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Competition and pricing in the electricity industry

Discuss About The Economies Scale Integrated Pest Management.

The main issues discussed in the article, “How big business shares the profit pie” is the competition and its ability to sustain lower prices of products even with the existence of possible cooperation between big two or three firms dominating the electricity industry. The article appreciates to some level the ability of competition and innovation to control prices but remains hesitant about its sustainability. This is because, while economist believes strong competition between enterprises remain essential in guaranteeing market economies function efficiently to benefit the consumers and employees, this remains a theory.

The main issue discussed in the article is how competition can help control the overpricing by monopolies. Thus the question begs, “To what degree does competition takes away the higher prices realised through innovation and delivered them into consumers’ hands, who usually get better commodities for lower prices? Subjecting this theory in practice proves otherwise due to the economies of scale. This then disapproves the assumption in theory that any market has a vast quantity of sellers, each too small to influence the prices in the market. However, the practical examination shows that two or three or four companies always dominate many of the markets. This is because the economies of scale ensure that as big firms produce more, to some point, they will require fewer unit costs (Gittins 2017).

Thus, it is rational to have just a few quantities of large business doing much of the production so long as the competition guarantees most of cost-saving being shifted to the consumers at reduced prices. This remains the general rule over the decades. However, there is still trouble as big firms have a certain extent of control of the prices they charge. Thus, it stays common for less big companies in the industry to cooperate and compete by use of product differentiation and advertising instead of prices (Gittins 2017). 

When they manage to implement such unspoken management, they will be able to expand their pricing power by overriding their rivals to get a more significant share of the market. Thus it is worth noting at this point that it is the responsibility of the “competition policy” to bar overt cooperation between businesses and takeovers purposed to raise market power. The issue, however, is, how effective is that role/policy working? “The natural monopolies have ensured that it is bare would not make economic sense for more than one firm to serve a given market, such a competitor sets of power lines ascending a street, or two service stations in a small town”-are an additional common deviation from the theoretical model (Gittins 2017).

Regulation and preventing collusion

Thus, the article sought to present what was found by Minifie in his study of competition in practice. The result was that plenty of markets with a few businesses doing a significant proportion of the company. However, “the market shares of the big firms in saturated sectors are never much higher in Australia as opposed to other economies of relative size; and that they have never expanded much in the recent past (Gittins 2017). He also discovered that nor did such significant, and few firms revenues or sales grew swifter as opposed to the GDD. Put differently, the firms’ profitability-profits comparable to invested funds-has never increased much beginning 2000.

Thus Minifie identified industries marred with natural monopoly (in diminishing order of size) as “electricity transmission and distribution, wired telecom, rail freights, airports, toll roads, water transport terminals, ports and finally, pipeline. Again, nine industries with large economies of scale that are dominated by a few firms were also identified as “supermarkets, wireless telecom, domestic airlines, and subsequently (of roughly equivalent size) internet service providers, pathology services, newspapers, petrol retailing, liquor retailing alongside diagnostic imaging”.


The study also identified eight industries subjected to extreme regulation by the administration as “banks, residential aged care, general insurance, life insurance, taxis, pharmacies, health insurance and casinos.” Such industries stay highly regulated for good public reasons. However, the regulation usually serves as an obstacle to novel firms that entered the market hence permitting big few ones to dominate (Gittins 2017). However, it was further noted by Minifie’s computations that natural monopolies barely denote 3 percent of the “gross value added” (a GDP variant), whereas high scale-economies industries denote five percent and the extremely regulated sectors represent seven percent (Brennan, Palmer, Kopp, Krupnick, Stagliano and Burtraw 2014.).

This then implies that a share of the economy whereby “barricades to entry” restrict competitive pressure account for nearly fifteen percent of the entire economy. Subsequently, 29 industries have low barriers to entry comprising the balance of the “non-tradables” private industry, and nearly 0.5 of the entire economy (Gittins 2017). The tradables segment (export and import rivalling industries) represent fourteen percent of the economy while the public segment comprises remaining twenty percent. Thus, Minifie verified that, in industries that few big firms dominate, several firms make “super-normal” profits-such more than what is required to keep them in industry.

Up to 50% of entire profits in supermarket sector remain super-normal while it is nearly seventeen percent in the banking industry. The other firms and sectors with a significant super of profits are Telstra, and certain large-city airports, internet service provider liquor retailers, agencies for sporty betting alongside insurers (private health) (Gittins 2017). When the last list is compared with those of natural monopolies and extremely regulated industries, it is shown that administration might be doing a much better task of guaranteeing regulators have never been captured by the firms being regulated.

Economic concepts of normal and supernormal profits, productivity, and natural monopolies

The identified stakeholders in this article include consumers, firms (big and small; old and new entrants), government regulators, and the public at large. To begin with, competition positively impacts on the consumers but negatively on the producers or investors (Makholm 2015). For consumers, competition ensures that they are charged lower prices for better and variety of goods. However, to the producers or firms, the competition provides they charge lower prices which main mean even a loss to them (Gittins 2017). To the government regulators, competition ensures that they are never captured by the same firms they regulate. In respect to economies of scale, it benefits the few big firms that wipe away small ones and hence barring them from entering the new markets or making the big ones dominate them. This is because the more they produce, the more they get to incur fewer costs per unit and hence can control their prices and therefore make supernormal profits (Duarte, Langarita and Sánchez-Chóliz 2017). The small firms are thus negatively influenced by the economies of scale enjoyed by the few big firms.

Competition: Competition is understood as essential to making sure that market economies function efficiently and hence benefiting workers and consumers. It is believed to be that which halts people from being ripped off by capitalists. It makes overpriced companies lose business to rivals that undercut their prices (Borenstei and Bushnell 2015). It pushes prices downwards towards costs defined as “cost of capital” or “normal profit”.

Normal Profits/Supernormal profits: Normal profits is the least rate of profit required to induce firms to thrive in the market. The supernormal profit is more than what is needed to keep the firms in the industry. Few get it but big firms capable of competing through differentiation and products rather than the price (Lim and Yurukoglu 2015).

Economies of scale: This is the benefits that accrue to big firms due to the production of more and more units leading to increasingly reduced cost per unit and hence making them lock new entrants from entering the market (Quarcoo, Bonsi, Tackie, Hill, Wall and Hunter 2017).

Regulation: This is how the government regulators use the competition policy and other policies to ensure that big firms do not cooperate to benefit at the expense of small firms and hence rip off the people through control over prices (Stern 2016).

Prices: This is the charge on a value of the products that consumers will pay in exchange for the products from firms.

Natural Monopolies: “This is where it is merely would never make economic sense for more than a single company to serve a given market, like as rival sets of power lines running down the street, or 2  service stations in small town are another common deviation from theoretical model”. These are big firms that can control their prices by controlling output. This makes them lock out small business (Stiglitz and Rosengard 2015).

Productivity: The productivity is also an economic concept that has featured profoundly in this article and explains the several measures of production efficiency. It is a measure expressed as the output to input ratio utilised in the process of production (Atack 2018). 

Conclusion

The main issues discussed in the article is the ability of competition to prevent the people from being ripped off by few big firms from their unspoken agreement or collusion. The article has detailed the central issue in the article, the impact of the problem or issue to stakeholders and the fundamental economic concepts in the article.

  • The alternative solution is that the government should always ensure that firms can specialise in the production of goods and services they can produce best and charge them higher taxes in return to be passed on to the consumers through the production of public products and services.
  • Alternatively, the government can boost the regulation to ensure that at all times, the market entry is never limited to the new entrants hence providing lower prices to the final consumers. This will ensure that natural monopolies do not exist and therefore no control over the prices (Duarte, Langarita and Sánchez-Chóliz 2017).

References

Atack, J., 2018. Estimation of economies of scale in nineteenth century United States manufacturing (Vol. 5). Routledge.

Baumers, M., Dickens, P., Tuck, C. and Hague, R., 2016. The cost of additive manufacturing: machine productivity, economies of scale and technology-push. Technological forecasting and social change, 102, pp.193-201.

Borenstein, S. and Bushnell, J., 2015. The US electricity industry after 20 years of restructuring. Annu. Rev. Econ., 7(1), pp.437-463.

Brennan, T.J., Palmer, K.L., Kopp, R.J., Krupnick, A.J., Stagliano, V. and Burtraw, D., 2014. A shock to the system: Restructuring America's electricity industry. Routledge.

Duarte, R., Langarita, R. and Sánchez-Chóliz, J., 2017. The electricity industry in Spain: A structural analysis using a disaggregated input-output model. Energy, 141, pp.2640-2651.

Gittins, R., 16 December 2017 — 12:03am. How big business shares the profit pie. The Sydney Morning Herald , 1(Competition), pp. 1-3. https://www.smh.com.au/business/how-big-business-shares-the-profit-pie-20171215-h0558m.html

Lim, C.S. and Yurukoglu, A., 2015. Dynamic natural monopoly regulation: Time inconsistency, moral hazard, and political environments. Journal of Political Economy.

Makholm, J.D., 2015. Regulation of natural gas in the United States, Canada, and Europe: Prospects for a low carbon fuel.

Quarcoo, F., Bonsi, C., Tackie, D.N.O., Hill, W.A., Wall, G. and Hunter, G., 2017. Economies of Scale in Integrated Pest Management in Vegetable and Fruit Production. Professional Agricultural Workers Journal, 5(1), p.53.

Stern, N., 2016. Economics: current climate models are grossly misleading. Nature News, 530(7591), p.407.

Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

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