To begin with, consumers can save considerable spending from the price stability in the oligopoly. With the kinked demand curve (figure1) (kinked demand curve assumes that there will be an asymmetrical reaction to a change in price by one firm (Anderton 2008)), if firm A increase their price, the rest large firms will not follow and keep their relatively low price unchanged. On the contrary, rivals are more likely to match a price fall by firm A to avoid a loss of market share (TUTOR 2U nd). In this instance, one large firm does not often raise its price since if it increases the price above P1Q1, there will be a loss in market share and a fall in total revenue of that firm. On the other hand, firms will not low the price below P1Q1 neither, as demand will be more inelastic and the total revenue will declines as well, though they will probably keep their market share (tutor2u 2006). In order to maintain the market share and make more total revenue, firms like Tesco, Sainsbury, Asda and Morrisons which occupy the main position in the UK supermarket industry will generally not raise or low their price. With the relatively lower and rigid price, consumers can save their spending while shopping.
Another advantage consumers enjoy in oligopoly goes to the non-price competition. It is apparent clear from Anderton (2008), price is often not the most important factor in the competitive process, but decide upon marketing mix which contains 4Ps-price, product, place and promotion.
Place-according Anderton (2008) a good distribution system is important to get the product at the right place. In the supermarket industry in the UK, in order to increase their market share, firms prefer to locate their store at a place with very developed transportation systems, though, it always with very high rent. Hence, amount their place competition consumers can purchase goods with a very convenient transportation system.
Promotion-although there is lake of price competition, price does different in particular few products. According Tesco(2010) and Sainsbury (2010), despite that there is the same product, Mobile LG KP170, Tesco sells it with promotion which is £19.97 and Sainsbury sells it on the original price £24.97. Obviously, it is £5 cheaper when buy the phone in Tesco in this period.
Price-producer set their price depend on the pricing strategy to be used. According to Anderton (2008), a high price needs to be set if the firm sold as a high quality product, conversely, a lower should be set if producer sold as a low quality goods. Thus, different groups of people can purchase the products rely on the different price.
To conclude the merits of the oligopoly industry to consumers, the non-price competition contribute consumers to purchase products in a relatively suitable or lower price. And the consumers can go shopping with very convenient transportation.
In spite of the advantages of an oligopoly market, drawbacks have brought to the consumers as well-COLLUDE and from a CARTEL¼ˆAnderton 2008). While there is non-price competition in oligopoly, firms will not raise or reduce their price in order to maintain the market share they already had. Once firms have colluded, they made an agreement amount each other, they can force up the price in a higher level¼ˆAnderton 2008). Under this circumstance, though, firms earn more abnormal profit indeedly; the consumers are suffering a huge exploitation. They have to spent more to purchase products which should be in lower price. However, it is apparent clearly from Anderton (2008), with the incentive that cutting price would increase its sales and market share; firms will probably cheat on any agreement which they made before they collude, cartels are usually unstable.
To sum up, despite the drawback exists in the oligopoly industry, the advantages are the neon to consumers. Under the oligopoly market, consumers can purchase product in a stable price and the non-price competition contributes consumer to gain relatively profit. Nevertheless, collusive oligopoly destroys that condition and cause consumers into exploitation, it is claimed that cartel should be banned highly to protect consumers.
Opportunities Offered By Trade Blocks To Businesses Contents Economics Essay
INTRODUCTION I am an international business consultant and presenting a report on the opportunities that a business in the textile industry in North America can be benefited from participating in trade with a trade block.
It is the European Union and North American Free Trade Area that I shall focus on as it is of most interest in this report and the possibilities of opening a textile plant in the European Union the largest trade block.
METHEDOLOGY To gather the information used within this report I referred to my own views as international business consultant and four academic books whose authors provide different views on why and how companies should be involved in word trade and the possible challenges that they may face in doing so or not.
SUMMERY Trade allows countries to use their national resource more efficiently through specialization. Regional economic integration is the growing interdependence that results when two or more countries within a geographic area and form an alliance aimed at reducing barriers to trade and investment. The rise of regional trade blocks that are in geographic areas consisting of two or more countries who have agreed to pursue economic integration by reducing barriers to the cross border flow of products, services, capital and in more advanced states has influenced world trade greatly
It is of great importance that we are strategically positioned as a business to benefit from this. To begin with I shall define what free trade is, the types of free trade blocks, the worlds leading trade blocks, discus the advantages and disadvantages they present to a country and a business and then give my recommendation.
DUSCUSION AND PERSONAL VIEW Free trade is the relative absence of restrictions to the flow of goods and services between nations. Trade is the core of a businesses existence it is prudent to consider international trade that is the exchange of products and services across national boarders especially that is natural for a business to want to grow; typically through exporting and importing, International Business (2008 Tamer C.S, Knight G and Riesenberger J.R)
Classical theories of trade World trade has come been around for a long time at has developed over time at different stages of history, by looking at some of the theories we are much more able to understand the word trade taking place right now.
The Mercantilist View; A belief that national prosperity is the result of positive balance of trade, achieved by maximizing exports and minimizing imports, emerged in the 1600 (protectionism).
Absolute Advantage principle; A country benefits by producing only those products in which it has an absolute advantage or can produce using fewer resources than another country : by economist Adam Smith 1776, An inquiry into the Nature and causes of wealth of nations
Comparative advantage principle; it can be beneficial for two countries to trade without barriers as long as one is more efficient at producing good or services needed by the other. What maters is not the absolute cost of production, but rather the reflective efficiency with which a country can produce the product, David Ricardo 1817; the principle of political economy and taxation.
Factor propositions theory; describes how abundant production factor give rise to national advantages for instance Brazil has abundant workers in all the various industries.
New trade theory; Paul Krugwa; 1970’s argues that increasing returns to scale especially economies of scale are an important factor in some industries for superior national performance. Some industries succeed best as their volume of production increases consider the airline industry that makes more profits by producing large numbers of airlines.
In this theory a variety of products and services are consumed at a lower cost.
The most refereed to theories today are those of comparative advantage and new trade theory.
Because of international trade, some county governments have set up protectionist measures against foreign competitions to protect their own businesses. This is necessary however it reduces international trade and its benefits of helping the countries firms to become efficient global competitors even invite retaliation, some of these measures are;
Tariffs or import duties; a charge imposed on the price of entering a country. This increases the price of imported goods it also increases demand on home produced good, generates government revenue.
Subsidies; is a financial support provided by the government out of taxation. The initial cost of producing a certain service or product is reduced due to government support there for reducing its selling price. These also encourage exports of local products and services.
Quotas; are a permitted or prescribed volume or a value of a product; this controls the level of imports and allows them to find their own price. This helps to reduce the influx of certain products into the country.
Non- tariff barriers; take the form of discriminatory administrative practices, deliberately channeling government contracts to home companies even when their tenders are not competitors
Local content requirements; require that a manufacturer include a minimum percentage of added value that is obtained from local sources, this discourages imports of raw materials, parts, components and supplies thereby reducing sourcing options available to manufactures.
Regulations and technical standards; include safety, health or technical regulations; labeling requirements. These may delay or block the entry of imported products and reduce the quantity of available products, resulting in higher costs to imports and buyers
Types of Free Trade
FREE TADE AGREEMENT; A formal agreement between two or more countries to reduce or eliminate tariffs, quotas, and barriers to trade in products and services
Free trade area; A stage of regional integration in which member countries agree to eliminate tariffs and other barriers to trade in products and services within the block
Customs union is stage of regional integration in which the member countries agree to adapt common tariff and non-tariff barriers on imports from non-member countries.
Common market; A stage of regional integration in which trade barriers are reduced or removed, common external barriers are established and product and services. Factors of production are allowed to move freely among member countries
Economic union; A stage of regional integration in which member countries enjoy all the advantages of early stages but also strive to have common fiscal and monetary policies.
The level of integration on laws and regulation increases significantly from free trade agreement to economic union observe the two diagrams below:
LEADING ECONOMIC TRADE BLOCKS More and more countries are becoming part of a trade block or trade agreement. There approximately 200 economic integration agreements around the world;
The European Union (EU) started in 1957 the most advanced of these, comprises of 27 countries in Europe. The EU increased market access, improved trade rules and harmonized standards among members.
The EU seeks to harmonize customer laws amongst member countries and prohibits all agreements and practices that may hinder trade.
The North American Free Trade Agreement (NAFTA); launched in 1994 the block consists of Canada, Mexico, and the United States. NAFTA is at the free trade area stage of regional integration mostly eliminating tariffs and most non tariff barriers for products and services in the block.
America and Canada would benefit from the low labour cost of Mexico and them from foreign direct investment as large markets of the other two. Since its formation NAFTA countries have become more integrated and a strong productivity growth.
Others include; EL Mercado Comun del Sur (MERCOSUR), The Caribbean Community (CARICOM) and Comunidad (CAN) in south America. In Asia Pacific; The Association of Southeast Asian Nations (ASEAN), Asia Pacific Economic Cooperation (APEC) and Australia and New Zealand Closer Economic Relations Agreement are leading blocks
The Southern Development Community (SADC), Economic Community of West African States (ECOWAS) and Gulf Cooperation Council (GCC) economic blocs in Africa and the Middle East have experienced little success.
Depending on weather you are within or without the trade block their advantages and disadvantages to businesses.
Economic Development seventh edition Todaro M, P. 2000
Disadvantages of Trade Economic Blocks New protectionist measures against exports from developing countries in terms of standards of acceptance of manufactured and processed goods
Oligopoly control of factors of production and commodity markets in developed countries combined with increased competition for sources of sources of supply.
Some countries with high labour costs in trade blocks lose jobs to lower labour cost countries due the benefits it offers business firms.
Advantages of Trade Economic Blocks Promotes competition , improved resource allocation, economies of scale and cost of production lowered
Increased pressure to be efficient , product improvement and technical change
Accelerates economy grows, raises profits and promotes greater saving and investment.
Attracts foreign capital and expertise, generating needed foreign exchange
Promotes more equal access to scarce resources.
Why countries may pursue regional trade (International Business 2008 Tamer C.S, Knight G and Riesenberger J.R)
Expand the market size of their industries o increase revenues
Achieve economies of scale and enhanced productivity
Attract direct investment from outside the block
Acquire stronger defensive and political posture
Drawbacks and ethical dilemmas of regional integration are; There is reduced global trade due to the fact that countries within a trade block tend to trade more with themselves that with countries outside the block
Another serious consequence is the loss of international identity and sacrifice of autonomy as seen from the countries within the European Union
Failure of small or weak competition because of the larger businesses that can pay higher wages and have economies of scale.
There reason that businesses may want to be part of a trade block International Business 2009 Hill C W.L
Consumers and firms can more readily buy the products they want due to the large size of the block.
The prices of imported products tend to be lower in a trade block than domestically produced products because of access to world scale supplies that force prices down, mainly from increased competition or production takes place in lower cost countries.
Lower cost of imports help reduce the expenses of firms, thereby raising their profits (which may be passed on to workers in the form of higher wages).They also reduce the expenses of consumers, thereby increasing their living standards.
How firm management must deal with Regional integration International Business 2008 Tamer C.S, Knight G and Riesenberger J.R;
Internationalization by firms inside the block The elimination of trade and investment barriers present new opportunities to source input goods from foreign supplies within the block. The firm can generate new sales and increase profits.
Rationalization of operations Instead of viewing the block as a collection of differing countries, firms begin to view the block as a unified whole, rather than individual countries.
Rationalization is the process of restructuring and consolidating company operations. It reduces redundancy, cost and increase efficiency in operations.
Mergers and Acquisitions The merger two or more firms creates a new company that produces a product on a much larger scale, mergers and acquisitions result a lot in trade blocks.
They increase R