Category: Monopoly

Monopolies develop according to the definite monopoly market structure which is discussed by economists as opposite to the competitive market because only one seller controls the industry.

A company can be described as a pure monopoly when it is a single seller of certain products or services within the market, when it is a price maker, the barriers to entry are high, and there are no close substitutes for products. The development of a monopoly within the industry creates conditions which can characterize the imperfect competition based on the absence of the other sellers. Moreover, the lack of the substitutes is observed, and the company becomes a monopoly within the market (McConnell, Brue, & Flynn, 2012).

Microsoft is the leading producer of operating systems for personal computers and different types of software in the USA. This leading position is often discussed as an attempt to receive the status of a monopoly within the market in order to gain the high economic profits typical for monopolies oriented to innovations. The recent situation in the market of the computer software is rather controversial. It can be explained basing on the idea that Microsoft tried to gain the market power several years ago.

Microsoft took the leading position within the industry in the 1990s when the most successful variants of the Windows operating system for personal computers were worked out. Moreover, the company presented the effective applications software, and the majority of the personal computers’ users began to utilize the Windows operating system.

Microsoft Office and Outlook also became popular with the users due to the fact the possible alternatives could not be discussed as the appropriate substitutes for the products and services provided by Microsoft. For instance, the operating system Microsoft Windows 95 was effectively utilized by over than 80% users in the USA because their computers were Intel based (Bittlingmayer & Hazlett, 2000).

Thus, the situation was discussed by the government as critical because of Microsoft’s possibility to develop into the monopoly with maintaining the control over the market. Microsoft had to change strategies of presenting the products and attracting the buyers after the investigations conducted in 1994 and 1997 in order to address the government’s requirements.

The advantages of Microsoft are in the fact the company regularly presents the technologically innovative products which have no substitutes within the market because of their high quality and originality. From this point, Microsoft’s strategy is based on the active usage of the technological development’s results.

Moreover, the company is regulated with references to the effective strategic marketing techniques in order to attract more customers (Bittlingmayer & Hazlett, 2000). According to these points, Microsoft supports its leading position and contributes to developing the controversial question of monopolization of the market. Thus, the leading position of Microsoft depends on the high standards and quality of the products.

The market occupied by the company is so expanded that there are significant barriers to entry which are the company’s ownership, peculiarities of pricing, and legal aspects. As a result, customers have no access to any relevant alternative products (McConnell, Brue, & Flynn, 2012). Today, the activity of Microsoft in developing the operating systems should be discussed with references to such competitors as the producers of iOS for Apple and Linux Operating System.

Limiting the possibilities for the competitors’ entries into the market, monopolies control the industry and develop monopoly pricing, maximizing the profits. Moreover, these processes are associated with the factor of a downward sloping demand curve which is typical for monopolies.

From this point, monopolies are not discussed by economists as the effective way for a company to develop within the industry (Kahn, 1999; Krugman & Wells, 2009). Nevertheless, not all the monopolies are bad. For instance, a natural monopoly does not influence the progress of the market negatively because it depends on the system of the fixed costs. Moreover, not all the monopolies are bad because of the definite support provided by the government.

That is why, government monopolies can be discussed as good monopolies or legal monopolies. However, the government can regulate and control not many monopolies. The U.S. Postal Service is the legal monopoly developed in the country because the activity of the company is controlled by the government, and the specific functions can be realized only by the U.S. Postal Service (Krugman & Wells, 2009).

It is possible to conclude that monopolies challenge the principle of the perfect competition and can be discussed as the negative factor for the industry and market’s development. Nevertheless, such types of monopolies as natural monopolies based on the large economies of scale and constant marginal costs which can be less than average ones and legal monopolies which are characterized by the government’s control should not be discussed as absolutely negative structures because they develop according to the specific principles.

Economists agree that the main disadvantages of monopolies are associated with the characteristics of pure monopolies when only one company is a seller within the market with the possibilities to control it and provide the barriers to entry. Furthermore, the monopoly market structure provokes the growth of prices which are often higher than the prices within the competitive markets.

References

Bittlingmayer, G., & Hazlett, T. W. (2000). DOS Kapital: Has antitrust action against Microsoft created value in the computer industry? Journal of Financial Economics, 55, 329-359.

Kahn, A. E. (1999). The economics of regulation: Principles and institutions. USA: The MIT Press.

Krugman, P., & Wells, R. (2009). Economics. USA: Worth Publishers.

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2012). Economics. USA: McGraw-Hill.

Introduction

After the rising costs of inputs and the prices arraigned by the opponents are taken into account, price-cap regulation is launched to guard the buyers while making sure that the businesses continue being cost-effective (Alexander & Irwin 1996). There is a trial by the income cap to employ the same procedures, but it does it for profits rather than for the prices. Let us look at how unusual a value operator is, compared to an average firm in the market.

Take an assumption that the operator is similar to the average firm, but the prices of inputs of the operator vary at the pace that is dissimilar to the pace of variation for the average firm. If the input prices of the operator rise more quickly than the inflation pace, then the retail prices of the operator will be forced to rise more quickly than the inflation rate so that the operator will be capable to earn more than the cost of capital of the operator.

Again, take an assumption that the operator is similar to an average firm, except that the operator has the capability to pick up value (Alexander & Irwin 1996). If the productivity of the operator advances more quickly than the average firm, then the retail prices of the operator will be forced to come down in relation to the inflation rate. When these variations between the operator and the average firm are combined in the market, the retail prices (revenues) of the operator ought to vary at the inflation rate.

From this analysis, two elements are recognized: the first one is the rate of inflation, which is utilized in the price cap index signifying the general price increase rate in the market; the second one is the X-factor, which is aimed at confining the variation between the operator and the standard firm in the market in relation to the increase in the input prices and variation in productivity. These elements indicate that the selection of inflation index and X-factor go together (Alexander & Irwin 1996).

Historical Background

The price-cap regulation is a type of regulation made in 1980s by Stephen Littlechild. Stephen Littlechild was a UK treasury economist. This regulation has been utilized in all private system utilities of Britain. However, it contravenes the regulation of the rate of return whereby utilities are allowed a lay down rate of returns on capital. In addition to that, the sum revenue is the regulated element in the revenue-cap regulation.

At times, the price-cap regulation is known as “CPI-X” (Alexander & Irwin 1996). The UK calls it “RPI-X” after using it to lay down price caps. RPI stands for Retail Price and X is the anticipated proficient savings. A form of this formula is used in the water business as RPI-X+K, where K is a factor of capital investment necessities (Alexander & Irwin 1996).

This scheme is made to give inspirations for proficient savings because the savings above X are handed over to the investors till the price caps are scrutinized. The main portion of the scheme is that the rate of X is grounded on both the firm’s previous productivity and the other firms’ production in the business.

This indicates that in the businesses, which are natural monopolies, X is endeavored to be an alternative for an aggressive market. The methods of incorporating and removing the rate components from the price caps are very crucial in businesses with quickly varying service deliveries. Price-cap regulation is not solely employed in Britain, but also in some Asian countries (Alexander & Irwin 1996).

Economic Components of the Price-Cap

At the initial usage of the price-cap scheme, it will look similar to the traditional regulation because the price-cap will work on the basis of the existing taxes or certain traditional procedures of the accommodative lay down of prices.

The strategy of the price-cap permits the firm to change its general level of prices according to numerous aspects of the industry while the traditional regulation permits to change its prices according to the firm’s particular information (Key Components of an Appropriate Price Cap System 2013). Below is a discussion of the main components of price caps.

Starting rates in the price-cap Strategy

For a price-cap scheme to give up a maximum outcome, the primary price ought to be accurate at the beginning. Such a rate is usually focused on the similar service cost and the principles of returns employed in the traditional directive. If the preliminary price-cap is put so high, the production might make monopoly profits, which are not related to the capabilities and production of its labor and administration.

Provided that the price-cap is lowered significantly, the organization may sustain significant losses and its revenues will be lower than, the cost of capital. As a result, the firm will go to the regulator for a high price-cap, abandon the price-cap scheme or adopt other variations that will overcome its problems.

Majority of the regulators who use the price-cap strategies have either initialized with the present taxes of the firm, or they needed a certain amount of downward reduction in these respective rates. As a rule, profits tend to vary if a company operates in a highly competitive environment and the government makes use of rate-base regulation.

These fluctuations can be above or below the cost of capital. If the firm is not obtaining its capital cost, then it might be deprived of an opportunity to overshadow the occurring inadequacy by the present level of the capping prices. Therefore, such firms keep profits below the usual level for quite a few years and vice versa (Key Components of an Appropriate Price Cap System 2013).

Index variable

Index variable is an indicator that is important for measuring inflation. It is widely used for setting the yearly price pap. When accurate initial rates are set, a suitable index is classically applied as an indicator of the amount to which the general price levels will be varying over time.

The level of input costs sustained by the industries is one of the factors which persuade price levels. For consistence of the price-cap scheme with the examples in the competitive economies, prices need to be evaluated by the variations in the general level of input costs incurred by the firms in the business.

From a purely theoretical perspective, prices are supposed to reflect the input costs which can be incurred by various exchange companies. This combined level of prices will focus on the cost of labor, services, and the firm’s substances that create services. The prices of such services are managed by the price-cap scheme.

The regulators can use such indices to check on the variations of the input costs of a business without connecting prices directly to the cost level of the firm. Therefore, if a firm is capable of operating competitively, then it will gain from that competence. However, every firm is given a benefit of probability to advance its prices when the input costs are rising.

Still, companies can increase their prices provided that their input costs increase. In turn, the buyers have the advantage of very low prices when input costs are decreasing. Adjustments are necessary in order to employ the price cap regulation (Abel 2000). Moreover, adjustments are needed if there is a discrepancy between the general inflation rates and the inflation rates that are typical of a specific industry.

This is one of the details that can be singled out. It should be kept in mind that the rates of inflation do not follow same patterns in various sectors of economy. The labor costs are impacted by the competition rate of the economy. A counterbalance aspect or a downward adjustment is important to indicate the gains of the advancing markets of density and scale.

Hence, one can say that the productivity improves provided that workers spend a smaller amount time and effort on the same task such as the production of certain goods.

Labor adjustments are done so that the rate payers can distribute the short-lived and long-lived gains of the incompetence caused by the price-cap. However, if the chosen productivity criteria are not accurate, then this rule cannot perform that function. As much as competition generates a number of gains, it should also be noticed that it has negative effects on present producers and their consumers.

Competition hinders the current rate of growth because as the market decreases, the gains of the markets of density and scale are minimized. Competitive forces are very tough when margins are at maximum level and/or obstacles to ingress are the weakest. Overall, technologies help companies to increase the volume of production, even though the input can remain at the same level. As a result, the production costs decrease, which will persuade the corresponding decrease in prices of the outputs (Abel 2000).

Monopoly entails two main problems. The first one is that the result is Pareto incompetent (inadequacy is created), and the second one is that the distribution of benefit is prejudiced in goodwill of the monopolist. If there is only one company in the business because of simulated limitations, then the removal of the constraint can work if the result after constraint is superior to the result of the monopoly.

However, if the business is a natural monopoly, using a constraint to the entrance will not permit an access. In this respect, the competitor will not create a profit because the market is small to handle more than one firm. There are three methods of controlling monopolists: price ceiling, rate of return regulation, and the efficient regulation mechanism (Osborne 1997).

Conclusion

Price-cap regulation was established in UK in 1980s by Stephen Littlechild (UK treasury economist). This regulation has been widely used within and outside Britain’s private services. The price cap regulation puts a cap on the value that the value giver can demand. The cap is put in harmony with the numerous economic issues like price-cap index, anticipated competence savings, and the rise in price.

References

Abel, JR 2000, The State Performance of the Telecommunication Industry Under price-Cap Regulations, National Regulatory Research Institute, Ohio.

Alexander, I & Irwin, T 1996, “Price Caps, Rate-of-Return Regulation, and the Cost of Capital,” Note no. 87 in Public Policy for the Private Sector, World Bank Group, Washington, D.C. Key Components of an Appropriate Price Cap System n.d. Web.

Osborne, J 1997, Policies to Control Monopoly. Web.

Introduction

Today’s economies need to evaluate and analyze effects influenced by decisions made in production, consumption or relatively all production and marketing activities. Economic agents interact in the production and marketing environments and a particular agent decision can have an influence to social-economic effects on the other (Externalities and policy, nd).

These influences and effects are regarded as the externalities. This means are effects beyond production or consumption of a project, firm, industry or individual spectrum (Mankiw, 2008). Externalities effects can be positive or negative. Negative externalities are actually painful to the immediate agent.

Governments through its institutions need to develop and implement policies to curb negative externalities effects that could otherwise cause malfunction of another economic agent.

As a policy maker concerned with correcting externalities relating to gases and particularly emitted by local power plants, various policies need to be developed and enforced. Policies to curb negative externalities due gases emission and consumption thus will lessen the overall effects to other agents still maintaining and maximizing the economic activity.

Policies to reduce the total amount of emissions

There are many costs related to the production and the consumption of gases. For example damage of the environment and risk of explosive gases emission and levels. Some of the policies to be developed include pure, per se and natural monopoly market structure policy and an environmental policy.

Monopoly market structure policy

Because the competitive economy of emission and the production of gases in presence of externalities are inefficient, fighting externalities through monopoly structure policy is legitimate. In this monopoly market structure policy, objectively target to shift production levels into a more social-economic level (Hirshleifer et al., 2005).

This will further reduce reduction. Market inefficiency in competitive economies regarding production of gases occurs due to production more that the market demand and thus increasing the negative externalities. The policy will reduce production of gases because the monopoly industry will produce enough to meet market demand.

Only one firm will be provided with the license to produce gases under pure, per se or natural monopoly bases. Government can franchise international company to engage in the production and benefit the monopoly powers. Conversely, there are various costs related to monopoly market structure.

Bearing in mind the industry produce enough for consumption, it still possesses powers to regulate prices thereby assuming the role of capitalistic market system (Hirshleifer et al., 2005). In fact, the industry is responsible in setting prices and not the demand supply mechanism in the market.

Environmental policy

The policy acts as externality control policy. Environment policy is usually also referred to as targeting policy (Riley, 2006). The policy involves deciding economic variables such as prices or outputs regulated in an attempt to control externalities.

Developed policy reduces production by giving quotas to the involved firms. Further as argued by Zilberman, (2002) production level is curtailed by applying taxes and subsidies to regulate or reduce production. Environment policy targets outputs reduction, inputs or externality generating activity to reduce overexploitation thereby reducing production levels.

Government measure and calculate the pollution produced per unit of outputs and set tax percentage on the output to achieve externality reduction tax. Conversely, there are various cost related to environmental policy. According to Riley, (2006) one cost is that the government institution may find it’s difficult in estimating the degree of pollution or externality thereby causing underestimation or over estimations.

In addition, increase in taxes and giving of subsidies may drive firms from the industry decreasing production levels lower than demand (Riley, 2006). This causes inefficiency in the market and under utilization of resources.

Conclusion

Externalities are usually connected to market failures. Usually, when externalities prevail and the policies are instituted to curb effects, prices do not reflect the true marginal costs. Ideally, many policies lead to erosion of competitive economy spirit leading to low production and consumption levels.

The benefits of producing and consuming gases do not only benefit the producer or consumer. The economic activity may bring fourth other negatives to the consumer. Thus immediate policies need to be formulated to protect other economic agents such as consumer and the social ecological systems.

Government should therefore reduce or internalize the main externalities through adoption of various policies. The above policies, market structure policies and environment policies would reduce externalities due to production and emission of gases.

References

“Externalities and policy” (nd). Negative externalities and policy. Web.

Hirshleifer, J, Glazer, A., & Hirshleifer, D.A, (2005). Theory and Applications: Decisions, Markets, and Information. Cambridge: Cambridge University Press, Mankiw, N. G. (2008). Principles of economics. New Jersey: Cengage Learning.

Riley, G. (September 2006). Externalities – Government Policy Options. Markets & Market Systems. Eton College Web.

Zilberman, D. F. (2002). Negative externalities and policy. University of California. Web.

DuPont was sued for allegedly monopolizing the interstate commerce, thus giving other companies in the same sector hardships in reaching out to the prospective markets and customers. The available markets became flooded with goods from one business entity. This was a strategy of making sure that none of the new companies had the means of matching the competition DuPont presented.

Although the suit before the court was a challenge evaluating the violation of the antitrust law, it was clear that there were economic impacts that were brought about by the monopoly that was created by the company. All the companies should be put on the same footing in terms of having the means to market their products in order to have an organized way of generating income.

The established companies should not be allowed to sell their products at lower prices because the new entrants in the market can lack a place in the growing market. It is an impediment to the expansion of the markets when there is only one nature of products that are sold at a very low price.

The decision was what the court felt was right given the circumstances. The decision was made with the intention of deterring other companies. It is this reasoning that saw a lot of mistakes in the economic sense being condoned. It was in this instance that the court applied the Sherman Act without taking into account some of the economic effects of the decision.

The consumers were following the guideline of a case that was held in total disregard for the economic principles that govern the running of free markets. It was at this point that the courts found it useful to hold the judgment in favor of the plaintiff, while the decision itself could not stand the test of economic advancement.

It is imperative to note the effects of the decisions to be reached by the court on the market in a case whereby the parties to the case are not both parties in the running of the market. A monopoly enjoyed by one party may be out of sheer handwork without any proof of mischief on the part of the company.

There were other companies in the case that were entrusted with the mandate of ensuring that the licensed patents were not used against the set out agreements. The patent rights of designing the Cellophane were meant to market the product in other parts of the world. This was made possible through licensing of the product.

The company engaged in the search for cheap employment, while strictly guarding its rights to make Cellophane. The popularity of the company went up, with customers having a great liking for their products. At the same time, the company ensured that the products were equally competitive. This was a major boost for the company.

The company was placed in a better position through its efforts and the virtue of having a wide base of customers. It was the quality of the goods that ensured that there was an immense liking for the company’s products. There was monopoly and unfair competition. There was no link between the allegation and the evidence offered, although the court held in favor of the plaintiff.

The market for DuPoint’s products, both in the United States and other parts of the world, became commendable. There was a need to reduce the prices of many of their products given the high percentage of market share. This was a gesture that enabled the company to compete against most of its competitors.

There was no evidence to indicate that there was any form of manipulation used by the company. The prices were set according to the economic dynamics of supply and demand. It was the dictates of supply that placed the company in a better place compared to its rivals.

In the given circumstances, the decision by the court rendered a stringent measure on the company. This made the market less competitive. The court’s decision was largely an interference with the functioning of the market. In that case, it was appropriate to ensure that the impacts of the decision were assessed by the court making the ruling. It was a major violation of the economic initiatives and the rules that govern competition.

It is evident that DuPont was not taking part in any form of manipulation of prices. This means that the prices in the market were left in the hands of the consumers. The consumers in this case were willing to buy the products of DuPont depending on their quality. The decision by the court in the antitrust case was a major interference with the rules of advertising.

Therefore, it is true to observe that the decision was a clear centralization of the market. It was a clear move to strengthen the weak companies by weakening the strong ones. This was made with complete disregard for the principles of supply and demand in every free market.

The salient features of a free market were greatly interfered with. In some countries, the government takes the role of regulating the markets, but in this case it was the court that took over the role. Courts can only interpret the law in favor of economic activities if they consider the effects of the decision.

Different market models

There are different market models in various business environments. These include oligopoly and monopoly (Keith, 2010, p. 195). In a monopoly market model, the market is characterized by a single business that dominates the market (Koenigsberg, 1980, p. 151). In such a call, the entry of other competitors in the market is demanding. On the other hand, an oligopoly is a market with a few large corporations dominating the market. In most cases, these corporations have more or less similar standards of operations, which again makes any entry hard.

Therefore, because of competition, prices may be low as opposed to a monopoly market economy. The company to be discussed is the Safaricom company in Kenya, which provides communication, as well as internet services to its clients. It is a publicly-traded company in the Nairobi securities exchange. Initially, a monopoly company, expansion of markets, and the emergence of other companies offering similar services to their clients changed it to an oligopoly company. Other companies have entered the markets, thus affecting the pricing strategy of the company. These other companies include Bharti Airtel, which is the major competitor, besides Orange and Essar. All provide similar services to the Safaricom Company.

Hypothesis about the basic short-run behaviors

As a hypothesis about the basic short-run and long-run behaviors of the Safaricom Company in a market economy, there is a predictable significant reduction in the sales output and profit of the company. When the other three mobile service companies joined the market, they reduced the number of customers of Safaricom. This claim has a negative impact on the company because the company’s sales went down. It had to adjust its prices to conform to that of other companies, which came with a pricing strategy to woo many customers. Therefore, in the short run, the behavior of the oligopoly model is that it is tough to enter such a market, especially if the economic scale does not measure up to the companies in the market. Therefore, this may deter new entrance to the market. This was not a problem for rival companies like Bharti Airtel, which was an international company that had enough resources to enter the market. As such, in the end (long run), the company, as well as the new entrants, will have to come up with strategies that would enable them to remain competitive in the market (Koenigsberg, 1980, p. 151). This strategy includes the reduction of the company’s fees for accessing its services.

Regardless of the stiff competition

However, regardless of the stiff competition that this company has continued to receive, it has improvised various strategies that have helped it continue to be competitive. Even though its shares reduced in the securities exchange, the company has slowly recovered from this downfall. Various measures have contributed to this. One of the factors is the provision of better services to its customers. The company has improved its services by revamping its customer care (Safaricom, 2012, Para. 1). Customers’ complaints are attended to immediately with their views and opinions being listened to keenly. This has made it attract many followers. Further, it has improved in its innovation. It came up with a mobile money transfer service named M-pesa that allows customers to send and receive money through their mobile phones. This service has enabled it to record many subscribers besides playing a crucial role in its survival based on the need to increase its revenue. The second thing that the company has improvised to remain competitive in the market is the regulation of its prices (Safaricom, 2012, Para. 2).

Even though the company charges slightly higher than its competitors do, it has continued to receive more customers. Its services are faster compared to those of other companies. It has already established a positive brand image to the public, which has contributed to its continued progress. Thirdly, the company is actively involved in social corporate responsibility initiatives that have seen it become famous for its philanthropy (Safaricom, 2012, Para.3). The company has various programs that are geared at promoting peace and economic balance in society. Some of the initiatives that have contributed to its social responsibility programs are sponsoring students from low backgrounds, providing assistance to poverty-stricken populations, and supporting campaigns that promote cohesion and road safety in the country. The company is also compliant in payment of taxes. Over the years, the company has always paid its taxes without problems. Therefore, this openness has made the company build a brand that has appealed to many mobile subscribers to continue trusting it and using its products.

Bharti Airtel

The two closest competitors of this company are Bharti Airtel, which is a multinational company, and Essar, which is a privately owned company. These companies are also fighting for domination of the market in the country. They have come up with different marketing strategies that are aimed at ensuring that they compete favorably in a bid to dominate over the Safaricom Company. One of the visible methods the two competitors have used aggressively is price strategy. They have reduced/adjusted their prices repeatedly in the quest for attracting more customers to their company (Bharti Airtel, 2012). They have reduced their calling rates to attract their customers. For instance, the calling quality of the Safaricom Service provider is four Kenya shillings per minute on this network, while the two competitors charge one Kenya shilling per minute for calling. They even charge no fees for sending a short message on their systems. This information on their pricing is essential for the Safaricom Company because it will help it set prices that can be competitive to avoid its customers from moving away. Therefore, based on such pricing information, my company is able to come up with right strategies that can ensure that it remains competitive to continue in a bid to meet its objectives and aims.

Safaricom Company

Based on how the aforementioned competitors charge their prices, I would recommend the Safaricom Company to look at various factors before making a decision to reduce its costs. The company should study the customers’ interests and needs to look at the profitability before lowering their prices to conform to those of its rivals. Therefore, the company needs to set a price that will enable it to compete favorably in the market to remain competitive. Its services are excellent compared to those of other companies. It has already established a brand image besides offering M-pesa services that all customers need (Safaricom, 2012, Para. 1). Therefore, in factoring in these issues, the company will remain competitive even if it offers slightly higher prices. This pricing policy will maximize the profits for the business in the sense that many customers will continue to use its services. Therefore, the company will reap from the increased rate of subscriptions compared to other competitors. The strengths of the company will play vital roles in the profitability of the company.

Reference List

Bharti Airtel. (, 2012). About Us. Web.

Keith, C. (2010). Oligopoly, distribution, and the rate of profit. European Economic Review,15(2), 195-224.

Koenigsberg, E. (1980). Uncertainty, Capacity, and Market Share in Oligopoly: A Stochastic Theory of Product Quality. Journal of Business, 53(2), 151-164.

Safaricom. (, 2012). About us. Web.

Economic situation

The interest rate, the unemployment rate and inflationary pressures are key economic indicators. These parameters elaborate how well the economic is performing. The interest rate denotes the cost of credit services; the employment rate is an indicator of the percentage of the population that is employed while the inflationary rate is an indicator of the ratio of production (output) and the money in circulation. In the last five years, these parameters have changed massively. In 2008, which was the climax of the depression the interest rate was about 1.5 %. In the subsequent years, the rate has decreased significantly below zero. This is an indication that the federal fund interest rate is lower than the inflation rate. The overall impact of this scenario is a negative lending rate.

The federal bank may lower the interest rate to encourage lending. Lending results in more money circulating triggering additional consumption, which is a key driver of the American economy. The unemployment rate has also been changing over the last five years. In January 2008, the interest rate was about 5%. However, by June 2009, it was well above nine percent. This was attributable to the recession, which had taken a toll on most organizations. As such, many companies were opting to downsize or close down. This resulted in retrenchment of numerous people. The highest unemployment rate was 10.1% in 2010. The inflationary rate has also been changing irregularly over the years. However, it has not formed any clear pattern even under the economic crisis (Schiller, 2003).

Currently, the economy is better. The inflation rate, unemployment rate and inertest rates are relatively lower. In an economy, which is driven by speculation and consumption, decreases in the above rates are likely to trigger additional investment. There has been a return to normalcy with respect to international trade, but investors remain sceptical. Overall, there are some fundamental improvements, which have occurred (Schiller, 2003).

Improving spending

For spending to increase, the public should have additional resources at their disposal. One way of improving spending is by boosting the availability of credit facilities. The government can accomplish this by lowering the lending rates. Lowering the lending will result in people paying lower rates for credit offered. Consequently, many people will take up loans. Taking up of loans will result in people having more cash that they can expend. This will trigger additional consumption. Increase in consumption will trigger additional production. The additional production triggered by the extra spending will require labour boosting employment in the economy. This idea normally results in more funds circulating in the economy. If there is no production to match the increase in funds, then inflationary pressure may rise (Taylor, 2010).

The second strategy the federal government can utilize to increase spending is through lowering taxation on commodities. Taxation on commodities and services increases the cost of goods and services. As a result, it reduces a consumer’s disposable income. The federal bank can boost the consumers’ disposable income without increasing the actual income earned. However, this strategy would result in minimal increases in spending. This strategy should be completed by other strategies such as reduction of income tax. The combination of these two strategies will result in substantial increases in expenditure. Increased spending triggers additional production. The additional production requires factors of production such as labour, which culminates in higher levels of employment (Schiller, 2003).

Anti-trust laws

Monopolies occur when one entity dominates an industry. Consequently, other firms have no chance of competing effectively with a monopolistic entity. There is minimal competition in a monopolistic industry. As such, the dominant entity sells to most of the clients in such an industry. Many monopolies make super profits since they can raise their prices as they wish. In the defence industry, there are three large firms, which are Lockheed martin, Northrop Grumman and Boeing. Lockheed martin is the most powerful followed by Northrop Grumman and Boeing respectively. The proposed merge involved Lockheed martin and Boeing.

This would have resulted in monopoly since Northrop Grumman could not match the resultant entity in terms of sales and resources. The US department of defence halted this merger citing ethical concerns such as competition. The defence department is the companies’ biggest customer. Consequently, the merger would have denied the department a choice when it comes to the vital defence contracts. The merger would have resulted in the largest defence entity globally. Subsequently, the entity would have dominated in terms of contracts bids and sales.

Defence contracts would encounter a monopoly since Northrop Grumman could not match the entity that would have resulted from the merger of Lockheed martin and Boeing. A merger of this magnitude would have had many positive impacts in the two entities. First, it would increase efficiency in both entities after merging operations. Additionally, the resultant entity would have best technology in the sector. The merger would also increase the capacity of the resultant organization, which would surpass that of the two constituent entities.

Economic efficiency in a monopolistic sector

Economy efficiency is only achievable in a perfect market. A perfect market is an industry in which there is fair competition and the forces of demand and supply set prices. In such a market, customers buy products whose value is equal to the price. Nevertheless, monopolies sell commodities at prices, which by far exceed the value in the commodities. As such, customers pay amounts, which exceed the values they are receiving. This signifies that monopolistic tendencies are the key cause of economic inefficiency. Raising prices unreasonably results in the efficiency. Monopolies also prevent the entry of other firms in an industry. Thus, denying the clients variety form they would choose the best product. This is a key undoing of monopolies, which deter production of a variety of goods with the best value possible. With time, monopolies develop complacency, which reduces innovation.

As such, the entity fails to offer any additional value for excising its dominance over the industry with regard to pricing and the clientele base. Monopolistic entities predominately focus on controlling the industry. Hence, the entry of a competitor will likely trigger a price war. This kind of an economic conflict will have many repercussions. The entity with more resources may undercut its prices. Consequently, most of the customer will buy form the entity which undercuts its prices. The other entity competing cannot sustain such a strategy so it will maintain it prices. The entity, which fails to undercut its prices, will have fewer clients and will eventually run out of business. This will leave the other entity, which will later raise it prices to recoup it losses (Kahn & CESifo, 2003).

Discounts

Discounts are a vital aspect of increasing clientele. A discount denotes a reduction in the price of a commodity or addition of quantity for the same price. Companies offer discounts to boost sales or as a reward to their clientele. The discount could entail additional quantity of a good. In case of services, discount will entail reduction of prices. A business, which is offering discounts, must undertake proper planning. This will ensure that the entity finances do not diminish to unsustainable levels. Entity offer discounts in the festive period since customers make massive purchases. During such periods, an entity can offer discounts since there are high volumes of sales. Determining the discounts to offer is not an easy undertaking. The firm has to consider the clientele and its corporate ambitions.

One means of determining the interest to offer entails using rates. A rate denotes a percentage of the entire price. Members of a company who have access to appropriate data should make this managerial decision, which entails determining the best discount rate. Most of the discounts rates are below ten percent. The marketing department should have the capacity to determine the appropriate percentage. The department should consider all the entity’s corporate target. The entity must earn a certain level of profit to support its operations. Most entities prefer a discount rate that ranges between five and ten percent.

The second method of establishing discounts entails offering quantity discounts. The customer will pay the old price, but he/she will get extra quantity of the product. This is exceedingly common in cosmetic products. This method is applicable on smaller goods, which have lower prices. The application of this method is limited to certain commodities. Discounting based on rates is more applicable than the latter.

References

Kahn, L., & CESifo. (2003). Sports league expansion and economic efficiency: Monopoly can enhance consumer welfare. Munich: CESifo.

Schiller, B. (2003). The macroeconomy today. Boston: McGraw-Hill/Irwin.

Taylor, L. (2010). Capital, accumulation, and money: An integration of capital, growth, and monetary theory. New York: Springer.

Monopolies are a danger to society as well as to the business environment. Governments plan interventionist policies to curtail the growth of natural or cartel monopolies in order to keep the business environment stable. Antitrust acts enacted by governments are believed to improve consumer welfare (Crandall & Winston, 2003; Stigler, 1982). Government interventions are aimed at controlling natural monopolies so that the prices in the market do not become exceedingly high. This paper looks into the policies and regulations that the US government took to control the growth of monopolies.

The monopolies in the US have a long history beginning with the colonial administrations (Investopedia, 2010). With the growth of corporations in the new word, there arose extreme forms of capitalism and rampant price-fixing that hampered the well-being of the people. The first attempt to regulate businesses was in 1887 with the Interstate Commerce Act (Stanford, 2013). However, the act to control the growth of monopolies came three years later. The Sherman Antitrust Law was passed in 1890 to check the growth of monopolies in the US, which was probably the first attempt to curb monopolies through government control in the country (Investopedia, 2010; Stanford, 2013).

It is believed that the Sherman Act opened the road for “jurisprudence regarding monopoly, cartels, and oligopoly” (Kovacic & Shapiro, 2000, p. 43). The act aimed at declaring illegal all forms of monopolies and violation of the act was treated as a crime (Kovacic & Shapiro, 2000, p. 43). In 1903, the country saw a few major corporate mergers when the Roosevelt government was in power. The government broke the merger of the Northern Securities, and then the Supreme Court broke Standard Oil in 1911 into 34 small firms (Markovich, 2013).

In 1914, President Woodrow Wilson brought in the Clayton Antitrust Act and Federal Trade Commission (FTC) to strengthen up the government’s fight against emerging monopolies (Markovich, 2013). This law increased the strength of the antitrust law that limited the scope of companies to indulge in anti-competitive behavior (Spengler, 1950).

Many US companies like the IBM encountered troubles with the antitrust law. For instance, in 1936, a marketing strategy undertaken by IBM ran into troubles with the antitrust law (Chang, 1995). After this, the FTC was given independent powers to control, regulate, and investigate monopolies. Price discrimination was controlled as a strategy to curtail monopolies by the US government with the Robinson-Patman Act of 1936 (Rowe, 1951). Overall, the US government has been instrumental in developing antitrust laws to curtail the growth of monopolies in the country.

Stigler (1955) makes a distinction between the kind of antitrust laws based on their objective – preventive and corrective. He believes that both the Sherman and the Clayton Act are corrective antitrust laws and do not have any measures to prevent the development of monopolies in the economy (Stigler, 1955). The typing-clauses and the price discrimination corrective clauses were adopted as measures to prevent the spread of monopoly rather than preventing them from appearing.

The antitrust laws post-1992 became extremely strong, and there arose various preventive measures. The regulative tools became more of a guideline to prevent monopolies through mergers. In recent times, the monopoly control body of the country has increasingly aimed at controlling intellectual property rights and patents in order to stop the growth of monopolies in the country.

References

Chang, H. F. (1995). Patent scope, antitrust policy, and cumulative innovation. The RAND Journal of Economics, 34-57.

Crandall, R. W., & Winston, C. (2003). Does antitrust policy improve consumer welfare? Assessing the evidence. The Journal of Economic Perspectives 17(4), 3-26.

Investopedia. (2010). A History Of U.S. Monopolies. Web.

Kovacic, W. E., & Shapiro, C. (2000). Antitrust Policy: A Century of Economic. Journal of Economic Perspectives 14(1), 43–60.

Markovich, S. J. (2013). U.S. Antitrust Policy. Web.

Rowe, F. M. (1951). Price Discrimination, Competition, and Confusion: Another Look at Robinson-Patman. The Yale Law Journal 60(6), 929-975.

Spengler, J. J. (1950). Vertical integration and antitrust policy. The Journal of Political Economy 58(4), 347-352.

Stanford. (2013). History of Antitrust regulation. Web.

Stigler, G. J. (1955). Mergers and Preventive Antitrust Policy. University of Pennsylvania Law Review 104(2), 176-184.

Stigler, G. J. (1982). The Economists and the Problem of Monopoly. The American Economic Review 72(2), 1-11.

The economy of the United States of America is arguably among the best performing in the world. Rated as the second largest globally, after the economy of the European Union, the American economy has in the recent past gone through a lot of turbulence, including the worst financial crisis of 2008. However, with an approximate GDP of 102 in 2012, the country has performed better than other advanced economies (see figure 1) (U.S. Department of the Treasury, 2012). The performance of an economy is usually evaluated by economic indicators, such as, inflation rates, interest rates, GDP, and unemployment rates. Economists can deduce the growth of an economy by evaluating the economic indicators as they vary with time. For instance, the performance of the American economy in the past five years can be assed from the values of the economic indicators of 2008 through to 2012.

Any country that aspires to attain significant economic growth must tame the rate of unemployment, because a high unemployment rate inhibits economic growth. This is partly because high rates of unemployment results into higher expenditures with minimal revenue (Levine, 2012) The US government is aware of the consequences of unemployment on her economy. Unfortunately, the unemployment rates seem to be growing by each day. According to the data obtained from the website of the Bureau of Labor Statistics (United States Department of Labor), the highest rate of unemployment in 2008 was recorded in December with a value of 7.3, whereas 2012 experienced the worst unemployment rate at 8.3 in January, February, and July (USA Dept of Labor, Bureau of Labour Statistics, 2012).

On the other hand, the US has been experiencing a decline in inflation rates in the past five years. Available data indicate that inflation rates were highest at 2.93 percent in January of 2012, whereas the average inflation rate in 2008 was at 3.85 percent. One of the factors that influence interest rates is inflation rates. In the year 2008, the US experienced an average interest rate of 2.8 percent; this was higher than the highest interest rate of 0.167 percent recorded in July 2012 (The World Bank, 2012).

It is true that government policies have a direct impact on investments and the general growth of an economy. Therefore, a government with sound policies can encourage both local and external investments. This leads to more revenue generation, creation of employment opportunities, and other significant economic growth factors. Governments should encourage investments and savings by prescribing favorable tax regimes on the same. For instance, lower tax rates should be levied on investments in research and development, capital gains, and other entrepreneurial activities (Kennedy, 2000). The government should encourage partnership between small and large businesses. McKinney (2011) argues that since many innovations are generated by small entrepreneurs who lack investment capital, the government should put in place tax and IP incentives that will make small entrepreneurs an attractive investment option for big businesses. He cites bureaucratic systems in big corporations as the major stumbling block to innovations (McKinney, 2011).

A court case filed by the Justice Department and 19 states of America, accusing Microsoft Corporation of infringing on the nation’s antitrust laws, was ruled in favour of the plaintiff on 4^th April 2000. Among other things, the government accused the corporation of engaging in predatory and anticompetitive behaviour that were in total contravention of the antitrust laws (Brinkley, 2000). In total disregard of the law, especially the vertical restriction of the 1995 consent decree, Microsoft Corporation was accused of hurting consumers by bundling products and suppressing competing products, such as Netscape browser. By integrating Internet Explorer (IE) into the Windows operating systems, and forcing computer manufacturers to sell their products with these operating systems, Microsoft Corporation was unfairly competing with the manufactures of stand-alone products with functions and features similar to IE (Economides, 2001).

Economides (2001) reports that while ruling in favour of the government, the presiding judge proposed that the corporation was, henceforth, required to adhere to strict business rules. Furthermore, Microsoft Corporation was supposed to be split into two companies. The corporation appealed against this ruling and it was consequently overturned. Nonetheless, the appellant court agreed with the findings of the facts by the first court. Subsequent to this turn of events, the Department of Justice relented on its quest for splitting Microsoft Corporation and instead demanded a lesser antitrust penalty. The two parties reached an agreement, whereby Microsoft was compelled into permitting computer manufactures to incorporate non-Microsoft software into their products (Shapiro & Kovacic, 2000). Furthermore, the settlement paved way for third-party companies to freely access all records and the application programming interfaces of Microsoft Corporation for five years (Economides, 2001).

To understand the drawbacks of a monopoly, it is necessary to make comparisons between the market forces inherent in a monopoly and those within a competitive environment. First, it is clear that a monopolistic environment supports higher prices, lower outputs, and less consumer surplus as compared to a business environment composed of competing players (Economides, 2001). Secondly, the destiny of profits accrued from monopolistic businesses is always expected to raise equity issues. The beneficiaries of these profits are shareholders, and most of them are usually wealthy individuals. The high pricing is therefore an exploitative venture to low income consumers, whose purchasing power is likely to be taken over by high income consumers through dividends. Finally, production of goods in monopolies does not attain the minimum average cost and this derails economic growth (Economides, 2001).

In a free market economy, the same product can be sold to consumers at different prices. However, while selling the product in this manner, well-thought-out strategies should be employed to guard the business against loosing its customers. The consumers who buy this product at higher prices may decide to buy from different sellers in their subsequent purchases. The seller should study the behaviour of consumers before making a decision on how much the price for the product should be varied for each one of them. For instance, if the seller acknowledges the willingness to pay a particular price for a certain product by a certain group of consumers, then the product can be sold to this group accordingly without alienating the consumers (University of Pennsylvania, 2007). Another successful approach at price discrimination is in the form of market segmentation based on social class. A product can be sold to consumers at different prices, as long as the prices are strategically differentiated according to social classes. Pharmacists have succeeded in selling drugs to consumers at different prices by establishing retail stores near the consumers. This strategy has been successful because people from different social classes often live in different places (University of Pennsylvania, 2007).

References

Brinkley, J. (2000). U.S. vs. Microsoft: The overview; U.S. judge says Microsoft violated antitrust laws with predatory behaviour. New York Times. Web.

Economides, N. (2001). The Microsoft antitrust case. Journal of Industry, Competition and Trade: From Theory to Policy, 1(1), 7–39.

Kennedy, E. P. (2000). Microeconomic essentials: understanding economic news. 2nd ed. Cambridge, MA: Massachusetts Institute of Technology.

Levine, L. (2012). Economic growth and the unemployment rate. Congressional Research Service. Web.

McKinney, P. (2011). What should the role of government be in encouraging small business innovation?Forbes. Web.

Shapiro, C. & Kovacic, E. W. (2000). Antitrust policy: A century of economic and legal thinking. Journal of Economic Perspectives, 14(1), 43–60.

The World Bank (2012). Real interest rates. Web.

University of Pennsylvania, (2007). Approaches for retailers. Vol. 2. Web.

US Department of Labor, Bureau of Labour Statistics Labour Force statistics from the current population survey. Web.

U.S. Department of the Treasury. Recent U.S. economic growth in charts. Web.

Duopoly

The word oligopoly is derived from a word in Greek, ‘oligois’, meaning few and the Latin word ‘polis’ which may mean few (Mandal, 2007). In microeconomics, oligopoly is a term that refers to a situation in which there are few firms in the market.

Owing to the fact that the number of firms is small, there is often a significant degree of interdependence between the firms. This interdependence is seen in the fact that each firm must consider rival firms decisions with regard to price and output policy (Mandal, 2007).

The simplest case of oligopoly is that represented by a duopoly where there are only two sellers. In the case provided the two sellers are the only competitors in their respective business.

Based on the point noted above it is clear that these two have a strong interdependence with respect to prices and outputs. It has been observed that based on their decisions with regard to operation the two could significantly change their profits.

Given that if one cheats and another cooperates, the cheater would earn $1.2 million and the cooperator would earn $200,000 we can assume that this option is unlikely to succeed. If both cheat, they stand to generate $500,000 each and if they cooperate they stand to generate $1 million each. It would appear that the two would opt to cooperate and generate $1 million, with each partner acting as a monopolist in their business.

This position is reached due to the fact that it is not uncommon for oligopolistic firms to reach an understanding that promotes their common interest (Mandal, 2007).

This comes about because of the fact that the primary objective of business which is profit maximization. Due to the presence of a small number of competitors it is likely that through cooperation the two firms will collaborate to create a monopolistic environment.

Unregulated Monopoly

It has been observed that certain industries operate best as monopolies given that to allow for competition would negate the main economies of scale associated with the nature of such industries (Musgrave & Kacapyr, 2009).

An example of this is seen in plants that generate electricity which require massive generation plants and transmission/distribution networks. Most monopolies are regulated so as to maximize their utility to the consumers.

However, there are instances where a monopoly may operate unregulated. In this case, this monopoly acts with the objective of profit maximization. In such a scenario the organization will determine prices and output at the level of output where Marginal cost is equivalent to marginal revenue (Musgrave & Kacapyr, 2009).

The absence of regulation reduces output and increases product prices. The result is a price that is higher than the competitive price and output which is lower than that of the perfect competitor.

Given the above scenario if a second firm enters the market it is possible to assume that the demand for the product will fall due to the forces of demand and supply. This comes in light of the fact that as supply of a product increases the demand decreases.

In relation to the cost of production it can be assumed that it will also decline. This comes in light of the fact that an unregulated monopolist produces goods at maximum price with minimum cost. Based on this the reduced demand will also reduce production costs.

References

Mandal, R. (2007). Microeconomic Theory. New Delhi: Atlantic Publishers & Distributors (P) Ltd.

Musgrave, F., & Kacapyr, E. (2009). Barron’s AP Micro/Macroeconomics. Hauppauge, NY: Barron’s Educational Series Inc.

Even though there are several types of market competition, large corporations such as McDonald’s have established monopolies to ensure that rival companies never get the same coverage and power. When a firm can gain significant power in the market, it is more likely to increase prices on goods and services (Thoma, 2014). On the other hand, monopolies aim to drive their competitors out of business or threaten new entrants to the market by setting prices below their costs and absorb losses until their competitors cannot survive longer. This practice is especially damaging to family businesses, which are the first to fail under significant pressure from monopolies.

It should be mentioned that the issue with monopolies goes deeper than economic effects because major companies also have political power and can contribute to changes in regulatory processes (Dechezleprêtre & Sato, 2017).

Large corporations can influence such processes against any threats to their power in the market by removing health and safety regulations, adding licensing requirements to prevent competitors from entering, avoiding sales taxes, participating in congressional hearings, and so on. Nevertheless, not all firms exploit their power or engage in behaviors to damage competitors’ livelihoods, but those that do have invested time and money into becoming renowned firms.

To conclude, the current state of market competition favors monopoly despite its damaging effects (Baker, 2017). Large economies such as the United States have had a long history of monopoly development through innovation and continuous progress to capture target consumers’ attention, which means that it is unlikely that they will stop using their power to gain leverage and influence market relations.

References

Baker, J. (2017). Market power in the US economy today. Web.

Dechezleprêtre, A., & Sato, M. (2017). The impacts of environmental regulations on competitiveness. Review of Environmental Economics and Policy, 11(2), 183-206.

Thoma, M. (2014). What’s so bad about monopoly power?Money Watch. Web.