A monopoly is a market structure characterized by only one supplier but many buyers. The one firm which supplies the entire market has enormous market power to determine both the price as well as the quantity supplied to the market.
In the process, they not only produce at high prices in comparison with a competitive market structure but they also produce less than the optimum quantities required in the market. The monopoly firms thus make super normal profits and are considered inefficient.
The main causes of the existence of monopolies are the barriers to entry resulting from several factors. First are the natural monopolies which occur due to the fact that only the firm is able to access resources used in the production of the final product.
Factors such as high cost of entry, government policies as well as limitations in technology also lead to the existence of monopolies (Price and Output under a Pure Monopoly, 2010, para3). The graph below depicts the monopoly market structure.
Notably, the Marginal Revenue curve is downward sloping as the firm can determine both the price as well as quantities. It is also important to note that all firms produce at the point where the Marginal Revenue Curve (MR) meets with the Marginal Cost curve (MC).
Total Revenue (TR) refers to the entire inflow of revenues resulting from the firm’s economic activity. By this definition, the TR can be derived by obtaining the product of the total quantity (Q) sold by the price (P) at which they are sold at. Consequently, TR=P*Q.
From the graph above, the price follows the Y-axis while the Quantity follows the X-axis. Again, the demand curve is the path along which the firm must produce. Bearing in mind that MR must equate to MR, then, the firm is producing at point J which represents Quantity E and Price A.
Therefore, the equation TR=P*Q is represented by the Rectangle 0EJA which is the total revenue of the firm.
Total Cost (TC) on the other hand refers to the sum of expenditure incurred during the production of the quantity produced by the firm. It is the product of the Average Total Cost (ATC) and the total quantities (Q) produced. Consequently TC=ATC (Q).
At the level of production E, the TC is defined at point H by the Rectangle 0EHB. Profits (n) refer to the excess of Total Revenues over Total Costs. That is
n = TR-TC
In the Graph, The difference can be interpreted as the difference between Rectangle 0EJA and 0EHB. This is represented by the Rectangle BHJA.
The case of a firm operating in a perfectly competitive market structure differs from the monopoly mainly due to the fact that the firm cannot determine the price or the quantity due to the presence of many buyers and many sellers.
The MR curve equates to the demand curve at a level where MR which defining the level of price. Notably, the competition ensures that the firms produce at the levels where the average cost curve is at minimum.
Therefore production is done at the level where MR=AR=AC=MC. In the graph the point would be K where the level of output is at L. Clearly, this level of output is higher than in the case of a monopoly.
A real monopolist in conventional sense controls the supply of some services or commodities for which there is no very close substitute. He may not control the whole supply, but he controls enough of it to influence the price. He may be a single large firm or a group of firms combined together to form a cartel, a government or some other public authority. Monopolies may be world wide, nation wide or local.
A monopoly may be based on the possession of an exclusive legal privilege. Therefore most governments may confer legal monopolies upon themselves or upon a public authority. As a rule of thumb, a monopoly based on legal basis will have a monopoly only on its home market. Even there it may be subject to competition from imports but its government may strengthen its position by taxing or even prohibiting such imports.
Public utilities include undertakings providing water, electricity, gas, telephone and rail transport. They are referred to as public utilities not because they provide for essential needs but because they tend to be local monopolies. They require a relatively large amount of specialized plant and equipment hence their fixed costs are large.
In an article in the New York times titled ‘Dismantling Tepco’ the author supports the move by the local government of Tokyo of setting up of new natural gas facility that will compete with Tepco in terms of production and distribution of electricity in Japan. This move came in the wake of the earthquake that rocked Japan and battered the Fukushima nuclear plant hence paralyzing the supply of electricity for the capital
Tokyo Electric Power Company had all the hallmarks of a monopoly. Tepco was established by well placed government officials of Japan to serve as the sole distributor and transmitter of electricity in the whole of Japan. Tepco has over the years profited from unchallenged hold on the market. Supporters of the power industry are of the view that deregulation will hurt the country they cite it to be the reason behind blackouts in countries such as the United States which have deregulated markets.
The government recently decided to inject $11.5 billion into Tepco, with a view of keeping the company afloat as well as assist it compensate the 90,000 people forced to flee areas near Fukushima Daiichi. The bailout will inevitably lead to a spike in electricity rates. This will be counter-productive to the utility’s main purpose of keeping the rates of essential services affordable to majority of the people.
Tepco’s power is centered on government policies. Japan is the only country among industrialized nations that has not deregulated its energy grid. Therefore, utilities have a firm grip on both the generation and the transmission of electricity. On top of that, power companies have the freedom to set electricity rates in compliance to a complex system fraught with unclear expenses (Okumura 2011)
Rumors have it that Tepco paid inflated costs to members of Keidanren who furnished it with equipment. The company gave obscene amounts of money to politicians, funded academic research and placed advertisements in the news media, despite the fact that it had no real competitors.
It also doled lucrative postretirement jobs to bureaucrats from government ministries as well as some members of the national police. In return, they turned a blind eye to Tepco’s practices. Tepco went on to become a major player in Japan’s nuclear establishment, referred to as the “nuclear power village.”
A solar farm that could grow into a full-throttle revolt against Tepco and other utilities was established recently. The idea behind this move was to try and loosen the utilities’ firm grip on the power grid. It has subsequently won the backing of many bureaucrats who seem to be aligning themselves to the escalating popular sentiment against nuclear power.
Tokyo is trying to do the same albeit on a much smaller scale with its natural gas plant, which city officials say will produce sufficient electricity to power its subway system as well as light most public buildings. Some supporters of deregulation are cautious about going down the path of separating power generation and transmission. This move would inevitably lead to increased competition.
Japan’s power industry has experienced deregulation in the past with nothing to show for it. The futility of that procedure, which has become more evident since the incident in Fukushima, highlights the hardships challengers have to contend with.
It is evident that though the protection of Tepco as well as the industry was pioneered by Liberal Democrats, it has thrived under the Democratic Party of Japan, which clinched power in 2009 on the platform of extricating the complex and corrupt ties between business and government (Okumura 2011).
When operations in the Fukushima nuclear plant were paralyzed in March, the new companies perceived it as an opportunity to make their presence felt in the market.
But the government ordered all commercial customers — including the new companies’ customers — lowers their electricity consumption by 15 percent. That subsequently meant that the new companies had an extra 15 percent supply which the government of Japan wanted to be sold to Tepco for a price lower than what it charged its customer and consequently incurred a loss to the tune of $ 130,000.
In another attempt at deregulation, the other utilities were permitted to compete against Tepco and one another. Instead, they decided to maintain their monopolies as they were. In the aftermath of the Fukushima disaster, the other utilities have opted to back Tepco, afraid that its collapse would spell the same fate for them. Some went ahead to contribute $90 million to Tepco’s bailout, testimony to the influence wielded by the company.
From the article one gets the impression that the author’s intention was to depict Tepco or any other monopoly in bad light by dwelling mostly on its misdeeds. Tepco is said to have been established by highly placed bureaucrats with the intention of serving their political as well as personal interests.
These bureaucrats went to great lengths to ensure that Tepco remained the sole producer as well as transmitter of most power. Attempts to deregulate Tepco were thwarted or only made on paper with nothing to show for them in reality. Monopolies have their demerits and some of them will be highlighted.
For starters, monopolies lead to production of products and services that are of compromised quality. In the aftermath of the earthquake that rocked Fukushima, the nuclear power plant owned by Tepco was profoundly devastated leading to reduction in the supply of electricity in the whole of Japan. The government was forced to order the populace to reduce consumption of electricity by 15%. This would not have happened if there were other major producers of power in Japan.
Second, monopolies reduce the range of products or services from which the consumer can choose from. This therefore implies that the consumer will not be fully satisfied by whatever products or services they are offered by monopolies. They only use these products or services because they have no other option and they need the product or service at that point in time.
Tepco had at some point unnecessarily hiked the rate of electricity making electricity expensive for its populace relative to other nations such as the United States of America. Citizens of the United States pay much lower prices for electricity than their Japanese counterparts owing to the deregulation of production and transmission in their country (Okumura 2011).
On the other hand supporters of monopolies argue that they are beneficial especially when it comes to dealing with utilities. Utilities are sensitive in that when they are left in the hands of private investors who take advantage of the fact that they are of extreme necessity hence maximize on making profits out of them at the expense of the populace.
Therefore from the article, one clearly sees the pros and cons of having a monopoly organization or business and the effects it has on the social economical life of the society. Tepco plays a major role in the social economical life of the Japanese as the social, economical and political lives of the Japanese are greatly influenced by the day to day running of Tepco.
In addition, competition and entry of new energy players is also influenced by Tepco which has a great flowing both politically and financially. Therefore such companies such as Tepco will always play a great role in the economy and thus influence the way new entrants into its domain run their organization.
Reference
Okumura H. (2011) Dismantling Tepco. New York Times. NY. New York Times.
The essay is an over view of monopoly. The chosen company or organization for the purposes of this study is Monsanto a company that holds about 70% to 100% of the market in commercial seed. It is well known for producing herbicide roundup, pesticide, crop seeds and it was sued by those organizations that compete with it for monopolistic practices as well as anti-trust.
The company was founded in 1901 and headquartered at Creve Coeur, Missouri in United States of America. It employs slightly over 21,000 as at 2009. In 2008 its revenue and net income stood at $11.37 and $2.02 billion.
Economists coined the term monopoly to refers to an existing situations whereby a particular person or an organization do have adequate say or control concerning given goods or services thus determining as well as dictating the conditions or terms under which consumers as well as other persons will have the potential to land their hands on such goods or services. There are four main characteristics of monopoly, single seller, market power, price discrimination as well as firm and industry.
History of Monsanto
It was founded in 1901 and well known as a multinational corporation that leads in biotechnology in the field of agriculture; additionally it produces genetically engineered seed. 18 years down the line, it partnered with Grasser’s Chemical Works thereby expanding its business in Europe. It later grew to produce industrial chemicals. In 1940 the company became well known in producing plastic. Four years later it started producing DDT bit was later banned, in 1949the corporation acquired the American Viscose (Julfekar, 2010).
Five years down the line it joined hands with Bayer to engage in Polyurethanes in United States of America. The corporation bought G.D Searle &Company. It is important noting that, 11 years later, it acquired 49.9% of Calgene and before the end of that year, it again acquired close to 5%. In 1997, it spun of its fiber division as well as industrial chemical. It later sold three of its companies among them NutraSweet Co.
In 2000 it entered into a merge with Upjohn and Pharmacia. Five years down the line the corporation acquired Seminis a company that is a leader in producing fruits and vegetable seed. At the end of 2007 the business venture purchased Delta as well as Pine Land Company. Two years ago, 2008 it again purchased De Ruiter Seed while selling its brand –Posilac. It now controls above 70% of the agricultural market in USA. In my view, Monsanto acquired it monopoly status through vertical mergers as well as acquisitions.
Market impact of the monopoly
It is worth noting that Monsanto Corporation through its monopolistic characteristic did impact both positively and negatively to the market. Traditionally, monopolies do impact especially in prices; it either lowers prices or makes it to skyrocket.
In this case, Monsanto at some point set their prices so high that Americans as well s other consumers were unable to buy their product, but due to lack of better substitutes they had to buy these products but at lower volumes (Montague, 1999). Additionally, due to monopoly, competition was not in existence, thus the products being produced ere not of high quality and competitive in terms of prices. Consumers had fewer choices.
Market acquisition
Just like other monopolies, Monsanto has been in law suits over various issues. Notably, in India, the corporation was accused of trying to control the cotton industry (Gersema, 2003). It has also been accused of controlling biotech corn as well as department of Soybean seed.
Concerning predatory pricing, the company was accused to misusing its monopoly to unlawfully monopolize and freeze competition relating to glyphosphate and maintaining a supra-competitive price (Stewart, 2010). Additionally, the corporation has been accused of antitrust as the company was accused of misusing its dominance it dominance in roundup to forcefully make companies that produce seed to license the company’ biotechnology.
References
Stewart, T. (2010). How monopolies impact consumer prices. Web.
Montague, P. (1999). Monsanto: The Bad Seed. Environmental Health Weekly, 21(6), 2-16.
Gersema, E. (2003). Death Sentence for Monsanto–Roundup Resistant Weeds. Associated Press.
Economics is defined as the study of the mechanism of people’s decisions on how to utilize their scarce resources (Baumol & Blinder, 2007).
Economics assumes rational behavior in people, thus, expecting them to maximize profits, and at the same time minimize the utility of scarce resources available to them.
Monopoly is defined as the power possessed by an enterprise whereby it is the only manufacturer of a good or service.
Understanding why the Microsoft Company has been labeled as well a trustworthy one, as well as analyzing the factors which have led to the above-mentioned conclusion will help to understand the positive and the negative aspects of monopoly and to evaluate Microsoft strategy.
As for the reasons which led to the decline of Microsoft reputation, it was alleged that Microsoft illegally monopolized operating systems (OS) market as pertains to personal computers (PCs).
The given fact can be proven if taking into consideration the information offered in the Act 2, Sherman Antitrust Act.
It was also alleged that Microsoft had signed anti-competitive contractual agreements with other sellers of related commodities (Rubini, 2010), e.g. Original Equipment Manufacturers (OEM), and at the same time had taken measures to maintain and enhance its monopoly (Rubini, 2010).
Another allegation made against Microsoft was that the company illegally tried to monopolize the internet browsers market, but failed. In accordance to Sherman Antitrust Act, Cap 2, the given attempt is considered illegal (Rubini, 2010).
In addition, Microsoft Co. went even further, bundling its internet explorer IE with the Windows Operating Systems, which is considered illegal under Sherman antitrust Act cap 1.
Opinion as regards allegations against Microsoft
Therefore, it is obvious that Microsoft used monopoly. The above-mentioned conclusion can be made if taking into account that Microsoft owned over 70000 applications on Windows, whereas other companies, such as Macintosh, possessed fewer. (Rubini, 2010)
However, it must be born in mind that a monopoly has the power of price control. With this in mind, the Microsoft Co. can be hardly regarded as a monopolist, since Microsoft’s’ price of operating systems was quite low as compared to what a monopoly would set, namely, around $1800.
Yet Microsoft priced the commodity at $40-60 (Rubini, 2010), which was considerably lower than a monopolist company would.
As for the accusations of monopoly concerning the market browser, it was investigated and found out that Netscape had the initial monopoly in the existing browser market and that Microsoft changed the situation, turning the Netscape monopoly into the duopoly of the two companies (Rubini, 2010).
However, the case of the internet explorer with Windows should be considered as well, for the given instance can also be viewed as monopolizing the market.
According to Rubini (2010), both services belonged to different markets, which was supported by the judge’s decision that Microsoft tried to marginalize Netscape’s market share by tying Windows and internet explorer together.
Incorporating the above-mentioned findings, one must admit that claiming that Microsoft was guilty as charged would be appropriate.
Since the market wasn’t monopolized since Netscape, Microsoft obviously tried to gain majority of the market share.
Despite the ace that a monopoly can bring considerable profit to the organization which rules the market, it is worth mentioning that a monopoly can also serve as the stumbling block of the market development and the state economic progress.
Nevertheless, it must be also kept in mind that, eliminating a monopoly presupposes having various producers of a commodity all charging high prices as compared to a monopoly charging a reasonable price. (Baumol & Binder, 2007)
Characteristics of a monopoly
Entry barriers
A monopolistic market is developed only when no other firms enter the market. If any new firms enter the market there will be no monopoly as completion will appear.
Lack of close substitutes
Monopoly presupposes that the market lacks a similar company providing a similar product, hence the company’s ability to maintain is monopoly status stems.
A monopoly earns profits in a long term as there is no competition whatsoever to minimize the monopolist’s profit earning capacity.
Therefore, the monopoly controls the entire market share being the only producer of the commodity (Baumol & Binder, 2007).
Price discrimination
Price discrimination is enjoyed by the monopoly as no one can dictate what prices are to be set and for what products. Only the monopoly determines what prices it will set and what the reasons for the prices are (Hirschey, 2008).
The monopoly is also a price maker since it determines what amount of money customers will pay for a certain commodity, thereby being the ultimate decision maker concerning the commodity price (Hirschey, 2008).
Barriers to entry a monopoly are designed to block any other entrants to the monopoly. The methods used include the use of patents, limiting pricing, heavy spending on research and development (Hirschey, 2008).
Natural monopolies are the monopolies that evolve as a result of high costs of business start-up, whereas government monopoly is a phenomenon that exists as a result of the government’s decision to be the only producer of a particular commodity (Hirschey, 2008).
Dead weight loss is the result of the inefficiency which, in its turn, stems from the monopolist operating in the market.
The demand curve is a curve indicating the slope of the demand depending on the price. A downward sloping demand curve indicates that more goods tend to be purchased at lower prices.
Marginal revenue is said to the additional profit made by making one extra unit of production (Baumol & Blinder, 2007).
Conclusion
Microsoft Co. enjoys the majority of the market share in the software market, yet it is not a monopoly in the market since it faces completion from other producers such as Linux.
References
Baumol, J. W. & Blinder, A. S. (2007). Microeconomics: Principles and policy. Kendallville, IN: Courier Kendallville, Inc.
In Britain, a monopoly can derive very well in products and services which are by nature requiring huge investments and most of the services they offer are public goods. For example, the UK electricity industry has been for a long period under a monopoly. Another one is the Railway industry which has been a monopoly before the privatization which introduced a competitor but using the same line. In theory, a monopoly derives well in an environment where there is one seller but many consumers. If we look at the case of British Telecom which was a monopoly before it was privatized and entry of mobile companies it was difficult for any person to start a business offering fixed-line because fixed-line require the use of some facilities in the public arena.
It will be very expensive for the private sector to venture into the business of fixed-line because the fixed-line requires the laying of holes around the roadside and they need protection from the state security agencies. This will be expensive if they decide to venture into the business to assist them in carrying out this duty.
In theory, a monopoly succeeds where the product and services offered do not have a close substitute. For sure British Telkom survived for many years without a substitute but the emergency of mobiles made the services of a company very expensive but because of inefficiencies the company started heading south in terms of performance which forces privatization in the industry. These two factors which are known as a single producer and seller and a product without close substitutes have facilitated the existence of monopolies in our markets.
The demand curve facing the monopolist
The products supplied by the monopolist in our markets had been successful for a long period but the politicians worked for the downfall of the monopoly and its benefits to its corporation. These monopolies started making losses until the public demanded better services which prompted the privatization of various companies to have privatized monopolies which eventually promoted the existence of competitors. The results of monopoly in various industries were due to large operations that require huge financial outlay unlike other businesses with competitors which do not require huge financial outlay. As demand increases for these products i.e. for electricity, fifth line railway, inefficiency cropped in thus affecting service delivery although demand was there.
These monopolies tried to improve efficiency in management through marketing and distribution but they failed because of political efficiency. Since they were monopolies demand remained but profitability went down, unlike private-sector monopolies. For example, the cost of transmitting and distributing electricity went up and the company remained unprofitable but after privatization these companies became profitable. In a normal monopoly the profits output revenue graph will be as follows:
In this case, a monopoly is making a profit, unlike the private sector where there are no abnormal profits a monopoly makes abnormal profits. However public institutions including railway and Telcom Company remained unprofitable an issue that pushed a government to sell the shares to the public to make it profitable. The British railway and telecom are classic examples of failed monopolies but have been assisted to remain profitable after the entry of monopolies.
The role of competition in business
Competition is very important for any business to succeed. A monopoly that operates without competition, increases prices to the level they wish. But worse still a monopoly owned by the government remains a poor performer in the market because of political interference.
Even if a company is owned by the state but has competitors the company will perform well because of good governance which will be implemented because the management will fear losing the competitor in case they mismanage the institution. But competition assists companies to embrace good management in their operations. It is through good management that proper marketing strategies are laid down, the best suited Human Resource is recruited and good business ethics are practices. A company without competitors will have arrogant and non-caring managers to the members of the public.
Without competition, a monopoly especially one owned by the government will develop a tendency of cronyisms as well as become arrogant because of the idea that they are invisible as well as protected by political forces who are involved in the appointment of their managers. These companies will shield themselves from the outside world as though it does not exist. There was something referred to as the Rank and Yank appraisal system in this type of monopolies of their performance. This system eliminated everybody in the system who disagreed with them and this helped to humiliate these monopolies when they started performing poorly.
In monopolies owned by the government, whistle-blowing becomes a nightmare to whistle-blowers because they will be humiliated by political cronies as well as humiliated by political appointees. In brief, completion introduces corporate governance in this type of companies making them responsible for their operations. Managers who are faced with completion employ strategic principles in order for the company to succeed. The procedures and principles of such a company are carefully and skillfully prepared to have the company succeed in the long run, however, a company without competition will eventually collapse due to political interference and unplanned winking.
Price determination under monopoly
Price determination under monopoly doesn’t depend on the demand curve but depends on the cost of production in the private sector. However, in the monopolies owned by the government, these monopolies determine their price through government policies that may not be based on cost.
However, these regulated industries used to enjoy protection from the state up to the point they has become arrogant and started failing in their operations. The introduction of competition into the industry uncovered many various weaknesses in the regulated industry players. In a competitive market, various companies compete for the market. It’s upon the best-suited company to work modalities that will assist these companies to grow financially.
In the industry, various competition strategies were applied one was vertical integration where efficiency was improved because a company like British electricity was split into various companies performing different duties but offering substitute products to the other. This actually brought fair play and safeguarded the public from unfair competition. The introduction to completion ensured that culture and ethics were introduced that suited a profitable environment. The utility industry in the UK was regulated thus technology in the organization was not well taken care of.
These monopolies under utility survive mostly because were subsidies and these subsidies help them to impress some technology although technologies embraced by them have not assisted them much in their operations. However, the introduction of regulative competition ensured that anti-competition practices were eliminated and proper reforms were carried out in order to make the companies more productive.
This idea of competition in the utility industry helped in ensuring publicly owned companies remained in business without exploiting consumers although the type of competition introduced was not similar to the existing competition in other sectors because the utility sector usually offers unique services which require huge capital outlay and the private sector will not be able to operate.
These industries have also failed because of the regulation provided by the regulatory bodies. Although the implementation of privatization failed much which produced fake companies that ended up matching again to take advantage of economies of scale at least privatization assisted them to grow.
UK electricity
In the UK electricity industry, there is a lot of government regulations especially the EU environmental legislation. This stipulates that companies should be wary of carbon emissions to the environment. This is likely to lock many of them that may not have complied with this legislation by 2015. A company in the industry can acquire more companies and widen its market share as a result of the exit of those companies that would not have complied with regulations. When a company is owned by the regulated private it performed well than a publicly owned monopoly. Other examples such monopolies include Railway Corporation.
Price discriminating in normal monopoly
Generally, the monopolist charges only one price from all purchasers of his commodity. But sometimes this is not the case. The monopolist can charge different prices from different people provided these people from different people, provided these people from different markets or belong to what is called ‘non competing groups’. This is known as price discrimination.
A monopolist will find what this strategy increases total profits as compared with a policy of charging the same price if two conditions are met:
The markets must display differences in the price elasticity of demand for the product. This implies that differences in marginal revenue in different markets are associated with any particular price. Given identical cost conditions, if that a price at which marginal cost and marginal revenue are equated in one market will not be associated with equality of MC and MR in another. Profit maximization in all markets, therefore, implies variations in price between markets.
Secondly, in order for price discrimination to be effective, it must not be possible for purchasers in a cheap market to sell the product in a dear market. It is possible then in the long run the price differential cannot be sustained. Thus, there must be barriers of some kind between markets. These may be:
Geographical (home and export markets)
Temporal (peak and off-peak travel) or
Based on the age of status (child or adult, working or senior citizen).
Privatization
Privatization came at the right time when most utility industry players who were monopolies on their right started failing because of inefficiency. Privatization introduced private investors to the company changing ownership and decision-making structure. The classic example was the case of British Telecom which introduced a new brand to the system of management and the company started engaging in expansion programs and strategic alliances.
Concerning the issue of character, the utility industry debacle tends to be character-based. The public monopolies people have to be the fine people they portray themselves to be. Maybe it was the corporate culture under which they operated that led to their problems. Maybe we have got what we can call “separation thesis” a case whereby an individual, for reasons that are fully tied to the corporate culture as well as the expectation of the society, adopted like their own an ethic which is associated with their role as manager which was separate from the individual ethics. These may be the kind of people who are good but acted faultily because of the notion that their managerial roles demand they perform in a certain unethical way.
Companies like British Telecom have got codes of ethics that prohibited the managers as well as executives from being involved in other business entities that participate in business with their own company. The codes of ethics are voluntary and therefore can easily be set aside by the board of directors. The legal structure allowed managers, to a larger extent to be able to enter the arrangements, constituting to conflict of interest. Of course, the managers and executives have got a fiduciary duty that acts within the best of the company’s interest as well as its shareholders. However, the law leaves some significant discretion to the managers and the executives to put into effect their own business judgment about what is in the finest interest of the company.
References
Florio M. – Does privatization matter ? The long term performance of British telecom over 40 years. Fiscal studies volume 24 nu 2, pp. 197-234.
HELM D – British Utility Regulation: Theory, Practice and reform. Oxford review of economics policy Vol 10, no 2.
HELM D & Jenkinson T – introducing competition into regulated industries, oxford review economics policy vol 10 no 13, no 1.
Parker D (2004), the UK privatization experiment: The passage of time permits a sober assessment, CESifo working paper No. 1126.
Vickers J and Yarrow G, Economic perspectives on privatization.
Smith R & Emshweller, J (2006) How two wall street journals reporters uncovered the lies that destroyed faith in cooperate America, Newyork Diane company publishing.
The available facts need to be examined. First, the USPS is a government agency that is authorized by the US Constitution under “Article I, Section 8, Clause 7” (US Constitution). Spooner states:
“By the old articles of Confederation, it was declared “the United States, in Congress assembled, shall have the sole and exclusive right and power of establishing and regulating post-offices from one State to another throughout all the United States.” (Spooner, 1844, p. 15).
When the constitution came to be adopted, this phraseology was altered, and the words “sole and exclusive” were omitted. This alteration… must certainly have been intentional” (p.11).
The legal status as a monopoly, under the Constitution is open to challenge. During the 1970’s, USPS was made into a Corporation that still retained its government agency status. USPS has allowed contractors to move mails between post offices. Today, Federal Express and United Parcel Service deliver high value parcels and will utilize USPS to expedite non-profitable overnight deliveries.
USPS is running significant losses. Why?
According to the US Government Accountability Office (GAO), for the following reasons:
“Since 2006, the U.S. Postal Service (USPS) has closed redundant facilities and consolidated mail processing operations and transportation to reduce excess capacity in its network, resulting in reported cost savings of about $2.4 billion. Excess capacity remains, however, because of continuing and accelerating declines in First-Class Mail volume, automation improvements that sort mail faster and more efficiently, and increasing mail preparation and transportation by business mailers, much of whose mail now bypasses most of USPS’s processing network” (GAO 2012, p.1).
What then, are the conclusions reached by the GAO?
“In February 2012, USPS projected that its net losses would reach $21 billion by 2016” (GAO 2012, p.4). The GAO have in 2009 made the following recommendations: “(1) rightsizing its retail and mail processing networks by consolidating operations and closing unnecessary facilities and (2) reducing the size of its workforce” (GAO 2009, p.2). In 2012, the GAO stand behind their 2009 recommendations:
“GAO is not making new recommendations in this report, as it has previously reported to Congress on the urgent need for a comprehensive package of actions to improve USPS’s financial viability and has provided Congress with strategies and options to consider” (GAO 2012, p.6).
What needs to be done? Economic theory provides the answer. The price system allows economic calculation, which is expressed in accounting terms as profits and losses. Profits accrue when the good or service demanded by consumers is urgent enough to provide a monetary profit after all costs and expenses. If losses accrue, it is clear that the consumer demand is insufficient, and the resources should be reallocated.
Clearly in today’s technological environment there simply isn’t the demand for postal services, as they currently exist. Should a consumer demand remain, and clearly there would remain demand, the private providers already in this business segment can charge a price that reflects the economic realities, which, undoubtedly would be significantly higher. Therefore the rational decision is to close USPS and liquidate the business as a bankrupt.
Politically, this will never happen. As the second largest civilian employer in the US, in the current economic climate of recession, in a Presidential election year, the losses will be allowed to continue to accumulate.
References
Spooner, L. (1844). The Unconstitutionality of the Laws Of Congress, Prohibiting Private Mails. Web.
U.S. Government Accountability Office. (2009) Network Rightsizing Needed to Help Keep U.S.P.S. Financially Viable (GAO-09-674T) Washington D.C., United States: Author. Web.
Industrial regulation is a scenario where the government regulates an entire industry for instance the oil or banking industry. It does so by putting in place rules and regulations that govern the way the organizations in that industry conduct their business. Industrial regulation aims to make sure that no business entity can monopolize or merge with another to restrict trade.
Social regulations
Social regulations are regulations that seek to benefit the public interest. It requires that firms in an industry conform to no discrimination, safety of their product and services, and environment-friendly practices. The regulations benefit the users by making sure that the end-user only gets to use the best quality products, the firm does not discriminate on who it employs and the manufacturers on the other side do not pollute the environment which they use to operate in for the benefit of the society.
Entities affected are the general public, producers of goods and services, and their employees. This is due to the regulatory requirements which require the producers to abide by strict production standards and produce quality goods, protect the environment by not polluting it, and their employees are employed without discrimination and have a healthy working environment. The general public benefits by getting quality products and services, equal employment opportunities, and a clean environment.
Monopolies
Natural monopolies are monopolies that come up because of the nature and characteristics of the marketplace or production process in the industry but not due to government intervention in the marketplace with the aim of favoring a certain firm.
Antitrust Laws
Antitrust Laws are laws that are used to discourage unfair trade practices and seek to encourage fair competition in an industry. By doing so they prevent firms and an entire industry from forming agreements to unlawfully fix prices, mergers, and acquisitions that introduce a reduction in competition resulting in higher prices or low quality for customers, an exclusive contract where a seller sells to a buyer on the condition that the buyer will not purchase from the seller’s competitors and interlocking company boards where competitors appoint common members to their boards.
The major antitrust laws are:
Sherman Antitrust act of 1890 was formed mainly in response to trust and pools in the railroad system which resulted in exploitive prices. It states that any contract, combination of contract in restrain of trade is illegal, and any person who monopolizes or shall attempt to monopolize is guilty of a misdemeanor.
Clayton Antitrust Act added more clarity to the existing Sherman antitrust laws by prohibiting unfair trade acts like price discrimination, exclusionary contracts, and mergers and acquisitions aimed at monopolizing the industry.
Federal Trade Commission Act. This act paved way for the formation of the Federal Trade Commission (FTC) which formulates and enforces laws that prohibit unfair trade practices by the major firms in an industry.
Robinson Patman Act of 1936 is a law that prohibits price discrimination. It requires a seller to sell the same product at the same price to different buyers to prevent large buyers from gaining an advantage over small buyers except in certain circumstances. It applies to the sale of tangible goods produced within a close timeframe and is sold in similar quality.
The three main regulatory commissions of industrial regulation are:
The federal communication commission (FCC) was established in 1934 with oversight of radio, television, and telephones. It drafts new laws to ensure that the industry remains competitive, inspects and ensures quality is met and ethical practices adhere in the communication industry.
Federal Energy Regulatory Commission (FERC), which was endorsed in 1930 and mandated to regulate electricity, gas, and water power. It regulates the transmission and sale of electricity gas and oil. It monitors and licenses and inspects private firms, municipal and state energy projects.
And State Public utility commission is responsible for the regulation of electricity gas and telephone. It monitors the state of all public utilities and ensures that these services are accessible and in a consistent usable state to the public.
References
McConnell, C. R., & Brue, S. L., Flynn, S. (2012). Economics (19e). McGraw-Hill. ISBN: 9780077337865 (e-text provided at no charge to student) OR 9780073511443 (hard copy print edition optional student purchase)
Ball, D. A., McCulloch, W. H., Jr., Geringer, J. M., Minor, M. S., & McNett, J. M. (2009). International business: The challenge of global competition (12th ed.). McGraw-Hill. ISBN: 9780077318833.
Anderson, D.R., Sweeny, D.J., & Williams, T. A. (2010) Quantitative methods for business (11th ed.). South-Western, ISBN 0324651813 or 9780324651812.
Johnson & Johnson (J & J) is an international organization based in America, which provides consumers with medical services by selling drugs. It is also a manufacturer of other goods like beauty products and was founded in 1886. Within the last five years, J & J has faced many antitrust probes with regard to the production and sale of drugs despite the company’s good status in America’s healthcare system. Therefore, this paper sheds light on how J & J was charged with antitrust actions and the various mitigation efforts to avoid such actions.
In 2006, J & J was accused of using its sutures monopoly to boost its sales of other surgical products. Ethicon, which is a division of J & J was accused of blocking the competition in the market for trocars tools used in keyhole surgery. These accusations were brought about by Applied Medical which is based in Rancho Santa Margarita. The company claimed that J & J had offered discounts on the sale of sutures to hospitals where it was also selling trocars and clip appliers. A branch of J & J based in New Brunswick opposed the accusations, saying that other suppliers who also offered sought to offer lower prices through contracts were not rejected. However, J & J’s spokesman defended the company by saying that they were awarded the contract because they gave the highest competitive bid which could benefit the customers. The jury, which had nine judges – six women and three men took two days to reach their final decision, in which J & J won (Bloomerg News, 2006).
Another lawsuit filed in 1996, but later decided in 2009 was alleged that J & J sold replacement contact lenses at a very high price because the company and other lens manufacturers had agreed with AOA, in infringement of antitrust laws, that their lenses would only be available in an eye care professional and so the consumers had difficulties in buying the lenses from pharmacies. After the case, the company promised to take action by giving offers to Maryland residents who bought the replacement lenses from 1st January 1988 to get $50 if they purchase 4 or other multi packets of these lenses. If a customer bought the disposable lenses for the second time, he got $25 to get his eyes checked by a professional (Patel & Rushefsky, 2006).
The Company agreed that it will distribute $30 million refunds to its customers. It also agreed to pay $25 million in cash to clear up funds and pay $8million in cash for the people who ceased to use their contact lenses. The customers also filled out the forms to get $60 in coupons or get $50 cash.
Consequently, J & J has agreed to change their lending practices. It is selling these lenses for houses, pharmacies, and stores to resell them to customers, provided they follow the instruction of the prescription and obey the rules and regulations of the government laws. This will benefit the consumers who will get the lenses for less and with price stability and so they will be able to access the lenses from many outlets.
In 2009, a lawsuit was filed against J & J and Omnicare Company in California. It was discovered that J & J collaborated with Omnicare, which is a pharmaceutical company to dominate medicine delivery to nursing homes while defying Medicaid laws. The complaints claimed that about 1.4 million managers were charged for drug prescriptions and that they had an overdose of drugs which was in the interest of J & J to increase income and profitability. It is also claimed that J & J paid Omnicare to create a program that was used to increase drug use, especially for the elderly. This was seen as a fraudulent business practice because people paid extra money for extra drugs. These two companies were charged with involving themselves in fraudulent, unlawful, and unfair business. The case was settled and the plaintiffs were to be paid all the costs including attorney fees, and damages. J & J was ordered to pay more than &50 million by a judge for overpricing drugs and participating in a marketing strategy that led to the rise of many drugs and overprescription. It also paid $7 million for violating state statutes (Singer, 2010).
There were other charges where the company was bribing doctors in Europe and paying inducements to the Iraqi government to illegally get business and get contracts from United Nations for food programs. The government accused the Company of giving money and gifts to doctors in Romania, Greece and Poland so that they could recommend their drugs to the patients. The company learned that bribery is not the best and paid $70 million to settle its criminal charges without denying or agreeing to the accusations.
According to the mentioned charges, it is evident that J & J has been able to deal with all the antitrust actions. J & J strives to maintain its status in the healthcare industry by ensuring that quality standards are incorporated in its production and supply processes. Furthermore, rewarding the parties affected by illegal activities shows that J & J is ready to avoid antitrust actions; in essence, antitrust actions are mainly perpetrated by third parties or firms affiliated to J & J. For instance, in 2010, J & J’s Ortho-Clinical Diagnostics division was accused of selling blood reagents without testing and illegal price-fixing. Later, J & J won the case and it was closed (Voreacos, 2011).
The company has shown improvement by agreeing to pay and settle criminal charges to the affected parties to rebuild its trust. In some cases, the penalties has been reduced because the company agreed to cooperate with the investigators. In this regard, J & J must also put in place programs that conform to anti-bribery rules in all its businesses. The organization should hire compliance officers who reports to the managers about any criminal activities. They should come up with other marketing strategies rather than bribery or overcharging drugs, not forgetting the fact that big pharmaceutical companies are under income strain.
J & J’s management must have a clear decision making model and understand financial and economic implications to provide good services. This is because many healthcares are being set up and there is need to retain customers. With good decision making, the management is able to provide the required medical services while considering the safety of their products with prevention of medical errors. Their products should be accessible wherever patients need them by having many qualified outlets. The care for the patients should be efficient and effective, meaning that the Company should give the right quality care (Chrichton, 2003).
In conclusion, J & J has used millions of money in settlement of many charges that it has faced in many years. In all of these cases, the J & J’s management has faced the repercussions and hence they should change their marketing strategy, improve on drug quality and hire executive sales team so that they can market their products worldwide, and implement quality healthcare team and management systems. This will help in regaining the consumers’ trust because there are many competitive health care services and therefore, there is need to remember that everyone deserves quality health care.
References
Chrichton, A. (2003). Health Care. A Community Concern Development in Organizations of Health Care Services. Alberta, Canada: University of Calgary Press.
The first era of antitrust thinking occurred between 1890 and the 1950s where restrictions were imposed against giant companies. The strategy is also aimed at protecting consumers from unreasonable prices. The political and economic rationale significantly influenced the second era of antitrust thinking in the 1960s (Laudon & Traver, 2019). During this period, people perceived economic power not as an anti-competitive aspect but as a factor of increasing efficiency and lowering prices of goods and services. Therefore, large firms were free to merge with other companies.
Natural Monopolies
A natural monopoly is a term used to describe a firm that serves a vast market share without fair competition due to entry barriers due to the required significant investment. For instance, electricity utilities are provided by monopolies who can set market prices and product qualities (Laudon & Traver, 2019). The United States has taken various measures to deal with natural monopolies. The government established regulations such as price capping to prevent consumers exploitation.
Market Dominance and Anti-Competitive Behavior
Market dominance and anti-competitive behavior of firms like Amazon, Facebook, and Google can be resolved by enhancing the review of suggested mergers with the idea of safeguarding start-ups against the acquisition. This idea implies introducing antitrust reforms that focus on making it difficult for firms to merge (Laudon & Traver, 2019). The issue can also be resolved by minimizing advertising to lower sales revenue and interest among consumers, therefore splitting the market share among other small firms. The third strategy entails splitting monopolies to run independently. Amazon can be split to operate as different individual firms in their respective sectors in media, electronics, groceries, among others.
The European Model of Antitrust Differ and the American Model
The main difference between the European model of antitrust and the American model is that the former only considers consumers. At the same time, the latter considers both the consumers and the market structure—the European model of antitrust interdicts anti-competitive accords among independent market operators. The model also forbids abusive actions by dominant firms in the industry by imposing fines (Laudon & Traver, 2019). On the other hand, the American model of antitrust law considers market structure, competition, and consumers by ensuring fair competition in an open-market economy. In this case, there is no consumer exploitation through exorbitant prices.
John D. Rockefeller made one of the most influential decisions of monopolizing the petroleum industry. John D. Rockefeller was born at Richford in New York in 1839. He lived a humble life and while still young, he used to sell candy. Additionally, he could make money by giving the neighbors loans.
At around the age of sixteen years, he was employed as a bookkeeper receiving fifty cents in a day (Gunderman and Gregory 1). In 1859, he collaborated with Maurice B. Clark and started a wholesale business followed by an oil refinery after including Samuel Andrews in the business.
As the demand for oil increased, Rockefeller bought the refinery from his partners after borrowing money. Later, he bought as well as build other oil companies. In 1870, John D. Rockefeller collaborated with his brother and established the Standard Oil Company at Ohio.
Standard Oil Company gave John D. Rockefeller the strength of driving away other owners of refineries by procuring their business premises (Baylor 1). At around 1880, the Standard Oil Company was refining approximately ninety percent of the United States oil.
The company controlled all the oil refining processes and marketing procedures in the United States. As a result, John D. Rockefeller had a strong influence on the quality of oil products produced and the market price. In 1890, John D. Rockefeller retired as the president of the company and Theodore replaced him.
During the reign of Theodore, he initiated antitrust actions, which led to the collapse of Standard Oil Company into other small companies. According to Gunderman and Gregory, John D. Rockefeller survived in the business environment because of monopoly (1).
Monopoly is a Greek word meaning alone or single. Monopoly exists when a particular business enterprise is the only supplier of a specific commodity (Baylor 1). The characteristic of monopoly is absence of competition to produce that commodity and a viable alternative product.
As a result, monopoly has a significant market power and it usually control the prices of commodities. For instance, monopoly can increase the profit margin by producing goods in small quantities and selling them at higher prizes.
Standard Oil Company was a monopoly. John D. Rockefeller used unethical business practices to monopolize Standard Oil Company.
The Six Unethical Practices of John D. Rockefeller
Reducing the Prices of Oil and Its Products
John D. Rockefeller reduced the prices of oil and its products temporarily (Baylor 4). His competitors could not keep up with the reduced prices because they had not planned for the same.
As a result, most of the business people who were dealing with oil and oil products ventured in to other types of enterprises. Those who could not survive in the competitive business environment sold their enterprises to Standard Oil Company.
The lower prices of oil attracted many consumers, hence, Standard Oil Company managed to establish a strong customer base. According to the theory of economics, low prices more often than not reduce the profit margin of a business and can even make it collapse.
John D. Rockefeller was not interested in the profit, but in monopolizing Standard Oil Company by driving away his competitors. He managed to stabilize Standard Oil Company at the expense of the profit. F
or instance, between 1880 and 1890, the price of processing raw oil dropped by one cent while that of refined oil by twenty six cents per gallon (Baylor 3).
By cutting down the prices of oil, John D. Rockefeller did not only win local consumers but also the international traders. Baylor stated that, in order for the Standard Oil Company to compete with the Russian Oil in the Asian and European Countries, John D Rockefeller subsidized the foreign prices of oil (5).
Additionally, he supplied free products in order to establish a universal customer base. For instance, in 1870, Standard Oil Company supplied kerosene lamps to the interior parts of the globe and taught people how to use them.
Procuring the Components Required Making Oil Barrels
John D. Rockefeller purchased the components required to make oil barrels and as a result, his competitors were unable to transport their oil to the consumers (Baylor 3). This is because his competitors could not change the raw oil into refined products that the customers can consume.
Thus, Standard Oil Company was the major supplier of refined oil products and it gained fame all over the world.
With time, Standard Oil Company started producing barrels and selling them at a reduced price in order to attract many consumers (Baylor 3).
For instance, John D Rockefeller was selling a barrel at one point five dollar while external suppliers were distributing at a price of two point five. This difference of one dollar facilitated the monopoly of Standard Oil Company because it attracted many consumers.
Secret Deals with Railroad
The major advantage of Standard Oil Company was its ability to get reduced rates from the railroads. John D. Rockefeller used the fame and prestige of Standard Oil Company to form an alliance with railroads, which gave it rebates in privacy (Baylor 4). Hence, the railroads reduced the shipping charges of Standard Oil Company.
The reduced prices enabled the standard oil company to compete effectively with other business enterprises that were charged high rates for the shipping. Some business enterprises could not cope up with the competition and they allowed the Standard oil to be a monopoly.
John D Rockefeller secured special considerations from railroads via giving them some amounts of oil. For example, John D. Rockefeller used to give railroads sixty carloads of oil every day in favor of shipment from other oil businesses (Baylor 3).
Railroads could carry oil from Standard Oil Company only instead of collecting supplementary products from other oil refinery companies. As a result, Standard Oil Company dominated the market by interfering with the supply chain management of other small refinery companies.
John D. Rockefeller won his railroads consumers by building an oil loading facility next to the train station, renting his oil tanker and taking responsibility for any accident on a property that belonged to railroad (Baylor 4).
This allowed Standard Oil Company outdo Pittsburgh Refineries because they could not receive any discount from railroads. Therefore, standard Oil Company managed to monopolize the market by maintaining reduced prices.
Buying Competitors Secretly
Gunderman and Gregory stated that John D. Rockefeller borrowed money and bought other oil refinery companies in secret (2). He then sent some of the workers from the procured company to find out the business deals of other oil refinery companies.
John D. Rockefeller used the report of the findings to take caution against a competitive business deal. For instance, if an oil company plans to reduce the price of oil products, Standard Oil Company would lower their prices further.
Some competitors that John D. Rockefeller had bought established oil companies and other refineries joined them. The aforementioned business development created competition with the Standard Oil Company.
As a result, John D. Rockefeller secretly hired the managers of the competitors companies and gave them high pay so that they do not produce any oil product (Baylor 2).
The refineries that produced small amount of oil maintained an expensive skeleton team. Standard Oil Company acquired approximately ninety percent of the refining industries.
In order to facilitate monopoly, John D. Rockefeller secretly bought dominating oil refinery companies but did not change their names to standard oil company.
For instance, Baylor stated that John D. Rockefeller bought Creek Oil Company in Pennsylvania but he did not change the name to Standard Oil Company (5). As a result, the workers of Standard Oil Company and Creek Oil worked collaboratively.
The sales of Standard Oil increased because customers who were against the company were still buying the oil because they thought it belonged to Creek Oil Company.
Buying or Creating Other Companies That Sell Oil Related Products
John D Rockefeller created companies that sell oil related products like pipelines as well as engineering firms that operated independently but gave Standard Oil Company rebates.
In 1879, Standard Oil Company became a monopoly in the oil transport industry after John D. Rockefeller created an oil pipeline company (Baylor 3). Although Tidewater Pipe Line Company tried to compete with Standard Oil, it did not succeed.
This is because John D. Rockefeller bought an exclusive chatter to construct its industry where Tidewater Company had planned to build one. As a result, Tidewater Company entered into an agreement with the Standard Oil Company so that they could survive in the competitive business environment.
Since Standard Oil Company had control over the market, it restricted the pipeline business activities of Tidewaters to eleven point five percent and retained the remaining percentage.
Standard Oil Company managed to form secret collaboration with the South Improvement Company. Thus, South Improvement Company proposed the secret cartels of the Standard Oil Company and gave them rebates while raising the charges for the other refineries industries (Baylor 2).
On the other hand, the South Improvement Company used to get rebates from other oil refinery industries as well as information about the prices of their products. John D. Rockefeller would be given the abovementioned information and he was able to regulate the oil prices and underpin his competitors.
Moreover, Standard Oil Company used to ship their barrel on the Standard Oil Company railroad in exchange of a discount of forty cents per barrel. As people became aware of the dirty games of John D. Rockefeller in the oil industry, he had already acquired twenty two out of twenty six of his competitors in Cleveland.
Use of Thugs
John D. Rockefeller used thugs to coerce competitors who could not be persuaded to collaborate with him. Ida Tarbell, an European competitor tried to attack Standard Oil Company by arraigning the impact of John D. Rockefeller on other oil refinery companies.
When John D. Rockefeller realized the mission of Tarbell, he tried to engage him in an agreement. Tarbell refused and John D. Rockefeller send the owners of small refinery companies to destroy his oil pump and well by burning or smashing them (Baylor 3).
The aforementioned tactic ensured that standard Oil Company remained a monopoly.
The Net Worth of John D Rockefeller and Carlos Slim Helú
John D Rockefeller net worth was six hundred and sixty three point four billion dollars as of February (Ash 171). He got his money from oil businesses. He operated standard oil company for twenty seven years before retiring in i897. He is the founder of Rockefeller and Chicago universities.
He was generous and supported tertiary institutions like Harvard, Yale and Columbia.John D. Rockefeller founded the Rockefeller Institute for Medical Research and the Education Board in order to increase the opportunity of people to learn. He was a philanthropist.
Carlos Slim Helú is the richest person in the world with a net worth of sixty nine billion dollars (Ash 171). He gets his money from his telecommunication, retail and mining business enterprises. Some of them include Conglomerate, Telmex and Grupo Carso. He is the chief executive of Telmex.
Every one dollar that each person in Mexico spent, twenty cents belongs to Helú. It is predicted that in the next five year, the net worth of Helú will increase by approximately thirty billion dollars if he maintain the same race.
Conclusion
John D. Rockefeller made one of the most influential decisions of monopolizing the petroleum industry. He used unethical business practices to monopolize the Standard Oil Company.
On the other hand, he was generous and made sure that he donated ten percent of his dues every month. He is the richest man that has ever lived with a net worth of sixty three point four billion dollars as of February.
Works Cited
Ash, Russell. Top Ten of Everything. Oxford: Oxford Publishers, 2006. Print.
Baylor, Christopher. “The Life of John D. Rockefeller.” Education Humanities 3.4 (2001): 1-6. Print.
Gunderman, Richard and Matthews Gregory. “Educating Leaders: Insight fron John D. Rockefeller.” Academic Radiology 1.1 (2012): 1-3. Print.
