Perfect Competition Issues - Assignment Example

Introduction Market forces and perfect competition has been a point of debate for many years among Economists and Philosophers. The idealistic perfect economy has been modelled under several variables and many researchers have formed theories on the closest possibility of such a model. Studying different economies in a global environment may give a deeper insight into the changing dynamics of economics and may define perfect competition not just in terms of entrants and prices but the availability of perfect information as well. 1. a) Explain how market structures in practice deviate from the model of perfect competition. Perfect competition in simple terms reflects a large number of firms selling a homogenous product in the market. This lies solely as a theoretical benchmark of measuring performance of companies operating under perfect competition. In practice, one of the many deviations may be the possibility and that the firms and customers may not have perfect information about the market. Some firms operating in the market may not have access to information that older firms do (Rees et al, 2005). Similarly, customers in emerging markets may also be at a lower access to information about the products and the industry than already developed and mature markets. This will lead to a change in structure of the theoretical perfect competition structure. Moreover, the imbalance in perfect information may also affect other factors such as the firms being price takers and barriers to exit and entry may persist for some firms while others may not face the same consequences. Firms may not exactly be operating on the floating prices as many market prices may be either exaggerated or deflated due to an overall nature of the industry at a given time. Many firms may drastically lower their prices in order to beat upcoming competition and if a new entrant takes the floating price at that time to try to equate marginal cost to marginal profit- it may lead to a long run closure of that new entrant (Worthington, 2006). Furthermore, pessimism and optimism in the market may also lead the market to deviate from the perfect competition theory as the cost of factors of production along with the floating price in the market may be perceived by the customers and firms in a different way both in the long and the short run. Many firms, therefore, may (along with the industry as a whole) may start functioning as a price setter rather than a price taker as generally assumed by the theory of perfect competition (Rees, 2005). 1. b) Use a range of examples to illustrate the relationship between market forces and organizational responses Building upon supply and demand of the factors of production and the supply and demand of the product itself, the organizations have to respond to the structuring and re-evaluations of the suppliers as well as the market segments as the fluctuations take effect. The organization has to tailor its pay structure in accordance to the minimum wage and the prevailing pay structure in the industry to remain competitive. An organization that will have a lower compensation package for its employees will lose in the long run as the supply of the human capital will not be available and similarly a firm with a higher compensation package will also suffer in the long run as the marginal cost of the products will increase and the firm will not remain cost effective and incur losses (Jarvenpaa & Ives, 1994). Over past few years, we have seen a global shift in the contribution of factors of production as the economy has gone through globalization. Most of the textile sourcing has been shifted to China, India and other eastern regions as labour and rent on land is much cheaper. As the first few firms moved their production to these regions to gain a cost edge, the others had to follow to remain competitive. We have also seen power, gas and oil companies shifting major parts of their production to these areas as well and the lower production cost has realized a shift from central production to global production of goods and services (Moore, 1993). Organizations have altered their cultures and behaviour to match the needs of a global customer and global factors of production. On the other hand they have also been exposed to recessions and booms in the respective regions which may have been the cause of many firms closing down in a global slum era as they have to face lower marginal profits. Macys, ABN AMRO, Barclays, and many other companies have faced the same dilemma in recessions (Rees et al, 2005). Organizations have gone through certifications such as ISO and pi-sigma to improve services and authenticate their improvements to global customers. Organizations have extended out of their respective regions to cut down on the cost of factors of production. They have met an overwhelming increase in demand of their products and have out of proportionately diversified their products and services. All of these have been done by a change in the market forces that have been an exercise to sort out trust issues in the consumers. 1. c) Explain the behaviour and competitive strategies employed by an organization and discuss the role of the competition commission and regulatory bodies. Although, it may be for the betterment of the customer that the market remains in perfect competition or at least operates close to it, many organizations in the industry may seem more benefits if they can control the price and be price makers instead of price takers. This practice may deviate the market from benefiting the customer and remaining perfectly competitive. Organizations may tend to team up and cartels may evolve and many new entrants may not be allowed to operate in the industry. The Microsoft Internet explorer is a good example of such a practice where the integrated browser did not allow full functionality of windows if it was substituted by another similar browser of a different company (Peteraf, 1993). Similarly, large organizations may gain influence over limited suppliers in the economy and may force smaller companies out of the market. To maintain the market close to the model of perfect competition, many regulatory bodies are formed to ensure freedom of entry- wherever there is chance that profits will increase the normal percentage, along with other functions of perfect competition. The regulation will ensure that there is a way for new entrants to get competitive information about the market that may have a chance to go towards being a monopoly or a variation of such (Scott, 2007). Honda has set its production plants globally and many developing or underdeveloped economies whose local car manufacturing has not matured yet may suffer due to the technological advancement of Honda. In such a case, a regulatory authority may define rules that Honda may over the period of time transfer the technology to the local region so that the local car companies may also benefit from the trained and specialized production unit of car parts (Scott, 2007). Many such regions such as India have regulated that most of the parts of such cars be produced and procured locally. The role of competition commission in the United Kingdom is similar where it acts as a constable and overlooks the markets to provide information and procedures for different industries so that the market remains close to perfect competition. Its role is to maintain credibility between the businesses and the consumers along with building a relationship of trust between itself and the two. Its role is evaluate complaints and lodge investigations where an organization tries to move away into a monopoly or cartel. 2. a) Discuss the importance of international trade, economic integration and global markets to UK business organizations. As with most global companies now present in the global economy, most companies with their origins form the United Kingdom have had many benefits from international trade, economic integration and global markets. The market forces have affected the nature of business of UK companies and they have been forced to outsource units of production from the relatively cheaper regions across the globe to remain competitive (Johnson, 2000). Economies of scale have also been put in place as these very same companies have been exposed to a much larger share of market and an increased number of customers due to international trade and global markets. The companies have improved their services and the goods and services have been maintained at a marginal profit volume in the local market, many companies have kept only the production units that had a comparative advantage inside the regional market of the UK and have moved the other products for a different region (Worthington, 2006). International trade and economic integration has allowed companies to use the by-products of their mainstream goods as a sellable commodity and hence it has helped in reducing the overall cost of goods made and factors of production. Integration with other economies has made the UK companies make new investments and enjoy a short term gain in the developing markets as being the first movers in that region. This has helped many medium sized companies to be a part of larger organizations and has made them stabilized than before. 2. b) Analyse the impact of two policies of the European Union on the UK business organizations. One of the main policy of the European union that had a strong impact on UK business was the availability of labour in the UK form other European regions that was not there before. This added labour did not affect that drastically on the available jobs for the UK residents but filled up many jobs that most of the available labour inside the United Kingdom was not willing to take up. The higher number of available labour however did not affect the wage rates or the pay scales but the organizations and businesses that were small and medium in size found people to work for them as they could not before (Johnson, 2000). However, even if the higher increase in the number of available labour did affect the wage rate, it went to the benefit of the UK based companies as they became more competitive for the global market. The labor force became more skilled and competitive and the organizations induced a lower cost on production generating more possibilities for new entrants. This policy may have adverse affects in the short run but the long run benefits may out run them as a whole (Scott, 2007). The second impact may be evaluated on the organizations and their structure. The exposure of the United Kingdom to other European countries has put the organizational response to solutions on a better and a much more effective path. Ministries and departments respond better and more quickly to communication and many new departments have been formed to function with the policies of the European Union. This change has brought new employment and efficient role of all organizations and department within the United Kingdom. 2. c) Explain the economic implications for the UK of entry into EMU United Kingdom is sought to be more volatile as a part of the EMU. This assumption is based upon that the interest rate will not be able to offset any shocks that may occur under the macroeconomic policy. Increased competitiveness and lower cost of factors of production will lead to a more stable price and lower inflation rates in the economy of United Kingdom- this will turn out to be a major benefit to the UK as stability in price and increase in investments will lead to a boom in the business cycle (Scott, 2007). The economic output of the United Kingdom will increase as the economy adopts new entrants and this increase in Gross Domestic Product (GDP) will ensure not only long term price stability but also a further increase in investment. Conclusion: Perfect competition may be attained as close as possible with strong regulation and checks on businesses and organizations. The global economy proves to be fast growing and geographically expanding, however, with this expansion, there is a need to control the businesses to ensure competitiveness in the industry. The regulatory authorities need to develop more into a more controlling bodies that can monitor the organizations in a more vigilant way. References: Jarvenpaa, S. L & Ives, B. 1994. The global network organization of the future: information management opportunities and challenges. Journal of Management Information Systems archive, Volume 10 ,  Issue 4  pp. 25 – 57, M. E. Sharpe, Inc.    Johnson, D. 2000. European Business: Policy Challenges for the New Commercial Environment. Routledge. Moore, J. F. 1993. Predators and Prey: A new Ecology of competition. Harvard business Review, May-June, 1993, pp. 75-86. Peteraf, M. A. 1993. The Cornerstones of Competitive Advantage: A Resource-Based View. Strategic Management Journal, Vol. 14, No. 3, pp. 179-191, John Wiley & Sons. Rees, A., et al. 2005. Economics for business: blending theory and practice. Financial Times. Scott, H. S. 2007. International Finance: Transactions, Policy, and Regulation. Foundation Press. Worthington, I. 2006. The Business Environment. Financial Times Prentice Hall. Self Evaluation The report studies different market forces and how these economic factors benefit the development of a model that is close to perfect competition. Research articles out of journals and books were used to support the ideas that how businesses in the United Kingdom as compare dot the businesses originating from other regions may benefit form from economic integration, globalization and international trade. It was found that even though the theoretical model of perfect competition may have been far from realization a decade ago, however, the global economy has increased the number of suppliers and sellers along with the customers to get the theoretical model come close to actual practice of markets. This in turn has been more effectively monitored through international legislation and supervision by trade authorities who have controlled the operation of businesses in the markets in a better way. The sources have been used to support the idea that perfect competition has resulted in the global economy and the market forces along with their influence have been made to discourage monopolies and cartels. The global economy has taken its turn to re-shape the organization of businesses and improved the competitiveness- resulting in firms being happy price takers. Read More