Global Marketing Issues The Power Of Monopolists - Assignment Example

ConTENTS QUESTION 25 MARKS) 2 QUESTION 2 (25 MARKS) 2 QUESTION 3 (25 MARKS) 3 QUESTION 4 (25 MARKS) 4 QUESTION 5 (20 Marks) 4 QUESTION 6 (20 MARKS) 5 QUESTION 7 (20 MARKS) 6 Bibliography 7 QUESTION 1 (25 MARKS) In a market economy, prices give signals, provide incentives, ration and convey information. Explain what this statement means and discuss how well prices carry out these functions with specific reference to the provision of goods and services in the South African economy. Prices in a market economy indicate a lot about the goods and services in the industry. Because prices are used to regulate the interaction between the demand and supply of a certain good, it signals when the supply is enough for a given demand. Prices, as results of interaction between demands and supply, may indicate either a shortage or a surplus in the supply. When there is shortage in supply, that is when demand exceeds supply, price is used as a rationing mechanism. When the price is raised to a certain level, demand falls. The price is raised at the level when the demand falls and it equals the supply in terms of quantity. Prices also provide incentives and convey information in a market economy. Take for instance the Sorghum beer in the 1990s. The price of the Sorghum beer in relation to consumers’ perception of the product leads consumers to buy beers that are import. The price created a negative perception of the beer as a drink only for poor people. QUESTION 2 (25 MARKS) Compare a perfectly competitive market structure and a monopoly market structure. By means of realistic examples, discuss the notion that a monopolist will not produce where the demand for a product is elastic. A monopolist will not produce where the demand for a product is elastic—that is when the sensitivity of the quantity of the product demanded is high in relation to its price. The main characteristic of a monopoly is that it has the power to influence price being the sole producer in an industry; therefore the higher the level to where it raises its price, the more drastic will be the decrease on the quantity demanded of its product. This decrease can lead to losses, which defeats the very purpose of its control on prices to gain more profits. In a perfectly competitive market, no single player has the power to influence the price level; because the are many players in the market, the demand for the goods of a single firm seems to look very elastic, as when it tries to influence price the consumers can buy from other firms offering the same goods. Given this situation, any single firm that is part of the industry will sell its output only when the additional (or marginal) cost that it will incur in the sales transaction is equal to the price of the goods sold in order to maximize its profit. Until the firm’s number of outputs reaches the point where its marginal cost is equal to the average cost for all outputs, the firm will earn profit. When the marginal cost becomes greater than the average cost that is when the firm starts to lose money. On the contrary, in a monopoly market structure a single firm produces all the outputs in the industry. Because consumers have but only one choice of provider for the product they need, a monopolist has the power to influence the price level. The more inelastic the demand of a product—that is a rise in the price level leaves little effect to the quantity that is demanded, the more profits a monopoly gets by raising prices. The more elastic the demand of a product, the greater the effect (decrease) there is on the quantity demanded of the product. In this case, a monopoly cannot use its power to reach its objective of maximizing profit because a slight increase in price will lead to less quantity that it can sell. This is the main reason why a monopolist will not produce where the demand is elastic. QUESTION 3 (25 MARKS) Economics is concerned with scarcity and choice. Discuss this statement and explain giving appropriate examples what is meant by .opportunity cost. We live in a world of scarcity: that is, a world where the amount of natural resources is relatively limited but human desires are unlimited. The limited amount of natural resources thus requires people to vote and choose the desires that they want to satisfy. Goods and services are produced given the limited amount of these resources in order to satisfy certain desires. In a world of scarcity and limited resources, the concept of opportunity cost is vital for us to understand. Take for instance the most vital resource every human being equally has—our time. We only have but twenty four hours a day to spend our lives. If we only have twenty four hours remaining in our lives, how would we decide to spend it? Perhaps the first thing we do is to list down all our desires (all the activities what we want to do with our time)—perhaps those include calling all our loved ones, traveling to places all our lives we’ve dreamt of going to, eating the food that we’ve never tasted before. We then prioritize each desire, then decide or rank the activities that we think can most satisfy us. Afterwards we see which among these prioritized activities can fit into our twenty-four hour time-frame for not everything that we want can be done within twenty four hours. To choose some of the activities would mean to let go of the others. The opportunity cost of doing an activity chosen is the cost of the activity that we do not choose to do. This is the point of economics: it is about scarcity—the limited resources that we have in this world; and choice—how we choose to spend those resources to satisfy us. QUESTION 4 (25 MARKS) In the long-run equilibrium, every firm in a competitive industry earns zero profit. Thus, if the price falls, all these firms will be unable to stay in business.. Evaluate this statement and relate it to the existence of monopolists and the need for government regulation in resource allocation. In a perfectly competitive market, no single player has the power to influence the price level; because the are many players in the market, the demand for the goods of a single firm seems to look very elastic, as when it tries to influence price the consumers can buy from other firms offering the same goods. Given this situation, any single firm that is part of the industry will sell its output only when the additional (or marginal) cost that it will incur in the sales transaction is equal to the price of the goods sold in order to maximize its profit. Until the firm’s number of outputs reaches the point where its marginal cost is equal to the average cost for all outputs, the firm will earn profit. When the marginal cost becomes greater than the average cost that is when the firm starts to lose money. When the price drops and all the costs remain constant to a firm, as well as the level of output it products, its average cost and marginal cost is now higher than the price. When the price is less than the cost, losses are incurred and firms go out of business in the long run. This implies, that up to a certain extent, the market should be regulated in such a way that firms has a some power to influence price in order to continue on its operations and provide the consumers with the goods that are needed to satisfy them. This gives way to the existence of monopolies. Most of the times, monopolies are encouraged by governments because they are usually the front-runners of innovation. Monopolies have the economic power—that is the resources to conduct expensive research and improvements in technology to foster innovation and push the economy forward. While a monopolist produces more, because of economies of scale, its average cost and marginal cost go down; and while it can influence the price, the level of output that is produced by it is not compromised which ensures continual production for the society. This power of monopolies requires governments to regulate them when they become abusive as they exploit consumers by raising prices to unreasonable levels. QUESTION 5 (20 Marks) Explain the task that the economic system in a country performs with regard to the following questions: How, what and for whom must goods be produced? Economic systems in every country deals with the problem of resource allocation—how can the resources be allocated most efficiently to satisfy most desires? This problem leads us to three questions: question of what to produce, how to produce it, and for whom to produce it. With the limited amount of resources, the question of what to produce leads to two options: either to produce goods for consumption purposes—that is if the system will produce pasta, designer jeans, cellular phones; or investment goods such as edifices to house restaurants that serve pasta, machineries that manufacture jeans, or cellular site and satellite systems for cellular phone-related services. The society has to decide how to produce it—that is, what the means for production are, what systems to produce it are needed, and who are going to do what. Everything that involves production including raw materials, technological capital, human resources, techniques to manufacture, is to be identified. For whom the goods are produced is the third question determined by economic system. When the goods are produced, the distribution of these goods vary depending on the mechanism of the economic system in a country—some people may consume more, some people are allowed to consume only a certain amount. The economic system determines as to the criteria on distributing the national product; in a market economy for example, distribution of national product is determined by number of currency votes a consumer has in his pockets. The more currency one has, the more goods he can avail and thus increase his proportion on the distribution of national product. QUESTION 6 (20 MARKS) There is always a probability that a monopolist will exploit consumers (although this does not necessarily always happen). Explain how the Government can take actions to monitor the situation and protect consumers against a monopolist who abuses his economic power? Most economies in the world are mixed economies—that is, a mixture of market and command economies. The extent of free markets is sometimes subjected to a certain level of government intervention and regulation to ensure that consumers are protected. Governments regulate monopolies that are abusive of their economic power by lowering quotas and tariffs to encourage foreign players that are more efficient in their operations to join the local competition, thus forcing monopolies to become more efficient in their operations. Most of the times, monopolies are encouraged by governments because they are usually the front-runners of innovation. Monopolies have the economic power—that is the resources to conduct expensive research and improvements in technology to foster innovation and push the economy forward. However, when monopolies use their power to exploit consumers with unreasonable prices or poor quality products and services, the government can regulate them by providing policies to encourage competition from foreign players. When foreign players that are more efficient in their operations enter the local competition, monopolies no longer have the power to influence price or level of service. With more choices the consumers have at the entrance of foreign players, rational consumers are assumed to shift consumption from goods produced by the monopoly competitor to the more efficient foreign competitor. This puts pressure to the monopolist to become more efficient to compete with the foreign player: there is pressure to either lower down its prices, or raise the level of quality of its products and services as demanded by consumers. The more players an industry has, the more competitive the industry becomes which lessens the power of monopolies. The key to regulating monopolies comes from the concept of competitive market structures—that is, in an industry the monopolist is the only one capable of serving the market because no one else dares to compete with it from the local arena. However, there are more efficient foreign players, that when governments encourage entrance to some of its local industries will promote local competition and put gradual pressure to monopolies to become more efficient in their operations. Thru foreign policies such as determining the level of quotas or tariffs as regards the imports, or foreign direct investments will the government be able to regulate monopolies. QUESTION 7 (20 MARKS) By means of a practical example, explain what predatory pricing is and give the advantages and disadvantages of using such strategy. Predatory pricing is a practice of influencing the price to go below the average cost of the competition which induces the other players losses and forces them to go out of business or be acquired by the largest competitor which can afford to go on predatory pricing. For example, a major manufacturer of a consumer good is faced with competition that comprises a number of smaller players. When one of the players try to cut down on its prices to encourage nudging and encouraging consumers to buy their products more than the other players, the major player may practice predatory pricing to fight and discourage it. Being a major player that enjoys economy of scale, it can lower down its price below the competition’s average cost without incurring losses. The other players, with their costs higher than the price will be forced to leave the industry as they incur more losses. The strategy is considered predatory as it eats away the other competitors either by putting them out of business, or by acquiring them. The drawback in using such strategy lies in the consumers’ perception of the product. Since prices signal something in the industry and convey information about the product, it can suggest poor quality in a way. It can damage the image of the company practicing predatory pricing as being cheap, as well as being accused of unfairness when the consumers learn about what the company has done to other players. Bibliography Johansson, Johny (2001). Global Marketing: Foreign Entry, Local Marketing, and Global Marketing. International Ed. Philippines: McGraw-Hill Samuelson, P. & Nordhaus, W. (2004). Economics. International Ed. Philippines: McGraw-Hill Wills & Rick (1999). The Kind of Imported Beers. New York Times, May 28, p. C1, C2 Read More