The Market Structure - Essay Example

?PORTIFOLIO Table of Contents Table of Contents 2 a) What type of market structure is being described above and what are its main assumptions and characteristics? 3 b) Discuss the evidence uncovered by the European Commission. 3 c) What form of collusion did the airline companies engage in? What factors can make some sectors more susceptible to this form of collusion? 4 a) What are the factors that were mainly responsible for the contraction of the UK economy in Q4 of 2010? 5 b) Examine the prospects for a stable economic recovery for the year 2011? 7 a) The benefits of trade and demonstrate the principle of comparative advantage? 9 b) Whether countries are justified in protecting their domestic industries? 10 Reference 12 Bibliography 12 Questions 1 a) What type of market structure is being described above and what are its main assumptions and characteristics? In a concentrated environment like that of Airline industry the market structure followed by the company players are mainly Oligopolistic. Oligopolistic market structure is mainly a characteristic of a market where the number of seller is small and very limited. Straight forward way of direct competition is not followed in case of oligopolistic market rather a more strategic planning is required to be the leader of the market. A market is defined as oligopolistic market when the top five companies in the market captures the share of around 60 % and above. Under the oligopoly market structure the seller has a greater impact on the market than in case of monopoly. Due to the cartel in the oligopolistic market all the players in the market limits their offers which results in the rise of price and are forcefully imposed on the market. Game theory techniques help the oligopolistic market to solve the equilibrium. Forming a cartel they act in a conjoint manner and fix the price together like monopoly and then share the profit (Econ. Ohio-State, n.d. p. 1-4). b) Discuss the evidence uncovered by the European Commission. European Commission investigated in the matter of air freight collusion case for the anti-competitive practices of the industry and fines eleven airline leaders with a massive amount of €800 million ($1.1 billion) for their faulty practices. Air France was charged with the largest fine of €310 million for their Dutch partner and French carriers. Though the Lufthansa and the Swiss Airline was accused at the beginning but they escaped the charged penalties as they act as the whistle blower on the cartel issue. British airways were charged a fine of €270 million after the second largest penalty for SAS Group along with Singapore Airlines with an amount of €70-80 million. Due to the previous involvement by the SAS group in anti competition issue they were charges about 50 % more than that should be charged. Many others airlines were charged with penalties according to their involvement in the process. Cartel behavior of fixing price for a long period of 6 years was uncovered by the European Commission against these airlines. With the activities like fuel price hike and security surcharges the players were involved in the Cartel practice (Anderton, n.d., p. 379). c) What form of collusion did the airline companies engage in? What factors can make some sectors more susceptible to this form of collusion? In some market segment the competitors are not sure of their moves and effect of their strategies implemented in the market. In such cases in an oligopolistic market collusion or a conjoint effort is done to share the market profit amongst the players. Collusion can be of several forms. It can be broadly categorized as Formal Collusion and Informal Collusion. The collusion technique followed by the airline industry is mainly formal form of collusion by forming a cartel between the small numbers of leaders in the industry. This form of cartelization is done where there are limited leaders with similar types of products offered to the customers and for their mutual benefit they form the cartel to take all decision together rather than competing with each other. A common objective is set by the players by fixing a set of prices between themselves. To maximize the profit of each and every company then act as a monopolistic market together and then share the total profit according to their contribution in the process. They together act as a barrier to the new market entrants to keep hold of the market share. With more and more players it’s more difficult to form the cartel. If the different elements like price, tax, regulations and cost vary little then it’s easier to maintain a stable industry. However this type of collusion does not stay for long due to the decrease in the demand of some services or product offered which leads to price cut from individual players and thus affecting the collusion policy adopted by the companies together (American Business, n.d.). Due to this type of collusion often it acts as an entry barrier for new players and also for the other industries which are related to the airline industry. Industries like hospitality and tourism are sometimes affected by this type of collusion as the bargaining power of the consumers reduces as they are one of the main sources of their business processes. If the price of the airfare increases there is some fall in the demand of travelling for holidays which has a massive impact on the leisure industry. Question 2 a) What are the factors that were mainly responsible for the contraction of the UK economy in Q4 of 2010? The UK’s fourth quarter economic growth reveals a contraction of 0.5% and was recovering at a very slow rate. The economic condition will be under pressure even on the year 2011 as consumers faces problems due to the government measures which was taken during the year. The contraction is mainly due to the bad weather in the fourth quarter of 2010 resulting from the UK’s freezing condition. This contraction in the Q4 follows the Q3 slower growth of 0.7 % in the year 2010. Figure 1: UK GDP with the main demand components (Source: British Chambers of Commerce, 2009, p.5) The government policy of dropping the interest rate to meet the budget deficit of UK and has a stable growth in future imposed massive programs. The rising price of commodities is also responsible due to the rise in inflation and this inflation is the important reason behind banks policy of not raising the interest rate to combat with the market situation. Government borrowing also kept low during the year which is expected to grow in the following years 2011 through little low of ?146bn than expected ?148.5bn. Figure 2: Growth per year (Source: BBC, 2011) These are the foremost factors which are responsible for the contraction in UK’s GDP during the fourth quarter of 2010 (BBC, 2011). b) Examine the prospects for a stable economic recovery for the year 2011? The contraction in the Q4 of 2010 in UK is to maintain a stable growth of GDP in the following years. With this 0.5 per cent increase in UK’s GDP the industry is expected to grow in coming years in different sectors. Figure 3: GDP growth (Source: Office of National Statistics, 2011) The business and the financial sector being the major contributor are expected to increase by 1 % compared to the previous year 0.5 % growth. The transport and communication also increased remarkably by 2.7 % which will increase even more as expected at the end of 2011. Government and service sector having a steady growth from 0.1 % to 0.7 % due to the major contribution from the health sector is also responsible for the stable recovery. Hotel and restaurant is another sector which contributed massively in this quarter of 2011. But on the other hand there is a minor decrease in few sectors also like Construction, Manufacturing, Mining and Energy sector which will affect the growth of GDP to some extent in the year 2011 (Office of National Statistics, 2011). Question 3 a) The benefits of trade and demonstrate the principle of comparative advantage? Trade is mainly carried out between countries when a product is produced at a lower cost by other country. The cost of production for different countries varies due to their different abilities to produce goods. These differences can be overcome by the countries with the help of trading technique. Trade of goods and services helps to find the opportunity cost which might be invested to some production. One country may be specialized in designing cars but their investment in producing poultry can be wastage of resources. Since the country is investing in other resources it cannot manage its specialized resources properly thus there is wastage in countries cost and time for diversifying its production with the motto of producing all. Trade helps to save this opportunity cost for the country. Another gain from the trade is countries or individual can have absolute advantages over other who can produce quality goods from smaller inputs and can produce more outputs than other country. Countries who are specialized to produces goods with lower inputs can keep the price of goods lower than other countries. For this the country has an absolute advantage over from others thus generating more demand for the product or services. Whereas country can also be beneficial from trading when it has a comparative advantage over other country for producing a product. Comparative advantage will determine the smaller opportunity cost for the country and they will produce only the products in which they are specialized in. The products which will lead to the wastage of money, resources and time are traded from other countries to save cost and invest in their own specialized product. This will result in producing best quality product by every country in their own specialized way rather than producing different types of products. Comparative advantage is only benefitted from trade literally. Absolute advantages are not so beneficial from trading. If we take an example it can depict how Trade becomes beneficial for Comparative advantage. Let’s say two people A and B working on two different jobs 1 and 2. A can do job 1 in 10 days while B does in 15days whereas A can do job 2 in 15 days and B can do in 12 days. Thus if the two person works on their specialized segment A can work on job 1 only while B can work on job 2 only. As a result of that both of them can produce optimum result for their own specialization (CSUN, n.d., p.1). b) Whether countries are justified in protecting their domestic industries? Trade barriers are used in order to develop the market and improve the economy of the country. Home industries are developed with these barriers due to the barriers in the entry of foreign industry into the country. These barriers are imposed for some beneficial cause of the country like – Protecting the Domestic Environment Domestic industries are threatened by the entry of more sophisticated products from imports. Domestic products are not in demand which leads to loss of jobs for the employees and affects the economy of the country. But on the other hand if the countries impose trade barriers then the countries industries will continue to produce the different products even if they are not so good in quality but will be in demand in the market due to no comparative advantages in the market. For National Security Countries also implement this barrier for protecting their national security otherwise it may cause a loss in the defense of the country if the defense industry trade of their products to other countries. Protecting Infant Industries To protect infant industries the governments increase the import duties of the products thus results in the rise in price for the imported goods. This gives space to the domestic industries to prosper in the market and compete with the imported goods from foreign companies being a cost leader of the segment. Consumer Protection Sometimes government protects the population of the country by imposing trade barriers as because certain products can be risky for the people of the country. For example South Korea placed tariff on the import of beef from USA as it might affect the population due to the different diseases caused by the product. This helps in protecting the nation from different diseases as well as increases the sale of different substitute of beef within the country’s industry. Thus imposing trade barriers though decrease the possibilities of growth of the country but on the contrary it can boost the domestic industries to grow and the government can also control the different aspects like health of the population and defense of the country (Libraries of Economics and Liberty, 2010). Reference American Business, (No date). Cartel. [Online]. Available at: http://american-business.org/127-cartel.html . [Accessed on April 30 2011]. Anderton, A., (No date). Edexcel Economics A LEVEL. Pearson Education India. BBC, (2011). Osborne's Budget 'to fuel growth'. [Online]. Available at: http://www.bbc.co.uk/news/business-12830224 . [Accessed on April 30 2011]. British Chambers of Commerce, (2009). BCC UK Economic Forecast – September 2009. [Online] Available at: http://www.yhchambers.org/Uploaded/BCC%20Economic%20Forecast%20September%202009.pdf [Accessed on April 30 2011]. CSUN, (No date). Microeconomics. [Pdf]. Available at: http://www.csun.edu/bus302/Lab/ReviewMaterial/micro2.pdf . [Accessed on April 30 2011]. Econ.Ohio-State, (No date). Oligopoly. [Pdf]. Available at: http://www.econ.ohio-state.edu/jpeck/H200/EconH200L13.pdf . [Accessed on April 30 2011]. Libraries of Economics and Liberty, (2010), Barriers to Trade. [Online]. Available at: http://www.econlib.org/library/Topics/HighSchool/BarrierstoTrade.html . [Accessed on April 30 2011]. Office of National Statistics, (2011). GDP Growth. [Online]. Available at: http://www.statistics.gov.uk/cci/nugget.asp?id=192 . [Accessed on April 30 2011]. Bibliography BBC News, (2009). EU gives boost to dairy exports. [Online] Available at http://news.bbc.co.uk/1/hi/world/europe/7846827.stm . [Accessed on April 30 2011]. Financial Times, (2010). China-US trade war: Beijing slaps new tariffs on US poultry. [Online] Available at http://blogs.ft.com/beyond-brics/2010/09/27/china-us-trade-war-beijing-slapsnew-tariffs-on-us-poultry/ . [Accessed on April 30 2011]. CNN, (2010). Beijing gets tough on US poultry sales. [Online] Available at: http://edition.cnn.com/2009/BUSINESS/09/28/china.us.trade.ft/index.html#cnnSTCVideo . [Accessed on April 30 2011]. Reuters UK, (2009). Obama reignites fight over U.S. farm subsidies [Online] Available at: http://uk.reuters.com/article/idUKTRE51O7HN20090225 . [Accessed on April 30 2011]. BBC News, (2009). EU gives boost to dairy exports [Online] Available at: http://news.bbc.co.uk/1/hi/world/europe/7846827.stm . [Accessed on April 30 2011]. Read More