The Advantages and Disadvantages of the Market Structure of Monopoly - Assignment Example

The Postal Market in the UK Total Number of Words: 2,531 Q Explain the advantages and disadvantages of the market structure of monopoly. Apply your understanding of monopoly to the situation of Royal Mail before January 2006. A monopolized market structure is referring to having only a single company that has the right to operate, produce and distribute a product or services throughout the market.1 A natural monopoly is more advantageous on the part of a business enterprise in the sense that the company has the power to dominate the entire local market. In the absence of a government intervention and regulation, the company can easily dictate the price in exchange for the product and services they offer to the public. Because of the fact that a monopolized company could maximize its profitability, the company could eventually have a bigger chance of being able to invest on product or service innovation in order to create more demand in the market.2 In the end, the company could generate more profit either at the expense of the target consumers or by being able to achieve a greater ‘economies of scale’3. The disadvantages of having a monopolized market includes: (1) having the public consumers to be on a less advantageous side in terms of having the need to pay a higher price for the product and services offered by the company 4; and (2) the quality and standards of services offered by a monopolized company suffers because of the absence of a fair competition in the market. Monopoly in the Market of Postal Service in UK For many years, the Royal Mail in UK has monopolized the entire postal service in the country. It was only during the early 1970s when the UK government allowed several small-scale private mail services to operate in the market due to the Royal Mail postal strike back in 1971.5 Despite the existence of small-scale private mail services in the market after the strike was fully managed, the market share of the Royal Mail has remained unaffected because of the huge size of its operations. The reason why the small-scale players were not able to penetrate the market share of Royal Mail can be determined by analyzing the relationship or interaction between the average operational cost and the market demand. Let take a look at the case of a small private mail service as Operator A and the Royal Mail as Operator B. Figure I and II will provide us a better picture with regards to its respective average costs and market demand in order to give us the minimum efficiency scale of each firm. Basically, a postal mail industry is a network industry therefore it requires a huge investment on technology in order for each company to meet the demand in the market. In the absence of a huge and efficient network, it would be impossible to for a small company to achieve a break-even point in line with the high cost of technology investment. For this reason, the small players in the mail industry were not able to penetrate the market of Royal Mail. Figure I – Economies of Scale of Operator A (Small-Scale Operator) Figure II – Economies of Scale of Operator B (Royal Mail) Based on the Postcomm Annual Report (2002), monopolizing the Royal Mail in UK was not working for the best interest of the local consumers nor to the Royal Mail itself since the efficiency in its services has suffered a lot.6 Even though Royal Mail has the competitive edge of having a more stabilized network as a postal mail industry in UK, the company failed to become more efficient in the market. According to Harberger (1954), one of the most common causes of inefficiency within a monopolized company is the misallocation of its resources which often results to the overall decrease in the welfare of its consumers.7 Competition in the Market of Postal Service in UK before January 2006 When Postcomm decided to slowly introduce competition in the postal mail market, the issue on pricing was the most sensitive part of shifting from a pure monopolistic operation to a competitive market. At first, all the other small-scale postal mail operators had to pay a certain amount of fee in order to deliver the mails. From this point of view, it was very difficult to decide on the most feasible price because of the lack of benchmarking and actual policy to change from monopoly to an open competition within the UK postal mail industry. Basically, if Postcomm would set the price without taking into consideration the financial and operational condition of Royal Mail on its renewal plan, there is a higher tendency that the entire UK postal mail service would suffer since Royal Mail is the biggest post mail operator throughout the country.8 For example: setting the market price at a very low rate could negatively affect the volume of Royal Mail’s daily operations. Thus, increasing the inefficiency of the National postal mail service. On the other hand, setting the price too high could discourage competition within the market because the demand for postal mail would decrease. A decrease in the demand will first affect the small-scale operators since it will affect their profitability which could make them unable to invest and established their own delivery networks in the long-run. The fact that many small-scale private mail services has emerged in the market means that the postal business can be very promising. However, the competition in the market of postal services in UK since the late 1990s has started to become tighter. Aside from the presence of the small-scale postal mail operators, the demand on the use of other modes of communications such as telephone lines, fax machines, and the use of the Internet back in the year 2000s has began to increase. These alternative forms of communication had a significant impact over the decline in the use of postal mail services in UK. Figure III will show us the impact of alternative forms of communication over the demand of postal mail services. (See Figure III on page 9) What happens when competition in the postal mail market is tight is that the demand curve would shift to the left causing the price (from P1 to P2) and production output (from O1 to O2) to decrease. Therefore, in order for Royal Mail to survive, the company needs to downsize its operational costs in order to make the company more efficient in maximizing its assets and other operational resources as well as its manpower. According to Leibenstein (1969), a company should be able to operate at the lowest possible operational cost in order for the company to maintain or increase its competitiveness in the market.9 Normally, what happens within a competitive market is that either one or more competitors would offer their services at a lower cost in order to grab some of the market shares. Figure III – Declining Demand for Postal Mail Services In October 2001, the European Union made a political agreement to further open the European postal market to competition.10 In line with this agreement, the right of Royal Mail to monopolize the operations of postal mails that weigh from 350 grams was downsized to 100 grams on January 1, 2003. When the Royal Mail was still monopolizing the entire postal mail market in UK, there was no low price pressure coming from a significant competitor in order to force the Royal Mail to improve its operational inefficiencies. In the end, the welfare of the consumers was greatly affected. For this reason, it is safe to conclude that even a regulated monopoly should never be considered as the best instrument when it comes to improving a company’s customer service or promoting a service innovation.11 Q.2 Since January 2006, the Royal Mail has to face 17 competitors. Explain in detail: the new market structure of postal services in the UK; will this change ensure that postal services are more efficient (in economists’ terms?); will consumers benefit from this change? According to Frantz (1992), allowing a free competition within certain industry could lessen the probability of having inefficient service in the market.12 Similar to the suggestion of Frantz (1992), Bertolettis and Poletti (1997) also believe that the introduction of a tight competition within an industry could improve the efficiency of services.13 Unlike in a monopolized industry, managers within a free competitive market will be able to gather more information and basic knowledge on how they could improve the services they render to each of their consumers. In a competitive market environment, mergers and acquisitions also becomes a good option in order to extend the available resources of two or more companies in order to reach a maximum level of economies of scale. Since January 2006, the US postal market opened its door to an open competition the industry.14 In the process of implementing the open competition, the Royal Mail including the rest of its 17 competitors had to conform to all the requirements that have been published on the Postal Service Act 2000 under the supervision of the Postcomm.15 The said Act provides the universal provision to all the postal mail service operators throughout UK. In order to promote an effective competition among the operators, all companies were required to secure a license from Postcomm each time they convey letters that weigh below 350 grams. The said license will serve as a legal binding between the operators and Postcomm with regards to delivering and maintaining the high quality service standards set by Postcomm; limiting the prices that is chargeable to the local and foreign consumers; as well as requiring them to provide a universal postal service. In line with pricing, a one price throughout the Universal Service across the UK has been implemented.16 Implementing a universal rate for all postal services will help ensure that all the local people will have an equal access to a reliable and a more affordable postal service. The prices of goods within a free market competition are normally dictated by the supply and demand. However, this is not true in the case of the recent postal service throughout UK. The Postcomm regulation (government intervention) concerning the implementation of one price for all makes the market price fix regardless of the movement in the supply and demand curve. This only means that for a postal mail service operator to gain profit, its manager has the obligation to keep its operational costs as low as possible as well as improving the efficiency of its services in order to maximize the company’s profitability. Figure IV will show how a postal mail operator could gain profit out of the fixed price of its services. (See Figure IV on page 13) Figure IV – How Postal Mail Operator could Maximize its Profit from a Fixed Price Service Considering that the prices of postal mail services in UK are fixed, it means that the only way for a postal mail operator to increase its profitability is by increasing the demand. Notice that when Demand (D1) shifted to point (D2), the production output also increases from O1 to O2. Since the prices of postal mail services is equal among the local operators, the only way to grab a bigger market share is by improving its services rendered to its respective customers. In the absence of a good service, a customer could easily seek for the services of other nearby postal mail operators. In other words, this type of business arrangement could really improve the efficiency in the postal mail services throughout UK. Aside from a higher quality in throughout UK’s postal services, the consumers will also be protected from a possible ‘price discrimination.’ Since the prices are dictated and heavily regulated by Postcomm, there is a lesser chance that the postal mail operators would take advantage of the consumers by charging more for the services they render to the public. The tight competition that is present among the UK post mail operators will also prevent the possibility of cartel or lobbying within the industry. Aside from the annual external audit plan with regards to the risk of a non-compliance with the regulatory as well as the statutory obligations of each operator17, the operators themselves could act as a security on behalf of Postcomm. Any operators that will violate the rules and regulations set by Postcomm can easily be traced and be punishable by law such as the issuance of a penalty by allowing the consumers and other operators to report any proven incidence of violation. *** End *** References: Abowd, J. M. (1998). Monopoly by Prof. John M. Abowd. [Online] Retrieved January 6, 2008, from http://instruct1.cit.cornell.edu/courses/econ101-dl/lecture-monopoly.html Compliance Officer Activities Annual Report 2006 / 2007. (2007). Royal Mail , 1 - 28. Corbett, G. (2002). Annual Report 2001/2002. London: Postcomm. Foot, P. (2003, November 12). The Guardian. Retrieved January 6, 2008, from Sorted - by the Workers: http://www.guardian.co.uk/post/story/0,11489,1083131,00.html#article_continue Bertoletti, P., & Poletti, C. (1997). X-Inefficiency, Competition and Market Information. Journal fo Industrial Economics , 45(4):359 - 375. Frantz, R. (1992). X-Efficiency and Allocative Efficiency: What Have We Learned? 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Journal of International Economics , 9(4):469 - 479. Leibenstein, H. (1966). Allocative Efficiency vs. X-Efficiency. The American Economic Review , 56(3):392 - 415. Royal Mail Group. (2008). [Online] Retrieved January 6, 2008, from Postal Services Regulation: http://www.royalmailgroup.com/portal/rmg/jump1?catId=23200529&mediaId=23200532 Read More