Part I. Analysis of the Posh Piss and the Foaming Ales Case
Analyzing the case of the two large beer companies and taking all he facts into consideration, a pay-off matrix of the expansion plans of Foaming Ales and Posh Piss can be constructed this way.
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Figure 1: Pay-off Matrix for Posh Piss PLC and Foaming Ales PLC
To explain the matrix in layman’s terms, it goes to show that if Posh Piss PLC and Foaming Ales PLC both have aggressive market share expansion through advertising, both of the companies’ profits will suffer more with their profits lesser than what they could get even before the expansion started. Such a situation happens because even if both companies expand their market shares through advertising, the beer market as a whole in the north would not grow.
This would then result to Posh Piss PLC and Foaming Ales PLC eating each other’s shares which is not healthy. This could also be explained by the type of market they are operating in which is an oligopoly. There are limited players in the beer market and both companies are trying to win over a small amount of consumers. So, it could either be healthy for both companies to either retain the status quo or not have expansion at all. This would be healthy for both companies as they could retain both their profits but with no growth at all.
Another way to maximize the profits of these two companies is to be the first one to expand over the other company, with this, the first company to expand it market share would enjoy the benefit of acquiring the shares of the other company. Say, if Posh Piss PLC was the first one to expand, they would raise their profits to £150 million while leaving Foaming Ales PLC with £50 million in profits or vice versa whoever comes first to expand. What happened in the case is that Foaming Ales PLC fought back the trend posted by Posh Piss PLC and in the process hurting both their profits.
In order to deter each this situation, an external factor could come in handy in order to bring the situation back into the part of the matrix wherein there would be a single dominant player over the other one. Here comes the ill-funded group which can help negate the saturation in advertising made by the beer companies in their aggressive campaigns to win market shares.
The two large funds obtained by the group could possibly come from both companies themselves as this could be a way to bring back status quo or downplay a company who could not meet the demands of the group’s advocacy on the banning of vice campaigning. It could be possible that one of the companies was able to use the group to gain advantage over the other company. Unfortunately, this might be also the strategy that was thought of by the other one and resulted to the group which has poor funding before, have a lot of funds and not to mention, instant publicity.
Figure 2: Pay-off matrix for the telegraph and the newspaper operations
The above matrix can be summed up to a similar concept of theory with the Prisoner’s Dilemma with the difference that if both ceases operations, both would obviously have no profits at all as compared with both continuing operation, newspapers would be more profitable. This is different from the Prisoner’s Dilemma because of the existence of zero benefits for the less dominant player in the game.
One of the possible outcomes for this is to continue operations for both mediums. Of course, there is a disparity in profits due to the difference in technology used. Also, newspapers and telegraphs are two different mediums with different purposes to fulfill in the market. It would be better too if the newspaper company would acquire the telegraph company instead for their own comfort.
Part II. An Analysis of the EU Oil Industry
Business competitions are generally healthy for the economy as a whole. Organization becomes more and more competitive with the product they are producing to gain more customers on their side (Carlson, 2004). The more they are competing, the more they strive for a better and efficient provision of their service or goods. Society as a whole benefits from the competition, high quality products are produced, prices are reasonable since the goods are determine by the supply and demand forces, there will be a variety of brands to choose from and there will be enough supply of goods and services to the public since there are a great number of firms in the economy.
As for the business players, competition is very risky and expensive on their part. Risky in a sense that there is uncertainty if whether customers will patronize their product given that there are other firms in the market that can offer them good transaction terms. This is the reason why businesses find ways on how they will lessen the risks and at the same time increase their profit. Some of the businesses are resulting to convergence of each other to increase the influence of them to other competitors and to have superiority over their consumers.
They most of the times control the price of the goods or their market share to the economy. They can dictate the price by making some changes with their supply to the market. As for the consumers, especially for the basic goods need in their daily consumption, they will now have limited brands to choose from therefore they have no choice but to purchase the good even if it has high price.
It can be seen in the above statement that convergence of businesses has imposing negative effects to the consumer group (Mintel, 2007). It is therefore important to educate them regarding the importance of competition to the economy as a whole. The business sector has something to do in disturbing the equilibrium of the economy.
This market structure is defined as the situation in which one or a few of the company provide goods or service to the economy (WebFinance.Inc, 2007). The convergence of a few major players in the market can also be considered as monopoly. The group works as a one business entity in terms of the effects and influence to the market and to the consumers.
The collaboration of the companies are made in such a way that all of the ‘members’ of the ‘group’ will benefit from the strategies that each of them will implement. For example in the case of the Philippines where in there are only three companies that supplies crude oil in the market namely the Shell Petroleum Corporation, Petron Corporation and Caltex Philippines Inc. (DOE, 2002). They are allegedly having collaboration in their marketing strategy. Let say, Shell is planning to increase the price of unleaded diesel in the market to have additional profit.
Without collaboration with the other oil player, Shell’s customers will shift to other company since their price is now relatively higher to the others. It is a nature of the Filipinos to easily give up their loyalty from one brand to the other just to save money. The safest way for Shell to pursue its plan is to tell the other companies to increase also their price along with them for in this case they will all benefit from this tactic since consumers will be forced to buy oil products even its price have been increased. Oil in the Philippines is considered to be a major good in the economy for it is used by most of the economic sector the said country.
Monopoly is not good for the economy in a sense that goods will no longer be innovated frequently compared to when the market in is competition that from time to time companies innovate their products to attract customers. Prices are also determined based from the profit maximizing condition of the company/few companies (Mintel Report, June 2007). They will always set the prices higher than what it is ought to be. The force of the demand form the consumers will no longer be a factor for the business in setting up their number of quantities to produce or supply.
Social Surplus is the totality of the producer and consumer surpluses of the economy. This can be used as a basis in studying the welfare of the society as a whole (maxwel, 2004).
Since there will be high priced products and less innovative companies, consumers of the economy under monopoly will now have a lower ‘Consumer Surplus’. Consumer Surplus is the area below the demand curve and above the price line. This is also defined as the total amount of the benefits that consumers derived from purchasing a product that has a price lower than they are wiling to pay (Answers.com, 2000). It has an inverse relationship with the price of the commodities in the market. As the price of the good increases, the consumer surplus decreases.
Moreover, consumer surplus determines the total welfare of the consumers in the market whether if they are worse off or better off from the undertakings of any of the economic agents in the market. Producer surplus refers to the amount of benefits derived by the producers from selling products into the market with a price that is higher on what they are willing to sell. Producer surplus is can be computed as the area above the supply curve and below the price paid. It is directly related to the prices of the goods that they provide in the market. The higher they set the price is, the higher is their producer surplus or the more they benefit out of their activity. Producers set their prices at P=MC, where P is the price and MC is the Marginal Cost of their production.
Moreover, producers in reality are giving up the quality of the product they are producing, since they are the only few who produce that certain product, the members of the ‘monopoly’ will concentrate much on the quantity of the production and putting less to the quality of the latter. In this regard, the tendency of the consumer’s satisfaction will deteriorate because of the declining quality of the product that before was of superb quality but now is depreciating, but they still have to buy to that company, especially if the good is needed in the daily consumption of the households, since they are the only one who produces the good.
Benefits from Monopoly
There were a lot of debates regarding the effects of the monopoly in the society as a whole. If monopoly has been imposing only negative effects to the economy, then, why there is still monopoly in the market? Why does the government allowing the existence of this market structure to their domestic markets? The is simple, despite the negative or bed effects of monopoly in the economy, there are still benefits that can be derived from it on the long run. As always an argument, monopoly provides less output and offering higher price compared to a competitive market wherein the industry as a whole will produce sustainable supply of goods at reasonable prices.
The said activities of monopoly produce net loss to the social welfare and efficiency. But monopoly still has positive effects to the consumers in the long run in the form of driving the price of the goods at lower level. Yes, lowering the price of the good, but in the long run. This happens because of the situation that monopoly, since producing at a larger scale, can take advantage of the ‘economies of scale’ (tutor2u.net, 2007a). An economy of scale is the economic position in which the firms that produces on a larger scale, on the average, will incur less input costs (Heakal, 2003). During this economic phenomenon, the company involves grows and rate of production increases.
The decline in the production costs will give the company additional profit and this will be passed on to the consumers in the form of lower prices. Both producers and consumers benefit from this activity. Producers will enjoy low production cost and profit raise while consumers will enjoy low priced goods. Consumers can also experience low priced product even when they are on a monopoly through the aid of the international competition.
Companies may monopolize a certain product line domestically but there is also some other firms from the outside of the country that can provide imports of the products therefore making the domestic company setting its price reasonably so as not to lose customers. Imports sometimes serve as a threat for the monopolists since it neutralizes the market by providing competition to the latter.
Other Affects on Consumers
If the consumer cannot withstand anymore the high prices of the monopolists, and if they are subject on a budget constraint, then, they have no choice to either cut their consumption of the said product or just use substitute goods of the product (Mises.org, 2007). If this continue to happen, monopolist are going to make bargain with their customers by slowly adjusting their prices based on the willingness to pay of the consumers and their willingness to sell.
With this, the economy will go back to its equilibrium position and everything will be back to normal. But take note, this case is only on the assumption that the product that we are talking here has a substitute good for the consumers to have an alternative. If substitute good is to be taken away, then consumers have to cut their consumption and the doings of the monopolists, which is to bargain with the consumers, would be the same if there is the presence of the substitute goods to gain back their customers.
More Affected Parties
Monopoly also affected the labor sector of the economy. The effects can be classified into two namely the decline in the wages of the laborers or simply the consumers and secondly the increase of the unemployment rate. On the down turn of the wages since there will be a small number of businesses in the economy, therefore, less jobs will be available in the market. In other words there will be an increase in the number of labor supply in the economy. This relatively high supply of labor force will make a pressure for the wage rate to drop giving the laborers to receive less salary and eventually leads to having less buying capacity. As for the raise of unemployment, since only few firms can enter the market [monopoly], therefore less jobs are created than what is ought to be (Wien, 2005).
Misallocation of resources can take place under the monopoly market. Monopolists as we all know always maximize their profits and sets their prices greater than their Marginal Cost. With this condition, resources are inefficiently allocated. On the part of the consumers, they will be paying more of the product that the monopolists are offering, therefore transferring the resources going to the monopolists (Alejos, 2005).
Another party affected is the income of the public wherein the incomes are redistributed. Since the monopoly charges price greater than their Marginal Cost, while before, consumers are only paying price equal to MC, then, more income are transferred to the monopolist than what it is supposed to be. This will cause the monopolists to gain large amounts of profits (Alejos, 2005).
With this, there is a need for the government to intervene and regulate the monopolists of their economy. Its negative effects could be minimize if proper policies will be implemented that will restrict them for abusing their power in the market.
Policies and Regulations
There were already a lot of debates regarding the imposition of regulations to monopolists. They say that the state should protect the welfare of the consumers to the abusing power of monopolists. Some are advocating for letting the forces of the market to equilibrate the economy based on the theory of ‘invisible hand. But in the end, government still provides regulations just enough in such a way that they do not distort the market nature (Jackson, 2005).
Regulation is set of rules given by the government to other agencies for them to have control and monitor the said agencies. With regard to the regulation for the monopolists, generally the government tries to prevent the companies that are in opposition to the ‘public interest’ (tutor2u.net, 2007b). As much as possible, the government prevents the consumers to be exploited by the monopolists.
On April 1999, the Competition Act of 1998, formerly the Monopolies and Mergers Commission, was promulgated to protect eh consumers from the abusing monopolists. The commission has two main roles namely: making a report to the ‘Director General’ of ‘Fair Trading’, the DTI and other regulators; secondly, taking the appeals of the consumers regarding the violations of monopolist under the Competition Act of 1998 (tutor2u.net, 2007b).
The Sherman Antitrust Law which was enacted on 1890 was made to illegalized the ‘conspiracy’, collaboration and other forms of business contract that restraint trade with the rest of the states (Becker, 2004b).
The National Recovery Act of 1933 was enacted to promote fair competition among business companies. Under section 3 [a] of the said act states that the President has the power to approve code or codes that promotes fair competition of businesses or industries (Civics-online.org, 2000).
Another law that prohibits the companies to abuse their market influence is the Federal Trade Commission Act. Under Title 15, Chapter 2 of the said act states that the Federal Trade Commission shall be the one to supervise the market and should promote ‘export trade’ and put to stop the unfair methods of competition (fda.org, 2001).
The Clayton Antitrust Act prohibits price discrimination on the market of any person or business entity which prevents competition to prevail in the economy. It also recognize the Federal Trade Commission to be the one who will monitor and revise the said act if needed (Becker, 2004a)
Another way to lessen the effect of monopoly is to cut the taxes of the new and small players in the market and increase the taxes of those who have a large market share in the economy (Mackinac.org, 1997). High taxes imposes by the governments to the businessmen, may it become small or large players, serves as a problem for them for it increase the production cost of the goods. With this, it is important for the government officials to review their policies regarding tax collections to aid the small business players with competence to compete with the larger players. Helping the competition to prevail in the market will ensure the welfare of the consumers. This would attract the small players and decreases their production costs.
The above efforts of the government sector enable the consumer to have a bargaining power to the monopolists even a little. It is their duty to promote fairness and equal chances especially for the trading sector. With the aid of the passed acts in the government, competition was empowered and made the market system to find its way towards the equilibrium state. As many economists are saying that market has its own way to cure what ever ‘aliment’ exist in its system. It may take some time to cure it self but the result will benefit the majority.
Based from the above facts and statement, I can now conclude that monopoly indeed imposes negative effects to the consumers. But on the other hand, it still produces some benefits that in-turn offsets its negative effects. We should not give more attention to the flaws of this market structure but rather appreciate its existence and find ‘cure’ for its ‘ailment’.
It is the role of the government to impose laws and acts that will promote fairness in every aspects of the society, including trade and commerce. The role of the government to make regulations to protect the welfare of the majority significantly preserves the ‘natural’ economy. Business competition is indeed healthy for the economy of every country or industry for it promotes healthy and equal business opportunity. But let us not forget that Monopoly imposes also some benefits to the society, to the consumers specifically. Even it has negative traits; I believe that other market has its own negative effects to the economy. Every market structure has its own flaws that have to be solved and made remedies.
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