment. Why the topic is Interesting Both price as well as market power are important as, according to economists, when an organization entail them, it cannot go bankrupt especially if it was experiencing unprofitable seasons. In addition to this, these aspects are important when considering the consumers. Such aspects balance the consumer’s ability to buy products, as, due to differentiated prices in the case of price discrimination, the consumers, regardless of their income levels, they are able to afford a good or a service. For instance, in the case of students, firms often reduce their products and services by 10% for the sake of students. They are typical examples of individuals in the society with low incomes. Due to this fact, their demands can be said to be more elastic. Due to reduced prices, they are able to access these services as well as products due to the reduced prices (Rey and Verge, 2008). Further, this topic, especially the market power, is essential as studying about it ensures that the marketing manager, or any one given the mandate to see an organization attain a commanding lead in the market, obtains appropriate information on how his company can generate sizable or substantial benefits in its operations while experiencing relatively low levels of liabilities. . General Setting This topic is underlain in monopoly aspect of macroeconomics. To understand this, it is essential that one take on each notion at a time. Market power; commonly, market power is usually referred to as monopoly power. An organization with market power is usually said as having control putting the terms as well as conditions of exchange into consideration. As such, such an organization can effectively raise the prices of its products as well as its services and still not lose its clients. On the other hand, the company can reduce the prices and still not cause a price war amongst the competitors, which is usually ruining. When an organization offers a differentiated product or a service to the market, it is easier to develop a monopolistic power as consumers will develop a tendency whereby they will prefer its products in relation to others (Yoshida 2000). Price discrimination; When an organization sells its products to the same market at different products and still making considerable profits without customers backing out, the organization can be said to be monopolistic in nature. In a perfect competitive market, such an aspect is not possible. Allocative efficiency; This situation occurs whenever an optimal distribution of both products as well as services exists in the market. As such, the price dictated by the organization is usually equal to the production’s marginal cost. Precisely, a market is at allocative efficiency where the price that the clients are able and willing to pay for a good or service is equal to the marginal utility that they have or get. According to economic analysts, monopolies can allocate efficiently where they maintain a price equivalent to marginal cost. Literature review on Market power, price discrimination and allocative efficiency in intermediate-goods market According to the findings of the research conducted by Inderst and Valletti (2009), the presence of market power depends on the conditions of demand that an organization faces. Mcafee and Schwartz (2004) supports this by further asserting that, if an organization’s product is differentiated, consumers will develop a tendency of choosing its products over the others from other companies. According to Degraba (2000), a demand function, which is downward sloping, is essential as it allows an organization to hike its price while not causing a fall in its sales or profit margins. A monopolistic organization that operates within an industry encompassed with imperfect competition, there are two possible consequences that the firm will most probably face when it opts to increase the quantity of products as well as products supplied. These include; the firm must incur a marginal cost with regard to the increased production; and, the firm must reduce the prices in an effort towards selling the increased production (Rey and Verge 2008). Price discriminations According to Yoshida (2000), if an organization imposes price discrimination within the market, there is a big likelihood that prices will be efficient. It is common that firms exploit market power and thereby causing welfare problems. Usually, most organizations have inadequate information regarding the preferences of the markets. This follows those organizations results in price discrimination and thereby implementing prices, which can be said to be effective. In a deeper insight, it results to improvements with regard to welfare but in unambiguous manner (Katz, 2007). In his research found out that price discrimination has the capabilities to open or even shut down markets. By practicing price discrimination, new markets, which otherwise could not be served, are established. Allocative efficiency In the research conducted by Inderst and Valletti (2009), it was found out that whenever there is an attainment of resources, increasing the well-being of an individual without having to harm another person becomes impossible. Mcafee and Schwartz (2004) asserted that a market is at allocative efficiency where the price that the clients are able and willing to pay for a good or service is equal to the marginal utility that they have or get. According to Rey & Verge (2008), monopolies can allocate efficiently where they maintain a price equivalent to marginal cost. According to Yoshida (2000), as long as an organization in a perfect competitive market produce at P=MC output level, that market will always be allocatively efficient. Usually, price is said to be a signal from the buyers for the sellers. The prices set by firms signifies the marginal benefits that consumer gets in the market. A situation where the price paid by the consumers for a certain product or service exceeds the marginal cost to the firms that produces that product or service, it signals an increased demand for more outputs. Every organization exists to pursue profits and as such, they allocate substantial amounts of resources in order to produce products and services until marginal cost and price equals. At such a point, firms do experience maximized profits and as such, the resources used to produce the products and services leading to the maximized profits are said to be efficiently allocated (Degraba 2000). Main assumption of the article a) The average of the monopolistic organization always exceeds the Price of a product in a certain market and that the price represents the direct losses incurred by the monopolist arising from unprofitable markets. b) There is no arbitrage c) The buyers of the goods and products cannot resell them. d) The monopolistic firm must have the ability to establish and target a specific market. Main conclusion The article, despite addressing the topic, it has not sufficiently addressed it. There are a number of points that the article has missed to address. In most of the article, the author has only concentrated on the derivations and thereby disregarding most of the theories involved which is equivalently essential. As such, if practical and theoretical aspects were blended together, a person is able to understand better than it would have been if it were singly utilized. The article can be observed as somehow convincing as practically, the derivations makes sense and are able to deliver the intended message with regard to the underlying topic of discussion. In addition to this, the article covers the other aspects, that is, the market power as well as allocative efficiency unsubstantially. This means that the author indeed see them as not so much significant to the macroeconomic area of study. If this article is aimed at helping the marketing manager of a certain organization, it is necessary that each and every topic, however insignificant it is, must be comprehensively covered so that the interested party can comprehend and take the information into practice in an effective manner (Yoshida2000). However, in trying to discuss the aspect of price discrimination, the article makes use of the downstream market model and according to Rey and Verge (2008); it is an effective tool from which the condition of the market with regard to price discrimination can be established. The strong point that the article possesses is the clear and precise explanation of the information entailed therein. This can be mostly traced in the conclusion, which gives a clear depiction or the overview of representations made by use of the formulas. Along with representation go both theoretic as well as presentations in form of graphs as well as tables. The article does not incorporate the aspects of graph representation and as such, the user of the information will not adequately get the main emphasis points that the article is trying to address (Katz 2007). Key points of Discussion a) Viability of using linear progressions for economic analysis b) Presentation of data Proposed Extension This article would be useful to the marketing manager if indeed the linear expressions, which have been used to reason out, were replaced with expressions, which are quadratic in nature. As such, when quadratic expressions are used in any economic analysis, it is usually that one is able to come up with graphical representations with regard to the various possible downstream economic models. In addition to this, most of the modern age software used in economic analysis comes while programmed with quadratic expressions and as such, the software saves the coefficients that have been estimated. Moreover, the software saves the variance-covariance matrix with regard to the coefficients that have been saved after executing a regression (Yoshida2000). An economic approach that uses quadratic expressions usually has a commanding edge over an approach that uses linear expressions. According to economic analysts, the approaches that use quadratic expressions are usually simple and easy to implement in computer programs and thereby allowing a room for prediction of values that are out-of-sample. In addition to this, it becomes easy to predict standard errors with regard to the mean prediction (Rey and Verge 2008). From this analysis, it is clear that Market power, price discrimination as well as allocative efficiency in intermediate-goods market are all elements of macroeconomics, that is, monopoly and as such, information that regards them is of great interest to a marketing manager of an organization. For instance, by being provided with adequate information concerning price discrimination, the manager will know that he can develop strategies whereby his organization can offer goods and services to the market at different prices and still retain its customers and make tremendous customers. With regard to market power, the marketing manager will get to realize that, as long as his company has a commanding status within the market, he can develop strategies whereby he raises the prices of its products as well as its services without despising away its clients. In addition to this, by learning about market power, a marketing manager will be able to realize that he can reduce the prices and still not cause a price war amongst the competitors. With reference to the alliocative efficiency, the marketing manager is able to get ample information on how he can allocate resources efficiently by maintaining a price equivalent to marginal cost (Yoshida 2000). Further, according to the discussion, it is evident that economic approaches that use quadratic expressions are the best to use while conducting economic analysis. This is mostly because they are easily represented in graphs. Other worthwhile and main attributes in regard to an approach that uses quadratic expressions is that such approaches are simple and easy to implement in software used in economic analysis. Therefore, this whole article is essential for any marketing manager of an organization that exercises monopolistic power within the market (Mcafee and Schwartz 2004). References Katz, M. (2007). The Welfare Effects of Third-Degree Price Discrimination in Intermediate-Goods Markets. American Economic Review, 77(7), 154–167. Mcafee, R.P., & Schwartz, M. (2004). Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity. American Economic Review, 84 (4), 210–230. Rey, P. & Verge, T. (2004). Bilateral Control with Vertical Contracts. Rand Journal of Economics, 35(2), 728–746. Yoshida, Y. (2000). Third-Degree Price Discrimination in Input Markets: Output and Welfare. American Economic Review, 90 (2), 240–246. Degraba, P. (2000). Input-Market Price Discrimination and the Choice of Technology. American Economic Review, 80 (4), 1246–1253. Inderst, R. and Valletti, T. (2009). Price Discrimination in Input Markets. Rand Journal of Economics, 40 (2), 009), 1–19. Read More