The Importance of Market Structure to a Firm - Coursework Example

Why is structure of the market in which a firm operates so important to efficiency It is important to understand that the nature of the market determines to a large extent whether the firm will be permitted to start operations within the concerned market or not. As it will be seen, in many instances the development of the market leads to its being shaped in to a particular form. There are three different types of markets that are going to be discussed here - monopoly, oligopoly and oligarchy. Monopoly: This occurs easily when the economies of scale exist all through the range of production as then large firms succeed in having output at lower costs than smaller firms. This can be seen in the cost of production graph given in graph 1. In the initial stages, there are a large number of small firms starting production at about the same time. It is likely that all the small firms have similar costs of production and this is shown in the cost curve named as ATCo. It is a natural process for one of them to become larger than others, and then it can produce items at a cost lower than others and then the cost curve for it may change to ATC'. This permits the larger firm to sell its products at a lower cost than others, and this hurts the other firms which are smaller as they incur losses at that price. It is not only development of production capacities that leads to this situation, and this concept of "natural monopoly" was first used to explain the development of the telephone industry in United States. (Microeconomics: Chapter 11) The situation in the early years was that most cities had more than one Telephone Company to provide telephone services. This was not an efficient operation as it required subscribers to contribute to the services of more than one company for getting a call through as the companies were not interconnected. Due to the fact that it was one of the first to start, Bell was larger than other companies. Since the cost of providing services to additional customers was relatively small, it was able to provide services to new customers at lower costs than others. Though the government was not in favour of the situation, it was compelled to accept the situation and permit the organization to operate as a regulated monopoly. The situation changed only at the end of the 20th century when the government decided to break up the company. This was believed to be a result of technological developments. (Microeconomics: Chapter 11) There are also other reasons for development of monopolies, and it happens in New Mexico due to the ownership of most known sources of desiccant clay by a single family. Even in the personal desktop industry, there are monopolies due to ownerships of software and chip technology. Monopoly also takes place due to high costs of investments for entering an industry and these come in various forms - high advertising costs for establishment of brand names, special purpose machinery needed for production, establishment of stocks at different levels for being able to make the goods available in the market, and so on. Patents and licenses are also methods of prevention of entry for new organizations, though there is justification for the provision of patents to ensure a return for research. At the same time, this permitted Polaroid to hold on to its business of instant film for a long time. (Microeconomics: Chapter 11) In UK, the distribution of industry was to a large extent controlled by the government and its public sector which changed through the privatization program that began in 1979. The first phase continued till 1983 and during this period, the government sold shares of organizations that were small in size and operating in competitive markets. The value received for the shares was more than the value of property sold, and at the same time, it reduced competition. There were some sales that did not affect competition, like the sales of more than one million publicly owned housing which gave the government a value of more than 15 billion pounds. The second phase was the process of denationalization of public utilities, and this effort had a twin effect of reducing government monopolies in those sectors as also bring in fresh competition in those areas. (The Evolution and Performance of UK Privatization) One of the major efforts was with the sale of British Telecom and even now there is the sale of railways. The current activity in this regard is the attempts to regularise the situation of organizations which were proving difficult to sell for the government, or were not generating enough revenue through quotations for purchase. The attempts are now to seek public involvement through contracting out, imposition of user charges and introduction of consumer driven initiatives for improvement of service. At the same time, it would be difficult to say that all these involved the question of removal of monopoly, or whether in certain cases, removal of monopoly is working in the interest of the people. In the cases of the industries that have been quoted for United States, or even in UK, it would not be true to say that the concerned monopoly industries were inefficient, but in the case of UK, there was a certain amount of lethargy being introduced into operations as the government was compelled to observe certain behaviour norms of public welfare, which made profit making difficult. (The Evolution and Performance of UK Privatization) Oligopoly: In many markets there are a few companies which end up controlling large portions of sales and production. In UK, a case can be seen in two large soaps and detergents companies - Proctor & Gamble and Unilever, having a control over 85 percent of the market. It is possible for them to join hands and increase prices in the market to a much higher level, though this sort of behaviour is limited by laws as the product is considered to be an item of public necessity. The situation exists over most parts of the European Union and only another manufacturer, Henkel, has any significant market share. At the same time, these companies are able to protect their position through charging high or premium prices and their competition is in the area of advertising and publicity. This also protects their position since the cost of entry for a new brand is high. (Oligopoly" Tiscali Reference) At the same time, let us remember that having only a few producers is not necessarily harmful to consumers as long as there is some sort of a control over the manufacturers either through the efforts of the government, or through societal efforts. When the technology for production is old, not much development is really possible and the changes that occur are often due to changes in availability of raw materials. In such cases, bigger units of production help efficiency, and that is helped in oligopolies. In this case again, there were efforts in UK to organise a restructuring and privatisation scheme for its electrical generation industry. The aim was to increase competitiveness and efficiency. The efforts led to four separate actions. The first was to sell off all government owned generation to two private companies. The second was to establish a national grid so that the transmission systems could be operated. The third was to start an electricity pool so that electricity could be priced at market levels like all other commodities. (Holt, 1995) Let us now look at the procedure of selling of the production units shares which was done first in March 1991 for 60$ and 40$ in the year 1993. A lot of efforts were done to ensure that shares of both companies were joined together and the winning bidders received 62 shares of National Power and 38 shares of PowerGen. There were also ratios set for different classes who could buy shares. The ratio for institutional investors was first fixed at 52 percent and then reduced to 28 percent. Among the individual investors, there were applications from all over the world, though the majority of applications were from United States. The ratio of shares allocated can be seen from the second graph shown below. The ratio of shares that went to individual investors from UK was 49 percent. (Electricity Reform Abroad and U.S. Investment: The Auction of UK Electricity) Thus in practical terms, the ownership of the national property was reduced from 100 percent to 49 percent. This 49 percent was of individuals who could afford to buy the shares, and it may be expected that the new companies would be controlled by them. The number of manufacturers also increased from only one - the government to two companies. How is this expected to help increase competition When the removal of the government control on electricity production was removed, the control on distribution of electricity by the 15 government owned companies was also removed. There were twelve of them in England, two in Scotland and one in Northern Ireland. They were privatised and named as Regional Electricity Companies. Their main business is of distribution and supply. In every area their service is a regulated monopoly as they have to ensure distribution of power to all consumers in their areas. They are also able to compete for supplies to the large consumers of power in their area. (Holt, 1995) Thus, while it reduced the power of the government, it also created different monopolies which are also not good for competitive marketing. As early as 1992, it became clear that the market was not resulting in any changes of energy efficiency through the demand parameters or investments. These companies are now trying to develop their business through involvement in a number of other businesses. Thus, removal of the oligopoly only harmed the system. The fundamental question to be remembered is that every market develops into different shapes due to the inherent forces within the market and political forces should not interfere in the process. After all politics is different from economics, and the existing market is a result of economics. Oligarchy: This is defined as the rule of the few, and is different from oligopolies in the sense that the rulers selected here are not necessarily an alliance between the groups that have been the most successful in business as was seen to be the case for Proctor & Gamble and Unilever. Among governments the recent example of an oligarchy is the rule of the Duvalier family in Haiti from 1957 to 1986. (Oligarchy: Tiscali Reference) They were removed from power and the situation in the country improved to some extent, but the position has worsened again. As one may repeat a famous saying - people get the government they deserve. Yet the rule exists of some powerful families even in the most developed countries, including United States. When one looks at the banking sector in this country, there are some twenty banks which are most powerful. Their relative positions and investments are given in picture 3. Apart from this, there is a high amount of interlocking between these different companies, control of these institutions from foreign families, their power over the medium and small sized banks, etc. To fully analyse the situation it would require a much bigger effort. A simple method of understanding their power is through the information that ten of these banks - six in New York City, two in Chicago and two in California - control as much as 70 percent of the holdings of these banks. The list is narrowed down even further, when we consider that it is a group of three families which control these banks - the Rockefellers, Morgan and Gianninis. They have different methods of control and this is achieved through both direct and indirect methods, meaning through the banks that they control. They also control other important industries which add to their power. (Wright, 1949) When one looks at the total picture, it is clear that a total of ten families effectively control all business in United States. The rules regarding banking in United States compel them to go through this process of controlling the banking industry. This is probably the best method for them to operate under existing laws, though whether this is the most efficient or not, one would not really know. If the laws were changed to permit them maintain direct control, the total operation may become more efficient. This is a little difference from control of the market where one would tend to consider the direct control at the wholesale or retail level. At that level, there are some groups which have large control, like Wal-Mart, but they cannot be considered to be controlling the total market. The reason for this is that investments required at that level are low, and when other interested individuals feel that there is enough money that can be made; they would also like to enter the market. The other point to consider is that situation in the world is changing very fast and even purchasing by people is also changing as the modes of communication from the buyer to the seller is following new and innovative routes. One of the biggest examples of this selling of books through the Internet that has now reached interesting levels. Since the communication speeds are changing, the tastes of people are also changing fast, somewhat like changes in fashion. To conclude, in a way, one can say that these forms of marketing are related to social concepts of power which will probably remain. Dictatorships are also a form of monopoly on thought. Appendix 1. Monopoly Development of Monopoly 2. Breaking up a public utility 3. Oligarchy in banking Name Assets in $ billion Bank of America, NT & SA 6.073 National City Bank (NY) 5.127 Chase National (NY) 4.631 Guaranty Trust (NY) 2.785 Manufacturers Trust (NY) 2.390 Cont. Ill. Bank & Tr. (Chi.) 2.356 First National Bank, Chicago 2.245 Secured First National (LA) 1.726 Chemical Bank (NY) 1.584 Central Hanover Bank & T'r, NY 1.544 Bankers Trust (NY) 1.525 First National, Boston 1.519 Mellon National Bank (Pitts.) 1.402 Northwest Bancorp 1.332 National Bank, Detroit 1.276 Bank of Manhattan (NY) 1.267 Irving Trust (NY) 1.244 First Bank Stock 1.211 Marine Midland Tr. (NY) 1.137 Cleveland Trust 1.100 REFERENCES "Electricity Reform Abroad and U.S. Investment: The Auction of UK Electricity" (22 October, 1997) Retrieved from http://www.eia.doe.gov/emeu/pgem/electric/ch2l4.html Accessed 16 January, 2006 Holt, Ed. (August, 1995) "Energy Efficiency in a Restructured UK Electric Industry, the Regulatory Assistance Project" Retrieved from http://www.raponline.org/Pubs/General/EffncyUK.pdf Accessed 16 January, 2006 "Microeconomics: Chapter 11" Retrieved from http://www.oswego.edu/economic/eco101/chap11/chap11.htm Accessed 16 January, 2006 "Oligarchy" Tiscali Reference. Retrieved from http://www.tiscali.co.uk/reference/encyclopaedia/hutchinson/m0031410.html Accessed 16 January, 2006 "Oligopoly" Tiscali Reference. Retrieved from http://www.tiscali.co.uk/reference/encyclopaedia/hutchinson/m0038364.html Accessed 16 January, 2006 "The Evolution and Performance of UK Privatization" Retrieved from http://www.itcilo.it/english/actrav/telearn/global/ilo/frame/britain.htm Accessed 16 January, 2006 Wright, John G. (August 1949) "Economic Roots of US Imperialism: The Reigning Oligarchy" Fourth International. Vol: 10; No: 7. pp: 198-203. Retrieved from http://www.marxists.org/history/etol/writers/wright/1949/08/oligarchy.htm#top Accessed 16 January, 2006 Read More