Monopolistic Tendencies within the Market
1. Report Topic 1: Market Structure
How far do you agree with the claim that the retail book market in the UK is competitive?
The notion of competition in any market rests primarily on the ability of the players in that market to be free from most, if not all, forms of regulation. In addition, the competitiveness in a given market is a function of the freedom which players are able to exercise in their day-to-day business activities (Weir 1993). In view of this, therefore, the UK retail book market cannot be said to be competitive because of its failure to meet these two key requirements as measured by a number of indicators discussed next.
Monopolistic Tendencies within the Market
Any market that has even the slightest monopolistic tendencies can never be said to be competitive. Instead, perfect competition, where there are a large number of firms selling identical or closely identical products, ought to be the case (Weir 1993). The books market in the United Kingdom meets only a few of these requirements. There are a many players in the market and these players are not under any undue regulation by the government to cause them to encounter difficulties in
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Significant Lessening of the Competition (SLC)
The merger between the two leading book stores served to significantly lower the intensity of the competition in the market because it has now become rather easier for both Ottakar’s and Waterstone’s to operate (Weir 1992). Previously, the two have been known to be very fierce rivals and they were at the forefront in helping enhance the quality of products in the market. For as long as the two were independent, there was significant competition and a level playing field had been created. Actually, for five consecutive years from 2001 to 2005, the two bookstores -Ottakar’s and Waterstone’s – had a higher combined share of the market than the others, indicating that they were powerful indeed. But the competitiveness of any market rests in there being close rivalry (Weir 1992).
The office of Fair Trading did not do justice to the books market in this country by allowing the takeover to go on because it has reduced the competition (Weir 1992). This is because the market now has one large player who does not have any significant competitor that can help make the market competitive again. Actually, although the report on the takeover of Ottakar’s by HMV falls short of admitting that the combined company is not without any competitor, it is true that the closest competitors – the specialist bricks and mortar book store Borders and the internet book stores such as Amazon – cannot measure up to the competitive advantage that Waterstone’s/Ottakar’s have as a combined team (Weir 1992). Although not a full-fledged monopoly because there are other players in the market, the two combined companies have a competitive advantage over the others (Weir 1993).
The market can be further proved to be less competitive when the other book dealers are considered with regard to their ability to sell books given the current state of affairs where there is one giant player and several minor ones (Weir 1992). Usually, the retail books market in this country has about four different categories of participating parties. The first category consists of the dealers that have specialized in the books distribution business such as Ottakar’s, Waterstone’s, and Borders. These rely solely on the distribution of books for their income. The second category consists of those bricks and mortar dealers who find books to be among the most important products in their business and include WH Smith (Weir 1993). Then there are those that only deal in books as part of a host of other products and who might not be so much affected if the sales from books are not as high. This category is mainly composed of supermarkets and other retail stores. Finally, there are those that deal in new and old books electronically such as Amazon (Weir 1992). As can be noted, perhaps with the exception of Amazon that is a bit shielded from the stiff competition from Waterstone’s/Ottakar’s because it deals in electronic books, the others are severely affected by the power which Waterstone’s/Ottakar’s has. Their sales are becoming diminished as they cannot measure up to the marketing power of Waterstone’s/Ottakar’s.
Another critical factor to consider is the effect of the merger on other firms. Of particular interest is price discounting that is being done by retail book stores (Weir 1992). For since the Net Book Agreement (NBA) ended way back in the 1990s, it has been the prerogative of publishers of books to come up or to recommend prices for their books based on the market conditions. However, in order to manage to deal with the actual forces of demand and supply in the consumer market and to manage the stiff competition, retailers have tended to disregard these recommended retail prices (RRPs) and instead have offered discounts on their books. This means that any market player that has access to the larger share of the market like Waterstone’s/Ottakar’s can easily afford to offer even higher discounts and so further deny other dealers access to the market through cost leadership (Weir 1992). It is only fair that cost leadership is applied in a context where all players in the market can benefit. However, since the other retailers do not have as large a market as Waterstone’s/Ottakar’s they cannot dare offer their books for sale at prices far below the recommended retail prices as Waterstone’s/Ottakar’s without incurring huge losses. But because Waterstone’s/Ottakar’s has the capacity to use their large-scale operation model to benefit from economies of scale, it is receiving undue advantage at the expense of the others (Weir 1993).
The Consumer Rating of Waterstone’s and Ottakar’s
The manner in which consumers view a book store or retailer determines the capacity of that store to sell its books as significantly as cost leadership does (Weir 1993). On this basis, it is worth noting that the report on the inquiry into the merger between Waterstone’s and Ottakar’s found that both stores were rated highly virtually on all non-price issues such as book quality, quality of service, and handling of customer (Weir 1992). This means, then, that even as independent stores the two still had a significant power over other players in the sector. Now that they have merged, each has brought on board the customers it had, leaving only a few for the rest of the book stores. Given that these and other non-price issues are equally important in the determination of market share, the Waterstone’s/Ottakar’s merger effectively lowered the competitiveness of the market (Weir 1992).
The Enterprise Act of 2002 and the 1973 Fair Trading Act
A last issue that points out that the UK books market is not competitive enough is the manner in which modern-day mergers are being undertaken (Weir 1992). Unlike in the days when the 1973 Fair Trading Act was still operational and when it was rather difficult for mergers to be legalized, today’s law embedded in the Enterprise Act of 2002 is not as restrictive of mergers and seemingly gives businesses too much leeway (Weir 1993). Businesses can now cite all different reasons that are responsible for their trying to merge and get away with it. For instance, two companies can be allowed to merge simply on the basis of their being economically unsound. Yet a critical look at what the Enterprise Act accepts as economic soundness includes an inability by a company to make profits within a certain period of time. This is gives room for firms to falsify their books of account just to be allowed to merge (Weir 1992).
Although the office of fair trading was formed and charged with the responsibility of overseeing all proposed mergers, its independence is an issue that needs to be addressed. For it defeats logic to allow two leading book stores to merge and yet claim that there is no proof that competition will be lowered (Weir 1993). Usually, a good merger ought to involve two smaller firms whose combined effect ought not to be able to significantly exceed the effect of the second largest partner. Such has been happening in other countries. For instance, a merger between two leading airlines in the US – US Airways and United Airlines – has been opposed by the country’s Federal Aviation Administration (FAA) on grounds that the combined company would offer undue competition to others and would cause a regional market imbalance. The same ought to have been applied in this case. Regionally, the strongholds of Waterstone’s and Ottakar’s are benefiting from the merger at the expense of other firms.
Weir, CM 1992. “Monopolies and Mergers Commission, merger reports and the public interest:
a probit analysis.” Applied Economics, 24, pp. 27-34.
Weir, CM 1993. “Merger policy and competition: an analysis of the Monopolies and Merger
Commission’s decisions.” Applied Economics, 25, pp. 57-66.
2. Report Topic 4: Domestic Economy
What do you understand by the terms ‘credit crunch’ and quantitative easing’? With reference to any country other than the UK discuss how the government has tried to deal with the problems and assess how successful it has been.
Credit crunch refers to a situation in the economy of a country when there is an acute shortage of credit or loans that are needed by businesses to carry out their day-to-day business operations (Cooper 2008). In other circumstances, a credit crunch – which might also be referred to as a credit squeeze – may refer to a situation where there is a sudden tightening of the conditions that are needed for any one to get a loan or credit from banks and other financial institutions such as mortgage lenders. In times of a credit crunch, there is usually some form of confusion as the rate of interest is no longer the key determining factor for credit issuance (Brigo, Pallavicini & Torresetti 2010). For instance, during such a time, interest rates might be low (are mostly low) yet the banks are less willing to lend. The reason is usually that banks need to protect themselves from possible losses resulting from an increase in the level of defaulting or other factors that might make lending a very risky practice (Whitehouse 2010). During a credit crunch, banks and other, lenders focus more on the so-called flight to quality when they prefer to invest in less risky assets such as gold, government bonds, or even land that have a lesser susceptibility to economic changes. In the process, business entities that rely so much on credit suffer a lot as they are not able to continue with their normal business operations.
On the other hand, quantitative easing is a term used in monetary policy and which refers to a policy by a government or any other authority to stimulate economic performance by increasing the supply of money in that economy (Brigo, Pallavicini & Torresetti 2010). Although the immediate goal of quantitative easing is to raise the level of interest rates that are usually low during times of low economic performance, the overall and long-term aim is to stimulate the economy through increasing the quantity of money being circulated in that economy. As more money gets into the hands of people, economic activities that were otherwise stalled or in a state of slow operation get to be revived and the economy can once again get to a level where it starts to grow (Cooper 2008). Quantitative easing is usually a government monetary policy that is carried out in response to a situation where there is a poor economic performance such as a credit crunch, an economic recession, or any other unfavourable economic condition that creates fear among banks and other financial institutions causing them to be less willing to lend due to the risks inherent in the economy at that time (Brigo, Pallavicini & Torresetti 2010).
Quantitative easing follows a series of steps depending on the particular challenge and the government involved; but most of the time it starts off by having the central bank of the country crediting its own account with fictitious money and then using this money to buy back from banks and other financial institutions both corporate and government bonds (Cooper 2008). This way, these banks and other financial institutions get to have enough money at their disposal and so find lending an easy option. This increased money supply is able to cause the economy to start operating again in a normal way or to start moving towards the desired direction (Brigo, Pallavicini & Torresetti 2010).
The US Example
The 2008 global economic crisis is a good demonstration of a case when governments found themselves dealing with credit crunches and so having to use quantitative easing to deal with the situation (Turner 2008). The US government was instrumental in doing this. With its banks having been greatly affected by the collapse of the housing bubble and the resultant defaulting on the subprime mortgages which had been issued in large quantities after the collapse of housing bubble, they were not at all willing to lend at whatever costs. The risks in the market were too high. Even inter-bank lending greatly diminished as fear gripped the entire financial market. News of the collapse of leading banks as the crisis worsened served only to exacerbate an already dire situation. The government had to take drastic but careful measures to stimulate an economy which for the first time since the Great Depression of the late 1920s and early 1930s was in deep recession (Whitehouse 2010).
Unemployment figures had risen to an all-time high and with the threat of more business going under the prospects of more people losing their jobs were high. The entire economy was almost static (actually it was experiencing negative growth) (Cooper 2008). Banks did not know what to do to stay afloat as they were the first culprits. Having been party to the issuance of subprime mortgages against which there was widespread defaulting, they were left with no money to fund their operations. Private and public sector demand was low and businesses were making losses at a faster rate than expected (Turner 2008). The government moved in and started introducing a set of fiscal and monetary measures aimed at stimulating the economy. The first one was the introduction of a fiscal economic stimulus package that was aimed at helping finance some of the critical businesses in order that they might not collapse. The economic stimulus package was in form of money given to selected struggling institutions. Specifically, there was an issuance of two stimulus packages that added up to about a trillion dollars in 2008 and 2009. This was just an emergency measure as other alternatives were being explored (Brigo, Pallavicini & Torresetti 2010).
Then there was a monetary policy adopted by the Federal Reserve specifically to deal with the credit crunch. First of all, the government bought back from commercial banks and other institutions of finance the corporate and government bonds they were holding. This helped to increase the supply of money through the open market operations policy (Turner 2008). It was the largest injection of government funds into the economy in the history of the nation and it worked to ease the cash shortage. However, it did not ease the tightened lending conditions at all. With the economy having some liquidity due to the increased supply of money, it was expected that the banks would start lending again (Turner 2008). However, that did not happen because it seemed too risky to lend when there was a lot of uncertainly in the market.
Next, the Federal Reserve introduced measures aimed at addressing any deflationary spiralling effects that usually result when there are high unemployment rates accompanied by low wages. If it is left unchecked, this trend can result into a global decline in the consumption of goods and services as it is able to reinforce itself (Whitehouse 2010). In order to stimulate demand for goods and services particularly in the private sector, the government borrowed widely in a move that led to a drastic decline in its current account. This was not so successful, though. However, it was able to spur private sector demand. The most controversial approach taken by the government was the bailing out of struggling institutions. This, critics said, did not serve the purpose because banks had been responsible for the crisis and ought to have been left to find their own way out (Turner 2008). Although certain beneficiaries managed to remain in operation, it has been viewed as a wrong way of dealing with the crisis because it has shown only very limited success.
The criticism notwithstanding, these approaches were highly successful because each worked to deliver the intended results though after a long time (Whitehouse 2010). For instance, companies like General Motors and Chrysler that got government aid are now on the path to profitability. The other measure that greatly helped to ease the credit crisis was the government’s move to offer an insurance package for loans that were lent by banks (Turner 2008). The aim was mainly to encourage banks to start lending again as in the event of defaulting there would be a guarantee that the money would be repaid. This move worked very well and has helped most of the industries in the country to start operating normally again (Whitehouse 2010).
Among the long-term measures taken by the US government were the passing of strict regulations aimed at deterring banks from engaging in risky financial transactions as happened in prior to the global economic crisis (Whitehouse 2010). Poor regulation was also blamed as it is alleged that those charged with the responsibility of overseeing the goings-on in the financial sector did nothing to stop banks from engaging in risky banking practices, specifically the issuance of sub-prime mortgages. On the whole, the measures taken by the government have been successful. Today, the country has been declared by the IMF to be officially out of recession and on the path of growth (Whitehouse 2010).
Brigo, D, Pallavicini, A & Torresetti, R 2010. Credit Models and the Crisis: A Journey into
CDOs, Copulas, Correlations and dynamic Models. Wiley and Sons
Cooper, G 2008. The Origin of Financial Crises. Harriman House
Turner, G 2008. The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide
Economic Crisis. Pluto Press
Whitehouse, M 2010. From Credit Crunch to Pure Prosperity. O Books
3. Report Topic 5: International Economics
Evaluate the arguments for and against free trade by making reference to two protectionist measures used in recent years, in any countries of your choice. Evaluate the rationale for choosing these specific instruments and their possible economic implications, in light of the advantages expected from trade.
The issue of free trade in the contemporary world has never ceased to be controversial (Sloman & Hinde 2007). Every side embroiled in the debate uses its own theories and examples to justify its position; but the overall conclusion is always dependent on the specific context in which free trade or protectionist measures get applied. In order to have a clearer view of some of the benefits and limitations of free trade, it is critical that some protectionist measures are considered. Two of these measures, as applied by different countries, are discussed here.
Tariffs are some of the most common protectionist measures adopted by virtually every nation in the world in one way or another to achieve some form of protection either for its local industries or to discourage the importation into the country of some undesired goods. There are two main types of tariff (Sloman & Hinde 2007). The first one is import tariff. Import tariffs are usually imposed on commodities that are being imported into a country from another country. The main purpose of import tariffs is to discourage the importation of goods, whether general or specific, into a country so that the goods that are produced locally within that country can get a chance to be marketed locally without any undue competition. More importantly, import tariffs are aimed at protecting local firms from competition that results from an influx into the domestic market of goods from abroad. These tariffs work specifically by raising the price of such goods in the local market and therefore causing their demand to fall significantly. Because of the increased cost that importers are able to incur, they tend to be discouraged from importing the goods. The outcome is a general reduction in the quantity of the imported goods (Sloman & Hinde 2007).
Export duties can be used to achieve similar motives but they are not popular because they are perceived to be harmful to local firms. However export duties are used to discourage the export of treasured goods. The EU uses tariffs to ensure that goods from non-member states do not get into the region to compete with local ones. While nations desire to protect local industries, this is usually an unfair move because these same nations might also need to export their products to other nations (George 2009). This way, it becomes unfair for some countries as the balance of payments and balance of trade becomes skewed to favour one side. That aside, imposing tariffs by one country almost always results in the imposition of tariffs by the other one as well. The overall result is that trade between the two parties is reduced. Another disadvantage of tariffs is that they tend to lower the quality of locally produced goods. When the competition is not stiff enough, local manufacturers tend to compromise quality because they enjoy the protection from the government. The overall result is that the population suffers from the poor quality of goods they receive.
Tariffs, however, have their own merits. They are critical in keeping the prices of goods in the market under check and so help in minimizing inflation. Absence of tariffs can bring about undue competition which can in turn cause commodity prices to soar. In addition, tariffs help check the entry into the country of unwanted goods. If a country has enough of what its needs, then it is no use allowing other similar goods in as they will cause unwanted flooding in the domestic market. Finally, export tariffs ensure that countries protect valuable goods by controlling their sale outside the country (Sloman & Hinde 2007). Game products are especially ideal for protecting with tariffs because although some countries might have banned the dealing in such products, they might be in high demand elsewhere. Export tariffs and export quotas can serve to protect such goods. For example, ivory exports are closely regulated on the international market because poaching of elephants has threatened to wipe the animal out in Africa. Such tariffs have helped to conserve the African elephants.
The second protectionist measure is the use of direct subsidies. Usually, subsidized goods cost less in the domestic market than those that have not been subsidised. For many years now, one of the critical challenges that have been facing the World trade organization (WTO) is the conflict between developing and developed nations regarding direct subsidies (Sloman & Hinde 2007). This was in fact one of the causes of the stalling of the Doha Round of WTO talks where developing countries argued that trade would never be free and fair for as long as developed countries offered their farmers direct subsidies, thereby making the exports from developing countries to be so expensive in the developed countries (George 2009). Agriculture is particularly a key area of contention. Agricultural produce forms a significant part of the exports from developing countries which find their way as raw materials into Europe and the US. However, these developed nations have been subsidizing their farmers so much so that it has been easy for these farmers to sell their produce at cheaper prices owing to the low costs of production they incur. This is in sharp contrast to the farmers in developing nations who have very limited or no subsidies at all and whose costs of production are usually very high.
It becomes very difficult for goods from the developed nations, therefore, to find market in the developed nations in the West unless the exporters are willing to offer them at reduced prices. The result has been losses on the exporters (George 2009). This has been happening even though the West has been claiming to follow open market policies for goods from developed nations. In this case, the balance of trade favours the West. On their part, developed nations, led by the US, reiterate that they have an obligation to ensure that their people do not struggle to get the goods they need to us. They are therefore compelled to ensure that these goods can be made available at prices that are as low as possible to be afforded by all citizens (George 2009).
Another example is China. Chinese goods have in the recent past been flooding markets in Africa yet most African nations are not capable of exporting as much to China because China subsidizes its businesses. As such, Chinese goods can be sold cheaply in Africa, a trend that is causing a lot of undue competition for goods produced there. The few firms in Africa producing similar gods cannot stand up to the stiff competition from Chinese goods as these do not get any subsidies. Here is a case where subsidies are working against the free trade policy (George 2009). It would seem a justifiable policy for African countries to impose import tariffs but since they badly need the foreign exchange they cannot dare impose restriction for fear of reprisals from China.
However, such direct subsidies work to protect jobs in the domestic market. Without subsidies, foreign goods might flood the domestic market and pose a significant threat to local industries, causing some of them – particularly the infant ones – to close down (George 2009). If African governments can ever hope to be free from the influx of goods from China and other nations, then they have to start offering direct subsidies to their own industries. In fact the failure to give direct subsidies to its firms is partly to blame for Africa’s poor performance as far as industrial development is concerned. As a developing continent, there is need to protect its industries from external competition. Most of the developed countries that are now agitating for free trade have nothing to lose because their own industries are well established and are producing more goods than their local market can consume (George 2009). They are therefore in dire need of a market elsewhere. Their firms have the muscle to compete in any market as opposed to Africa’s infant firms. Therefore, protection of such a kind is ideal as it enhances growth of local firms. In addition to this, subsidies help to protect local jobs. In a very competitive world, jobs have become scarce. Allowing an uncontrolled influx of foreign goods into the domestic market means that industries will collapse and jobs will be lost. That aside there is the likelihood that in a free market, workers (labour) will move freely into the country to take over local jobs because foreigners are willing to work at lower wages (Sloman & Hinde 2007). This is a common trend in New Zealand where the lucrative dairy industry of the country is full of foreigners. Foreigners have taken over local jobs, leaving the locals to venture elsewhere for alternatives.
George, H 2009. Protection or Free Trade: An Examination of the Tariff Question with Especial
Regard to the Interest. BiblioBazaar, LLC
Sloman, J & Hinde, K 2007. Economics for Business. Pearson Education