Competition and Prices Policy - Assignment Example

Student Name: Course Name: Tutor: Date: Question 1 The retail grocery market in Australia is not a perfectly competitive. It is very hard for industries to satisfy perfectly competitive market requirements in the world we live. Many markets structures are monopolistic or oligopoly in nature. Perfect competition explains markets that the suppliers are not large to take control of the market in a way that they can set prices of non differentiated product. The competition and commission in Australia estimation that Coles and Woolworths accounted for about 70% of packaged grocery sales and 50% of fresh food product sales, implies that these retail groceries are dominant in the market. Therefore the market is not a perfect one (MU: IAER 56). In perfect competition it is believed that all consumers and producers need to have perfect information about the commodities quality and prices. For the Australia grocery market this is not the case, the prices of the goods keeps on increasing because the retail groceries are large and can easily set the prices of their goods. The products in the perfectly competitive market need to be homogeneous. the products characteristics need to be the same across all supplies. In the Australia grocery sector the products are differentiated, it has packaged products and fresh food products. Its market is not a perfect competitive one. According to (M.U: IAER 103), perfect competitive market is characterized by many buyers and sellers who are willing and able to buy and sale the products at a given price. In Australian grocery sector there has been criticism a bout the rising prices of their goods. The buyers are not happy with the market prices implying that many buyers are not willing and able to buy the commodities. The market therefore is not a perfect competitive one. In perfectly competitive market the price of the commodity is equivalent to the firm marginal cost, buyers are charged fair price. This is not what Australian grocery market is experiencing. The market is criticized by rising prices of the commodities, a clear indication that the market is not a perfectly competitive one. It is free for firms to enter or exit the market in perfectly competitive market. There are no barriers to firms that want to either join or exit the market. In Australian case the market is dominated by two firms, there dominance restricts other firms to enter into the market thus disqualifying the sector to fall under perfectly competitive market. Perfect competition is characterized by several small firms, each producing small percentage of aggregate market product and thus they cannot control the market price. The Coles and Woolworths accounted for about 70% of packaged grocery sales and 50% of fresh food product sales in Australia which is a large percentage of the total product in the market. Implications to consumer The assumptions of perfect competition do not apply to the Australian grocery sector thus the sector qualifies to be imperfect competitive market. This implies that the monopsony power may prevail against sellers because they buy a large percentage of aggregate demand. There are often little barriers to market contestability and away from being identical, most markets have many heterogeneous products because of product differentiation. Consumers do not have perfect information and their likings and selections can be affected by adverting and persuasive means. Advertising could result to increase prices for consumer goods, due to its costly nature. The production cost is increased thus pushing up prices. Advertisement may also manipulate consumer’s tastes minus expressing any information that is useful. It may also build differentiation among similar commodities. Consumers do believe that advertising is assign of quality, because the firm cannot engage in advertising the commodities that they have little confidence in their quality . The supplies level of output is lower than that under perfect competition. Therefore the grocery firms will set prices that are greater than that under perfect competition. This implies that there will be welfare loss because some consumers cannot manage to buy the product. Imperfect competition have social benefit, that is, firms contend in areas not the price, advancement and research are good examples of those areas. This always led to advancement in technology and increased in consumer’s options. The rate structure of the production might result into fewer firms that are more resourceful than those under perfect competition, thus delivering quality and cheaper products to consumers. Through advertising, consumers are helped to reduce the cost of comparing tradeoffs of many competing brands. In some cases the consumer has to decide on a single brand, gathering information will be therefore relatively inexpensive. The information got from advertisement are not only used to asses the advertised brand, but also inferring to the availability of possible brands to consumers. Through advertisement consumers are conveyed with important information about the new commodities prices, their locations and qualities thus it promote competition by delivering a lot of information on pricing. The consumers will have to try such commodities even if the advertisement content is minimal. Question 2 Workable competition is a market structure that has a high degree of monopolistic power with enough competition among near-monopolies to guide consumers from monopolistic exploitation. It is a market situation that leads to efficient production minus attaining the strict perfect competition requirements. This concept is applied mostly by governmental authorities in protecting regulatory policy. It is an important term in explaining the competitive market structure. Many sellers and buyers, no political controls in determining prices, consumer standards and consumer demands are the common elements of free competition. The objective of the policy should be to promote workable competition, not necessarily a perfect one Reynolds and Cuthbertson (2004) note that workable competition is relevant to the Australian grocery market because the market portrays some degree of monopolistic power. The market has two grocery retailers that occupy a large percentage of the grocery sector. The retail grocery market is characterized by existence of heterogeneous products, that is, it has packaged and fresh food products. Condition that gives possibility that capable members disclose various choices on different market thus the producers and distributors posses a market structure relationship. This is clear indication of existence of workable competition in this retail grocery market Reynolds and Cuthbertson 79). Commodities prices in the retail grocery market are done by the economic agents, the government has no control over the prices. The grocery sector is facing the criticism over the increasing price of the commodities which is a clear indication that there is no state control of products prices. Therefore this market qualifies to be a workable competitive market. There are various indicators that could be used to asses the existence of workable competition. Customer knowledge of option and enough retail contestability, that is, customers are conscious that choice is there. This protects the consumers from exploitation by the sellers in the retail grocery market. Customer’s skills to practice choice are very important indication. This is assessed by their ease of getting and sharing information and their ease and expense of alternating retailers (Reynolds and Cuthbertson 45). Assessment should also base on the availability of choices to consumers. This is depicted by the number and occupation of the market by the competing suppliers, market share trends and rivalry in the industry, acceptability of the market offers, offers disclosed to customers and restrictions to entry. These will assist to understand the degree of customer option in the market. These are mostly used to know the competitive firms in the market. Question 3 Vertical integration is the extent to which producers posses their upstream suppliers and their downstream buyers. It is the procedure in which many steps in production and distribution of a commodity are restricted by one entity to boost that entity’s marketplace power. In simple terms it is merging of firms along chain of supply. There are two types of vertical integration, that is, forward and backward integration. Forward integration involves the downstream growth of activities, and backward integration involves upward growth of actives. This concept can be easily explained when we consider firms whose commodities are manufactured through an assembly procedure. Such firm can merge backwardly into intermediate production or forward merging into distribution. There are number of reasons that always motivate for vertical merging among the firms. The production cost minimization and profit maximization are some of these factors. Merging entails the capability to protect supplies and orders in future. The areas of production protected from competition may become less resourceful as there are no competitions. The merging is most frequently justifiable where it result to efficiencies. Industries have increasingly gone to outsourcing several factions. It is always an important progress away from this type of integration. Vertical merging implies that profits can be influenced at all stages. Gross profit tends to increase with vertical merging because it does not include many costs. The vertically integrated firm is bigger than non-vertically merged firm with the similar revenues, the profits generated should be greater. Vertical implies the expansion of industry via ownership of organization that trade in intermediate products needed by the industry. Such growth is demanded because it protects the supplies required and market required to sell commodities. It always leads to a more resourceful industry with lesser costs and high profits. Vertical integration also implies increase in scales and achieves market power to competitors. Prisoner’s dilemma Prisoner’s dilemma is a basic problem in game theory that explains why two individual might not collaborate even though it is their both best benefit to do so. Products do not enter into new markets overnight, firm need to create market for some time. Numerous strategies, which vary in aggressiveness and risk, are available. Country entry strategy Exporting is a fairly small risk approach in which a small number of investments are created in new states. By the firm not working in the nation, learns little regarding the market. It will be hard for firms to know the real requirements of the consumers, suitable advertisement, and useful technique of distribution. If an importer applies all these then he will have done a good work of marketing. Licensing and franchising are also an entry strategy, in this case you permit another party to utilize your trademarks and expertise you have accumulated. Your associate injects in the money and takes the risk. The only problem here is that you are teaching a possible competitor and you have small knowledge over how the trade is conducted. In America it is discovered that new franchisers always fail to keep up America quality of cleanliness. A foreign producer may apply lower standards ingredients in producing a product based on best contents in their home country (Nieuwenhuysen and Neville 40). Turn key projects: A firm utilizes information and expertise acquired in a single or many markets to offer a working project to consumers in a foreign country. Contract manufacturing entails having somebody else produce the commodities, as you take some responsibilities of marketing yourself. This saves asset. Direct entry strategies: The firm either attains a firm or create procedures ‘’ from scratch’’ include the maximum exposure, most chances for profits. The firm adds more information a bout the home market and sustains better control, but currently has a big investment. In some nations, the state may expropriate investments minus compensation. therefore direct investment involves an extra risk. Differentiation entails a joint venture, in which a home firm creates some money and information regarding the market at home (Nieuwenhuysen and Neville 65). Illustration of the prisoner’s dilemma Pay offs matrix Prisoner B Stays Silent Prisoner B Betrays Prisoner A Stays Silent Each serves 6 months Prisoner A: 10 years Prisoner B: goes free Prisoner A Betrays Prisoner A: goes free Prisoner B: 10 years Each serves 5 years In this game, despite of what the competitor chooses, every player always gets a higher payoff. For instance, A prisoner can say, ‘’ whatever prisoner B does, I individually am better off lying than keeping silent. Therefore for my good, I should betray. ‘’ however, incase other player responds the someway, then they all lie and all receive a lower payoff than what they would have if they stay silent. Rational self-interested choices lead to every prisoner becoming worse off than if every one decides to reduce the verdict of accomplice at the expense of staying a bit longer in prison himself. In the game theory, this show very stylishly, in a non-zero-sum competition Narsh equilibrium requires not to be a Pareto optimum. Works Cited University of Melbourne. Institute of Applied Economic Research (M.U.: IAER). The Australian economic review, Volume 37. The Institute, 2004. Reynolds Jonathan and Cuthbertson Christine. Retail strategy: the view from the bridge. Butterworth-Heinemann, 2004. Nieuwenhuysen J. P. Neville R. Norman. Australian competition and prices policy: trade practices, tariffs, and prices justification Taylor & Francis, 1976. Read More