Flexible Capacity Strategy in Asymmetric Oligopoly †Free Samples

Question: Discuss about the Flexible Capacity Strategy in Asymmetric Oligopoly. Answer: Introduction: According to the number of sellers and buyers, the structure of market can be divided into various forms, for in instance, perfectly competitive market, monopoly market and oligopoly market. This essay is going to discuss about the oligopoly market structure, where small number of firms dominate the entire market. Under this market structure, each firm knows about the actions of other firm and based on this, the firm takes its own business decision. Hence, collusion is occurred based on certain agreement among firms at the time of competition (Haraguchi Matsumura, 2016). This practice is known as cartel. Thus, the chief feature of this specified market structure is interdependency. This market structure is very common from practical point of view, where small number of producers supply a huge portion of the entire market supply. There exit various types of restrictions to control exit of a firm under market, which in turn has helped the market behave like an oligopoly, for instance, patents and economies of scale. Patent is implemented legally though this restriction is existed until another competing firm invents same product with higher quality (Leibowicz, 2018). Oligopoly market can be existed, where large-scale of firms operate, for instance, capital-intensive industries, by capturing large market share can bear huge amount of costs, which become impossible for other industries to carry. Moreover, by adopting new technologies, those firms can successfully prevent the entry of other firms into the market (Gugler Szcs, 2016). This scenario can be seen in the motor vehicle industries, where limited number of companies dominates this entire automobile industry. The banking system in British is also experiencing the oligopolistic market structure, where four major banks dominate their countrys entire banking system. In this context, it is important to analyse the reason that why those oligopolistic industries have not tried to form a monopolistic market. This situation can be analysed with the help of some economic concepts. According to some economists, the number of firms does not depend only on their economies of scale but it depends on the keenness to merge with each other. In this context, it is beneficial to explain that economies of scale cannot operate without large market structure. The oligopolistic market has some advantage as each firm, without controlling the market price, can influence this. As interdependency prevails in the market, a firms price and production policy can influence others and consequently, those firms also respond. Thus, the chief characteristic of this market form is its price stickiness. In this market, a producer experiences kinked demand curve, which means, if the price increases then the demand for the concerned persons product decreases significantly, while by decreasing the price level, the producer can increase its output level by small amount. This situation occurs because other firms follow the strategy of price reduction. Thus from this consequences, the phenomena of leaders and followers under price leadership model, cartels and price fixing, production discrimination and cut price competition has occurred. The concept of price leaders and followers have been observed under the price leadership model, where a producer, by applying the dominant position, can play the lead role to set a fixed price and at the same time, other producers follow the price structure of the leader. In this context, the concept of cartel has occurred, which implies a situation where all competing firms charge the similar prices. However, in this price settlement, agreements related to market shares or operational areas each firm may not be included. Those firms can implement their market share, where demand becomes low compare to supply at the cartel price some producers can experience surplus capacity. Thus, all firms under a cartel operate like a monopolist, for instance, the Organisation of Petroleum Exporting Countries (OPEC) is well-known oil cartel, all over the world (Pierru, Smith Zamrik, 2018). The other example of cartel is airfares. The International Air Transport Association (Iata) has fixed this f are, based on international agreement. The chief focus of Iata is to achieve daily services without considering customer satisfaction. On the contrary, charter tour companies have provided holiday packages with other essential accommodation with a normal price range (Moreno-Izquierdo, Ramn-Rodrguez Ribes, 2015). Hence, each company have formed their own cartel to operate their business. In Britain, the clearing banks have been operating a cartel on bank charges and interest rates for many years. However, by implementing policies based on credit control and competition, the Heath government has closed this agreement in 1972 (Flgel Grtner 2018). At present, large banks of this state has set their individual interest rates for the purpose of borrowing and lending. Thus, this money market has also formed oligopolistic competition as each bank has followed the interest rates charged by other banks. However, expect price leadership strategy, firms under oligopolistic market also compete with each other by adopting various strategies, for instance, product differentiation and cut-price competition (Ju et al., 2015). To compete with each other, each firm, under this market structure, has followed product differentiation through advertisement, brand image and styles and other strategies that are related with price (Neary Leahy, 2015). Hence, by adopting this strategy, each firm tries to capture its own market. Moreover, the market can adopt another business strategy to compete while it faces insufficient amount of demand. This strategy is called cut-price competition, where due insufficient demand; firms have remained unsuccessful to achieve the targeted level of sales (Huck, Lnser Tyran, 2016). This situation has occurred when while each firm, by adopting new business strategy, wants to capture a large share of the entire marker. Thus, according to this strategy, firms with larg e amount of profit, sustain in the market, while others, by incurring loss or low amount of revenue, exit from the market. Rolls-Royce and some major manufacturing companies of aircrafts have sustained in their respective market after adopting this cut-price competition strategy. However, in Britain, various tour companies have collapsed during the period of 1974-75, when the economy has faced price hike in oil industry, which in turn, has increased the transport costs (Dietzsch, 2015). Advantages and disadvantages: In this context, some advantages and disadvantages of this specified market can be explained from a consumers perspective, where economies of scale can influence the product price to go down. However, by performing this economic activity, firms can experience waste due to over capacity or the market can face an increasing monopoly one (dAspremont Ferreira, 2016). In addition to this, under oligopolies, by adopting price-fixing agreements and cartels, can exploit the market by forming a monopoly condition. Thus, the government of a state, by implementing various policies and restrictions, can prevent this economical exploitation (Idrees, Vasconcelos Ellis, 2018). In this context, restricted policies of the government of United States can be taken as an example, where competition has been prohibited by implementing antitrust legislation. For instance, the U.S government has imposed legislation on one of the leading computer company of the state, IBM. Thus, the chief motive of the gov ernment of a state is to restrict collusion in an oligopolistic market, to protect the shelf-interests of consumers. Instead of these restrictions, the government has overlooked the price fixing practices under this oligopolistic market condition some firms, who are supported by the government (Tyers, 2015). Moreover, to prevent the unethical business practices, the government of Britain often has taken steps to protect companies like Rolls Royce and British Leyland, who have been squeezed out under this market environment. After the Second World War, the petrochemical industry has significantly increased their business by adopting this oligopolistic market structure. The industry, through their building blocks, has manufactured various products for customers, like synthetic fibres, dyes and rubber and all others. Those product groups can be divided into two parts, viz., ethylene and benzene, whose demand has increased in the world market since 1950 compare to all other industrial products (Tobin, 2018). However, this increasing trend of growth can be occurred with the help of three factors. Firstly, the price of various petrochemical products, for instance, artificial fibres has become affordable along with higher quality. Secondly, the technological development and economies of scale have been exploited due to the increasing demand of those petrochemical products, which in turn has helped to increase the productivity of those products. For instance, in 1050s, the ethylene cracker of first generation h as produced about 30000 to 50000 tonnes of output while, at present, the amount of same output is 500000 tonnes (Strm, 2018). Thirdly, large scale of production has earned some other economical advantages in the form of fewer workers, complete utilisation of fuel usage and raw materials and downstream of the chief product. However, the cracker industry has also faced some problems due to excessive production. Firstly, to produce more outputs, the industry has invested more capital inputs. Secondly, costs associated with the start-up of this industry have remained higher because of capital-intensive technology. Thirdly, the production technology, under this industry, has reached at its maximum level. Thus from this discussion of the petrochemical, it can be seen that the industry has faced both advantages and disadvantages for its oligopolistic behaviour (Yang, Ng Ni 2017). Initially, by reducing price level, the industry has experienced an increasing demand for its product, which in turn, has helped this entity to earn higher amount of profit, which can be invested to increase the plant size further. However, after achieving full penetration, this increasing trend of petrochemical has decreased. Therefore, the demand for input raw materials, like benzene and ethylene, has varied significantly, compare to that for final products. In addition to this, due to enhancing efficiency in the production process, the industry has experienced price-cutting. Thus, the capacity of plant operation, below 80%, between 1960s and 1970s, has experienced an uneconomic condition (Tobin, 2018). Thus, to protect the excessive amount of output, this price-cutting strategy has been applied by the industry from the future perspective of industry growth. Thus, from the above discussion, a structure of oligopolistic market can be drawn, where few numbers of firms operate their business by adopting different market strategies, which are not followed in any other market structures, like perfect competition or monopoly. However, in some situations, an oligopolistic marker can perform like a monopolistic one, for instance, by forming a cartel (Haraguchi Matsumura, 2016). To make a market oligopoly, that is, to make the number of firms limited, an industry can adopt various restrictions, for instance, patent and economies of scale. One of the chief characteristics of this specified market structure is interdependency among all firms, that is, one firm can influence the business strategy of others or the entire market by applying its own business strategy. In this context, it can be stated that the oligopolistic market has been experienced some advantages as well as some disadvantage. Under the situation of price leadership model, an experienced and large-scale firm has set the price level while other firms follow this level. By applying this method, firms can protect themselves from incurring losses. For instance, due to short of demand, firms can experience excess supply of output. In this situation, to face with this economical situation, the firms can protect themselves by forming a cartel, where they operate as a monopolist (Idrees, Vasconcelos Ellis, 2018). They can also earn profit by competing with each other through product differentiation through advertisement or other non-price competition. In addition to this, by applying cut-price competition, the market can reduce the number of firms, where large firms trough installing capacity produce large number of outputs to capture excess share in the market. This price-cutting com petition helps consumers by decreasing the price level, though this strategy may affect those firms negatively as the market can face excess capacity of production and monopolistic behaviour of the existing firms. Hence, to prevent this competition, government intervention is essential. Thus, by forming a cartel, all firms can behave like a monopolist with a unique price level, which in turn, has helped those competing firms at the time low demand while, in other forms of market competition, weak firms have lost their market share. Moreover, an industry can face advantages due to higher amount of demand like the petrochemical industry, initially (Yang, Ng Ni, 2017). However, in the later phase, the industry has experienced various disadvantages due to large economies of scale, which in turn, has helped to decrease the production in this industry. Under monopolistic market, a producer can charge higher amount of price for a product compare to the average costs while the nature of this products demand curve is inelastic. Thus, the producer, by charging higher price of product, can earn higher amount of revenue, which in turn, helps the person to earn excess profit in market (Kairouz et al., 2017). Moreover, the producer can apply price discrimination for same product in different markets. Hence, by applying this strategy, the producer can exploit customers, especially for necessary goods, this practice has become easier for the concerned person. The monopoly market does not prevail only in private sectors even the state can also establish this specific form of market (Kubick et al., 2014). This essay tends to explain this kind of state monopoly market in Britain. However, the outcome is not equal for all countries, for instance, by adopting monopoly strategy, Britain has experienced various economical losses in its domestic and international market. This essay is going to explain some economic and political reasons, based on which the state has decided to nationalise some industries. Moreover, this is essay is going to describe some reasons for which the government has failed to attain its goal. Reasons behind state monopolies: To protect the state form excessive abuse of monopoly power, the government has undertaken some private companies, who have enjoyed this power in the market (Henckel McKibbin, 2017). However, State has also enjoyed monopoly power through controlling natural resources, for instance, energy resources and water supplies and producing some particular products, viz., telecommunications and steel production. By nationalising, the state cannot prevent the monopoly power of a private sector. However, practicing of monopoly power by some nationalised industries vary states wise. For instance, in Britain, the British Rail has earned low amount of revenue as most of the people other transports, especially, private cars. Energy is supplied by nationalised industry, which in turn, has influenced them to compete with other industries. For doing so, oil and gas industries bear advertisement costs. However, this increasing price of oil has negatively affected other energy producing companies, thoug h the government cannot decide that whether they should increase the price level of those energy products equivalent to that of oil price or not. The other reason of the state to provide monopoly power is to achieve economies of scale. By doing so, the state can create a competitive market for other firms, where those firms intends to maximise their production scale by investing small amount of money (Trentmann CARLSSON-HYSLOP, 2017). For this, most of the countries need a producer under the capital-intensive industry, who can support the nation to compete in the world market. Hence, state investment is essential; otherwise, the country can face various economical difficulties. For instance, due to lack of governmental investment, the British Steel has produced less amount of output, for which the country has imported more amount of output by 1975-76 compare to that in the year 1970-71 (Tschannerl, 2018). The argument of state monopolies can also be described from the political perspective. The first argument is supported by the Marxian concept (Foster, 2017). In Britain, through nationalisation, the government has taken away all assets from individual shareholders and have given those to government employees and to ministers. Therefore, in 1974, the labour party promised to nationalise aircraft industries, ports and shipbuilding (Medhurst, 2014). Moreover, in 1976, the party has taken a resolution regarding the nationalisation of insurance companies and the largest banks. Secondly, the state has nationalised some specific industries, which take parts on social activities by either providing similar services with low prices, for instance, transport service in rural areas or for an uneconomic sectors that needs more security to balance in various economical activities (Warde, 2017). These governmental activities have successfully divided the public goods with state industry. The government has taken responsibility of those declining industries to prevent the economic condition of a country. For instance, some leading industries of Britain like coal and railways have cut down work force successfully before nationalisation (Arnold, 2016). However, later those industries have found it difficult to remove their labour force easily and consequently, wage has become the fixed cost. Inefficiency of state monopoly: Britain has nationalised leading industries to protect the self-interest of the nation. However, one can rise about the efficiency of this procedure and the implication monopoly power in the economy of Britain. According to some economists, the government has taken a chance to protect the country through nationalisation (Massey, 2018). The state has forced those leading companies to nationalise as most of the industries have collapsed or many services have lost in the economy. However, in this context, it is important to state that the state cannot solve those problems only by nationalising them (Henderson, 2015). This is because the government may not understand the basic problems of those industries and for this may delay to take action. Consequently, some small industries have omitted from the industry after nationalisation, for instance, overseas communications business. By comparing nationalised companies of Britain with other western counties, the method of selection procedure can be understood. Most of the western countries have nationalised postal services and telephone services. Rail may be public, private or mixed for different countries. Moreover, some socialist countries of Western Europe have not nationalised large number of industries. On the other side, the political influence along with various governmental constraints, like attitudes of unions or parliamentary timetables, are more in Britain, which in turn, have controlled the process of nationalisation and denationalisation. Thus, for those unstable economical factors, the state has some nationalised industries, whose net output are comparatively low and contributed fewer amounts to the countrys GDP. However, the government has invested more amounts in those industries, which implies that the government has faced loss through nationalisation. Consequently, the nationalised companies, especially suppliers of capital goods, along with private ones, who have faced difficulties due to state monopolies, have pressurised the government due to those changes. Though the government has faced huge losses from some specific nationalised industries, they have provided higher amount of wage compare to that of private sectors to their workforce, who has captured 8% of total population during 1960s. Income of some specific sectors, like gas and electricity, coal and rail industry have increased almost by 152% while that of private sector has increased by 106% in 1970-75 (Hunter, 2018). However, after all those efforts, the government has faced losses as those nationalised companies have faced various difficulties at the beginning of the process and as their objectives have been remained indeterminate. Thus, they were informed to break even by taking one year or more than that for providing sufficient service or to become efficient. However, those objectives have made many conflicts among those nationalised industries. In an industry, where economies of scale exist, the producer can efficiently use existing equipment through charging the marginal cost from consumer for meeting his demand (Burger, Chaves-vila, Batlle Prez-Arriaga, 2017). However, until the economies of scale has exhausted, marginal costs remain below the lower compare to average costs and as a result, losses has occurred automatically. Thus, it is essential to discuss about the role of government and it decision to making a state monopoly market. Under this market condition, a producer by charging higher amount of price can earn excess profit. However, in practical scenario, this market structure may perform accordingly; for instance, Britain has faced some critical conditions after adopting this market structure (Alemu, 2018). The country, by adopting this economic concept, has tried to remove the monopoly power of private producers and their power of exploitation. For this, the state has undertaken some vital industries under their coverage and provide huge amount of interests. However, due to their lack of proper business objectives, they cannot perform well and the government has faced huge loss. In other western countries, the government has practiced monopoly power ( Schakel,2015). However, they have taken limited number of firms to nationalise and hence their degree of responsibility is low. On the other sid e, the government of Britain has nationalised various large-scale industries for some economical and political reasons. The state also tries to increase the economies of scale and also try to protect self-interest of labourers. As a result, state has provided salaries to their limited workers by a large amount. By following Marxian concept, they have decided to protect this exploitation. It can be seen from the above discussion that after all these efforts, the government cannot achieve its goal and has failed drastically. In this context, it can be mentioned that the government of Britain cannot follow the changing trend of international market (Jessop, 2015). Moreover, the institution has remained unsuccessful to adopt modern and new technologies, while private sectors have improved their production methods, which in turn, has helped those companies to compete in international market by adopting modern trend of fashion, technology and tastes of customers. The chief motive of a private company is to maximise profit while a nationalised firm always tries to maintain social welfare. This motive has helped companies to adopt various new business strategies according to the requirement of their business, for instance, a medicine company can introduce new business strategy in fashion sectors. However, for nationalised companies, adopting of this dynamic strategy has rema ined u acceptable due to the various rules and regulations of the government (Demeritt et al., 2015). The government, by providing various subsidies and securities, has tried to main a social welfare. On the contrary, under the protection of the government and monopoly power, those nationalised companies have not adopted new business strategies to compete with others in domestic and international market, which in turn, has negatively affected the economic conditions of the state. Moreover, unfair competition between private sector and public sector has adversely affected many companies to compete as most of the private companies with huge potential but lack of governmental support, have remained unsuccessful to adopt new business strategies and consequently, has abolished from the market after incurring huge loss. Inefficient monopoly market structure in Britain: Hence, it can be concluded that the practice of monopoly market structure, is not always, chiefly for Britain. Due to this unbiased market structure, some companies enjoy political and economical advantages, whereas, some companies have abolished from the market due to lack of support. The government has nationalised various large-scale industries to remove monopolistic power in private sectors, as it can adversely affect the socio-economical conditions. However, an inappropriate business strategy with lack of objectives of the government has adversely affected the economical conditions of Britain. Thus, monopoly practice is viable for an economy like Britain, where the government has appropriately adopted those strategies without adopting modern business strategy. However, the government has adopted those activities from various political and economical aspects, for instance, to eradicate labour exploitation, obtain economies of scale and to protect those companies, who provide soci al services in the state. Hence, the chief motive of the state has based on social welfare and public security. Hence, from this perspective the monopoly market structure is beneficial for the economy. However, due to governmental security and huge amount of subsidy, those nationalised companies have operated their business without any competition for which, they have not utilised their resources completely. In addition to this, they have incurred huge loss for maintaining old strategy of production. However, in some other western countries, the government has successfully adopted this monopoly strategy and have earned huge amount of profit. 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