Monopolistic Competition in the Retail Industry

Based on this article:

Written by: Rebecca Smithers

The Guardian, Thursday 18 October 2012

http://www.guardian.co.uk/business/2012/oct/18/chain-stores-close-business

Monopolistic Competition in the Retail Industry

Monopolistic Competition in the Retail Industry is not just the current issue that countries face nowadays, but it is an economical issue that is faced all year long by the retailers in the market. The retail industry is comprised of thousands of different brands and companies. However each is defined by its quality of make and materials used. Zara, Topman, and Gap are all well-known and respected brand names. However if prices were to exceed what people are willing to pay, then the consumers would alter their preferences and buy from another brand. Therefore we are dealing with a monopolistic competition.

The article from the Guardian.co.uk on “More Than  30 Chain Stores Closing a Day”  by Smithers, Thursday 18 October 2012, http://www.guardian.co.uk/business/2012/oct/18/chain-stores-close-business discusses how more than 30 chain stores are closing a day. There are many issues that may have caused this slum in the retail industry. In my opinion, one of the main causes to this is the monopolistic competition in the industry that retailers face. Retailers face many competitions as they are not the sole sellers, or in other words, the monopoly. There are many retailers that sells products that are about the same, or the same in the market.

Monopolistic competition is often defined as a common form of industry structure characterized by a large number of firms, none of which can influence market price by virtue of size alone, as some degree of market power is achieved by firms producing differentiated products. New firms can enter and established firms can exit with ease.

In monopolistic competition, the industry consists of a large number of firms. The presence of a large number of firms has three implications for the firms in the industry. First, it’s the small market share. Each firm supplies a small part of the total industry in monopolistic competition. Therefore, each firm has only limited power to influence the price of its product. Each firm’s price can deviate from the average price of other firms by only a relatively small amount. This implication is described as small market share.

A firm that produces different products makes the firm hold the market power. Product differentiation allows the firms to compete between each other in the areas of product quality price and marketing. Consumers will be able to choose from variety of qualities and prices which may be affected by each firm’s ways of approaching the consumers through their marketing strategies. Monopolistic competition also, has no barriers of entry for new firms to enter the industry. Firms are able to enter and exit the industry freely.

In Malaysia, with the monopolistic competition in the retail industry, the retailers throw about many creative ways to boost their sales. This includes freebies, goodies, discounts, and many more. For an example, Topshop, a retailer that makes massive sales yearly, has a day exclusively for their members where goodies will be handed out to the first 300 customers and discounts are given, even on new arrivals. This attracts even more customers to be members of the retail company. Even though this exclusive day is only being done once a year, and only for a day, it attracts many consumers who will spend more at their stores, compared to other stores.

Another example comes from America’s retail industry.  Due to the competitive market, retailers have started to give out freebies and increase discounts to attract customers. They came up with the tagline ‘Free Is The New Discount’. Free goodie bags and so on, lure customers into believing that the store has more to offer. This works for the American retail industry as their retail’s sale boosted immensely after that.

Besides giving out free goodies and increasing discounts, the retail industry also have used ‘dirty’ tactics to win over consumers. This may be indirectly, or directly. For an example, to make their products seem more in demand and much better than the competitor’s, the retail company might downgrade the competitor’s product in their commercial or advertisements  to make their product seem more attractive, and as said earlier, it may be indirectly, or directly.

An example for this is when the Blackberry Company attacked Apple indirectly in their television commercial where a blackberry went straight through an apple. Apple later on came up with a comeback via a television commercial as well, indirectly attacking them where the blackberry fell apart upon hitting the apple. A competitive competition such as so, leads many retailers to desperation for survival in the industry.

Apart from that, a firm might also alter the prices of their products according to the desirability of them based on the season and so on. This is determined by the elastic of the products that may be elastic, or inelastic.

Diagram 1 shows that as price increases, the percentage change in demand is lesser than the percentage change in price. This shows that during a peak season where people demand more for the firm’s product, a change in the price will not affect the demand for the product abruptly.

Diagram 2 shows that as price increase, the percentage change in demand is greater than the percentage change in price. This shows that during a normal season, a change in price will affect the demand of the product greatly as compared to Diagram 1, during the peak season. A retail firm might increase the fare during the peak season because the elasticity of demand is inelastic and elastic when it is during the normal season.

Monopolistic Competition is a market structure where a large number of firms compete, each producing differentiated products based on the quality of the product, price, and marketing strategies. Firms are also free to enter and exit the industry. In this competitive market, firms compete with other using various ways and strategies, such as giving out free ‘goodies’, increasing discounts, also attacking each other indirectly or directly via commercials and advertisements. These are the ways for the firms to survive in the industry with the pressure from the competitive competition, but are only efficient to a certain extent.

To conclude, in Monopolistic Competition, retailers need a compelling offer in order to justify their existence in the retail industry. This pushes the retailers to come up with different, brilliant ideas and strategies to tackle the consumers and make the sale. Even though the competition is tough in the retail industry, this competitiveness pushes many retailers to go beyond their comfort zone, and over the consumers’ expectations to stand out in this industry. Some of the major brands we have today once started small, and then worked their way up to where they are today.

Taxes and Subsidies focused in Budget 2013

Based on this article:

Written by Max Koh of theedgemalaysia.com

Friday, 20 September 2012 09:21

http://www.theedgemalaysia.com/highlights/221519-budget-focus-on-taxes-subsidies-.html

Taxes and Subsides focused in Budget 2013

There was good news for most Malaysians in Budget 2013, with Datuk Seri Najib Razak unveiling various incentives and goodies. Budget 2013 highlights focus more on taxes and subsidies. Taxes is a compulsory contribution to state revenue, levied by government on workers’ income and business profits or added cost of some goods, services and transactions. Whereas subsidies is a sum of money granted by the government or a public body to assist an industry or so that the price of a commodity or service may remain low or competitive.

According to an article from the Edge on “Budget Focus on Taxes and Subsidies” by Koh, Friday 28 

September, http://www.theedgemalaysia.com/highlights/221519-budget-focus-on-taxes-subsidies-.html  ,  which regards to Budget 2013 focus on taxes and subsidies to benefit the lower and middle income groups. The article discusses the current main problems that are faced by the Malaysians together with the new ways to tackle the problems that the lower and middle class income groups are facing. This is of course being done with the act of intervention by the government using taxes and subsidies.

Firstly, the article discusses the government’s plan on reducing the personal taxation that is imposed on Malaysians and to increase the child tax relief to help reduce the burden on families. This is a good move because the current standard of living in our country Malaysia is high and people are struggling to cope up with the high prices of goods and service that is due to the level of taxes imposed. A loaf of bread that was once priced at RM 1.50 is now priced at RM 2.50. That is an increase of price over 66%. If the price of a loaf of bread has increased in such a way, what more the prices of other goods and services? Reducing personal taxation and increasing child tax relief might not take the burden off the shoulders of the people who are troubled by this, but it will definitely reduce the burden they are faced with.

Another way that the government is using to tackle this issue is through the ‘Bantuan Rakyat 1 Malaysia’ (BR1M). ‘Bantuan Rakyat 1Malaysia’ is for the citizens of Malaysia who have gross incomes of RM3000 and below. For an example, in 2012, people who fit the qualifications are entitled to a one-off RM500 cash aid. In the Budget 2013, this is still being continued as of Budget 2012. With this being done, BR1M is most definitely proved to be a popular move with those in the lower income groups. A continuous action will improve the standard of living of Malaysians.

Apart from that, another issue that was discussed in the article that is relatively just as important and the main issue facing young adults in the current generation is the ability to take up loans to buy properties. Nowadays, the prices of properties are sky high and are a heavy burden for the young adults who have plans on investing and buying properties. For an example, the price of a double story-link house in Subang Jaya is currently priced high at RM650, 000 a unit. In reality, it is not just impossible for the young adults to buy properties at these prices, but in some cases it is also impossible for some adults who have been working for a few years to buy properties too.

In the Budget 2013, the government is taking an incentive to help those who are facing this problem by increasing the eligibility for My First Home Scheme for those who are earning less than RM3000 gross income per month to RM 5000.  Besides that, our Primes Minister, Datuk Seri Najib Razak also announced that a subsidy of RM 1.9 million will be allocated to build 123, 000 affordable homes around the country. This subsidy got attention from many people who are very pleased and satisfied with the new planning by the government to tackle this problem.

The diagram explains the effect that arises from the introduction of subsidy. When the government subsidises production of the affordable houses, the supply curve moves to the right from S1, to S2. This will result in an increase of supply.

With the allocation of the RM1.9 million to build 123, 000 affordable houses, the price range of these houses will be reasonable and affordable for the lower income groups to buy. This may range from the young adults who have just started working to those who do not earn much.

Moreover, the article also discusses about the palm oil and steel industry getting benefits from the Budget 2013. The steel industry asked for protection from the government before in protecting their sector as foreigners are dumping cheap steels, disrupting their business. This in other words, is called black market. The emergence of black market happens when prices are priced too high, with low protectionisms, letting in illegal sellers and this case; it’s the foreigners dumping cheap steels. This can be solved government interventions. For an example, banning the foreigners from selling the cheap steels or imposing high taxes on them. This will drive them towards ending their illegal business. This can be monitored by the demand and supply of the steel industry.

Taxations and subsidies are both ways that the government uses to intervene in the economy of the country. These ways are used to successfully tackle the economical problems, such as what is said earlier, to reduce the burden on families regarding the prices of goods and services, to help young adults to be able to take up loans to buy properties, and to intervene the emergence of black market in the steel industry. The government are cutting down personal taxes, and giving out subsidies, such as what is mentioned earlier, RM 1.9 Mil to build affordable homes around the country. On the other hand, to solve problems regarding the emergence of black market in the industry, the government could intervene by imposing high taxes, and also through the act of banning.

In conclusion, it is proven to say that Malaysia’s Budget 2013 focus on taxations and subsidies. This, as discussed earlier is to help the lower income, and the middle income groups. With the act of imposing taxations for certain cases, and giving out subsidies to those who need them, will help to reduce the burden that families face in our country.  

The Increasing of Car Sales

Based on this article

Toyota, Chrysler gain in US car sales 

October 3, 2012 

Chrysler and Toyota have posted solid gains in US car sales in September while rival Ford says its gains have stalled."Last month marked our 30th consecutive month of year-over-year sales increases and our strongest September in five years," Reid Bigland, Chrysler's head of US sales, said in a statement."Going forward with our current product line up, record low interest rates and a stable US economy, we remain optimistic about the health of the US new vehicle sales industry and our position in it."Chrysler's sales rose 12 per cent to 142,041 vehicles in September as car sales jumped 27 per cent and truck sales rose six per cent.Toyota said its sales jumped 42 per cent to 171,910 vehicles and would announce more details later in the day.Ford's sales slipped 0.1 per cent in September to 174,976 vehicles as truck sales fell eight per cent. But the second largest US carmaker hailed the fact that sales of its small cars jumped 73 per cent to a decade-high."As more buyers look for new vehicles across the country, Ford is ready with our strongest lineup ever of fuel-efficient cars, utilities and full-size pickups," Ken Czubay, head of US sales at Ford, said in a statement."Fuel economy remains one of the most important features customers want most today, and Ford is answering the call with five vehicles that deliver 40 mpg or better - with another three on the way by year-end."Automotive website Edmunds.com forecast that the pace of US auto sales will ease somewhat to a seasonally adjusted, annualised rate of 14.4 million in September from 14.52 million in August.US car sales have been climbing slowly but mostly steadily this year after struggling to recover from the 2008 financial crisis and supply shortages caused by last year's Japanese quake and tsunami."There's a feeling among dealers and automakers that car sales are easing into cruise control, and that's a good feeling for an industry that's felt more than its share of bumps in the last few years," said Edmunds.com analyst Jessica Caldwell."This month's results offer more evidence that car buyers are finding the right signs to jump back into the market."

Read more: http://www.smh.com.au/business/world-business/toyota-chrysler-gain-in-us-car-sales-20121003-26y2w.html#ixzz28bH6GZeC

The Increasing of Car Sales

Over September 2012, there is an increase in the amount of US’s car sales especially for Toyota and Chrysler. In contrary, Ford’s car sales experienced degradation even has been stalled in that particular month. Reid Bigland as Chrysler's head of US sales, said that in September 2012 the company’s car sales increased a lot, even it becomes the company’s strongest month over the last five years. Reid also believe that the sales of the vehicle will remain constant or even becomes higher if the economy situation in the country is stable and with the low interest rates. If the economy situation is stable it means the average income level in the country is also stable. The sales of US’s car determine by the income level of the country. Therefore the car sales in that particular country is stable as the income level is stable too. Chrysler’s car sales jumped up until 12 percent to 142,041 vehicles and Toyota’s car sales rose up until 42 per cent to 171,910 vehicles. 

However total increase of the car sales among the country has reached until 27 percent, while the total truck sales rose 6 percent. The number of the total increase for US’s car sales is quite high. From the result that has been shown, it means the company can get more allowance which can increase the total average income. While their rival, Ford which is the second largest carmaker in US, experienced the decreasing in the truck sales as high as 8 percent while its small car’s sales increased 73 percent so entirely Ford’s car sales has slipped 0.1 percent 174,976 vehicles in September 2012. But Ken Czubay, head of US sales at Ford, said that Ford is ready with their strongest lineup ever of fuel-efficient cars utilities and full-size pickups. He thinks the car products that provided by Ford will answer the need of people today of vehicles. Ford has expected that their car sales will increase because it fulfill the people wants with its new products which will be launched at the end of the year. 

In 2008, there was a financial crisis that happened. This financial crisis happened because of carmakers has experienced a decreasing in supply. From the graph above, supply is decreasing from So to S1 meanwhile the demand was remain the same. The changes in supply made the equilibrium point also change from Eo to E1 or shift to the left which made the equilibrium price became higher and the quantity supplied was smaller. This condition leads to a shortage situation, where the quantity supplied cannot fulfill the demand of the car. The worse is Japan also experienced the earthquake and tsunami last year which made the country could not increase thair supply. 

This graph shows the condition after the financial situation become stable again even becomes better than the condition before the financial crisis happened. So is the supply curve before financial crisis and the natural disasters happened and Eo also the equilibrium point before there was not any changes that happened in Japan. So shift leftward become S1 and Eo changes into E1, when the financial crisis and the natural disasters happened which has already explained above. And now there are S2 which the supply curve after Japan’s financial economy going back to normal and even better than before the financial crisis and natural disasters happened. The supply curve is now shift to the right from S1 to S2 while the demand stays constant. This can makes the equilibrium point also changes from E1 to E2. In the new equilibrium point or the E2 point, it shows that the price has decreased but the quantity demanded is increasing even bigger than the quantity demanded in Eo. And according to the article, the car sales has jumped up quite high after the financial crisis is over and when they have already recover from it and also from the natural disasters. This condition matches with with the law of demand which states that the higher rge price of a good the smaller is the quantity demanded and the lower the price of a good the larger is the quantity demanded. 

I think nowadays everyone need cars. Car becomes one of their main priorities. I can see it that everywhere people use car until the traffic jam becomes worse now. Even each house has more than one car. And for some brand such as Toyota, is one of the most brand that people. It means now car is one of normal goods for people. They need it for doing their activities like go to work and they still can buy it. Especially now people can buy a good car that can fulfill their need with affordable price too. So, no wonder they prefer to buy car instead of use the public transportation which means can make the number of car sales rises. Because of that, I think that car is inelastic demand good. People will not change their behavior of buying car although the price is quite high, but I think as long as they can afford it, people will look for it and buy the car. That is one of the reasons the number of car sales 

has jumped up. The car producers also has predicted the number of car sales will keep rising and they will gain a lot of profit from the sales. 

In conclusion, Toyota and Chrysler have experienced the increase of the their products sales especially in truck and car type of vehicles. On the other hand, Ford the rival of Toyota and Chrysler, has experienced a slight decrease of vehicles sales in the amount of 0.1 percent. Ford experienced the decline mostly at the sales of truck vehicles. However Ford small cars sales increased significantly. But three of them believe that their products will achieve higher sales at the future because they see the economy situation in the country is stable so they predict the quantity demanded of the car will increase. 

UK's Fish Supply

Based on this article

Fish demand 'exceeds UK sea supply' 

Level of consumption in 2012 has already met annual fish supplies, leaving the UK reliant on imported stocks 

·         Press Association
·         guardian.co.uk, Tuesday 21 August 2012 10.47 BST 

Annual fish supplies from UK seas can only satisfy demand for 233 days. Photograph: Bethany Clarke/Getty Images 

UK fish consumption in 2012 has already matched what our seas can supply for the year, leaving the country reliant on imported cod and haddock for fish and chips, campaigners have warned.
Annual fish supplies from UK seas can only satisfy demand for 233 days, so if the UK were to rely on its own fisheries for the year we would run out of stocks by today, a report from the New Economics Foundation (NEF) calculated.
At least one in three fish consumed here is imported from outside the EU, the thinktank said, with the UK reliant on countries such as Iceland, Norway and even China for a large share of traditional British fish.The situation has improved since last year, when the UK effectively ran out of fish more than a month earlier than in 2012, but is largely unchanged over the past decade.
But if the UK's seas were better managed to allow fish stocks to recover from overfishing, it could meet annual demand from its own waters and even be a net exporter of fish, NEF suggested.The UK imports more than 101,000 tonnes of cod, worth £372m, and 60,000 tonnes of haddock, worth £156m, in a year, the majority of which comes from outside the EU, according to figures from 2010.Rupert Crilly, of the NEF, said the UK had access to productive fishinggrounds and had moderate levels of consumption compared to some other European countries such as Spain and Portugal.
"It could produce as much as it needs but instead it is a net importer of fish."Consumers understand that we import tuna which is virtually non-existent in its waters; but they will wonder why we need to import cod and haddock from China when our cod and haddock stocks could deliver five and three times more catches with better management," he said.Across Europe the situation is even more acute, with EU consumption of fish outstripping the bloc's annual fish supplies by 6 July.Campaigners are calling for ambitious reform of the European Union's common fisheries policy, which governs the fishing activities of the EU fleet, to ensure fisheries are more sustainably managed to prevent overfishing.They are also calling for the EU to promote responsible consumption by EU consumers and to make sure fishing outside the bloc's waters is done more responsibly.Ian Campbell, UK co-ordinator for Ocean2012, a coalition of organisations, said: "Fishing within sustainable levels and adapting fish consumption to available resources is the only way to regain healthy fishing grounds."
An Environment Department spokeswoman said: "Overfishing has been a central failing of the current common fisheries policy and the UK is adamant that the new CFP, which is currently under negotiation in Brussels, must ensure catches are set at a level that is sustainable."We will not be able to rebuild fish stocks without getting this right."

UK's Fish Supply

The demand of fish in UK has been exceeds the maximum amount of Europe sea’s supply. Annual UK fish supply can only fulfill UK consumers of fish for 233 days and UK would run out of fish stock if they only depend on itw own fisheries. This report has been calculated by New Economics Foundation or NEF. UK has imported the fish from some countries such as such as Iceland, Norway and even China. This situation means that the demand of fish in UK is really high even higher than the supply that can be produced by the country. If the quantity demanded is higher than quantity supplied, it indicates that there is a shortage and there is also an increase both in the equilibrium price and in the equilibrium quantity.

UK can fix the disproportion between the quantity demanded and the quantity supplied of fish by elevate or forces up the price of fish so that the quantity demanded of fish will drop into a lower amount. If the quantity demanded of fish becomes lower, UK’s supply of fish can fulfill the quantity demanded. The other choice to revise it is by making a better way to manage the UK’s seas, to save its fish stocks from overfishing even UK could be a net fish exporter. NEF itself has recommended this solution. 

As it has written from the article, UK has imported more than 101,000 tonnes of cod, which is worth £372 million, and 60,000 tonnes of haddock, which is worth £156 million, in a year. According to Rupert Crilly from NEF, UK could produce fish more than the amount that they have imported because UK has the access to productive fishing grounds and the consumption of fish in UK is not as big as the other European countries such as Spain and Portugal, but instead UK becomes a net fish importer. Even some consumers are wondering why do they have to import cod and haddock while their sea has a lot stocks of it. Once again it is related to the UK’s seas management which actually can be improved. UK’s supply of fish especially cod and haddock are a lot but they could not manage it well so that they experienced a situation when the quantity demanded are higher than the quantity supplied of fish. If UK can manage well its sea, UK can boost up the number of the quantity supplied of fish. When there is an increase in supply, there will be a movement down along the demand curve which means will drop the equilibrium price but will make the equilibrium quantity of fish becomes higher. When the total amount of quantity supplied of fish increases, it will fulfill the consumer’s need or the quantity demanded of fish and the producer do not have to make the price of fish higher because the supply of fish has already meet the public’s need. When there is an increase in supply, there will be a surplus because the quantity supplied of fish is now bigger than the quantity demanded of fish. The producer will get more than it actually needed. Even the producer can make the price lower because they still have a lot of fish stocks and according to the law of demand, the higher the price of a good the smaller is the quantity demanded and the lower the price of a good the larger is the quantity demanded. When UK has a lot of supplies or even more than its citizen’s need they can make the price lower or export it to the other countries. Although UK sell it with lower price but the quantity demanded is increasing more than its markdown so that UK still can get bigger profit. I think this way seems will be more favorable for UK than if they sell it with no change in the price of fish which will make the quantity demanded of fish remains the same. This situation shows that the quantity demanded are increasing and the quantity supplied of fish increase too.

When UK imported the fish, it means the stock of the fish will increase. As it shown from the graph above, the increase in the change of supply will make the supply curve shift rightward. It also change the equilibrium point. There will be an increase in equilibrium quantity but a decrease in equilibrium price of the fish.

Over fishing in UK has made the country suffer from the costs. They have to manage the UK’s seas well in order to prevent the over fishing which can cause UK to inapplicability between the demand and supply of fish in the country. UK will get more of profit. According to Ian Campbell, UK co-ordinator for Ocean2012, a coalition of organisations, UK has to make a policy that can make a stable condition. Because if this kind of situation is being supined, it will make the imbalance worse and if the demand and supply can not meet at the equilibrium price and the equilibrium quantity of fish, the demand are getting higher while the supply are getting lower. It will make UK must import the supply of fish for fulfill the demand of fish which means UK has expenditure on unnecessary things and could not get the profit from exporting the fish because actually they can produce the fish itself both for own consumption and for being the net exportir of fish.

Actually, if there is any substitute for the fish, the demand is elastic. Because people in UK will looking for the substitute such as chicken, beef, or anything else instead of the fish whose supply is low and hardly to get if the goverment do not import it. Moreover, if the supply is low, it means there will be the scarcity of fish which can make the fish price higher than before. I think it will be better if people in UK look for the subtitutes until the supply of fish that can be produce by UK itself can fulfill the demand. But for some people, the demand of fish in UK is inelastic. For example is the seafood restaurant, one of their main menu is fish so they cannot cut off their stock of fish straight away or at least they only can cut a bit of their fish stocks.

The Proposed New York City Cigarette Tax Increase

http://www.nycclash.com/Taxes.html

The Proposed New York City Cigarette Tax Increase

Summary of main article

Under a proposal by Mayor Michael Bloomberg (pic), the New York City cigarette excise tax will rise from 8¢ per pack to a $1.50 per pack – an astounding 1,775% increase.  Coupled with the state tax of $1.50 (effective April 3, 2002), NYC consumers would face state and city taxes of $3.00 a pack. The City tax would be 3 times as large as the average state tax and approximately 5 times as high as any municipal tax in the country. NYC prices would be nearly $6.80 per pack, making a pack of cigarettes about 50% more expensive than an ounce of silver. The typical NYC smoker would pay roughly $1,400 per year in NYC and NY State cigarette taxes.

Does increasing taxes for cigarettes affect both cigarettes sellers and buyers? What are taxes actually? These are some of the frequent questions that arise among us about taxes. First of all, let’s get to know the definition of tax. Tax is a pecuniary burden laid upon individuals or property owners to support the government. It is to impose a financial charge or other levy upon a taxpayer. When the government imposes a tax on the sale of a good, in this case – cigarettes; the price paid by buyers might rise by the full amount of the tax, by a lesser amount, or not at all. For example, if the price paid by cigarettes buyers rises by the full amount of the tax, then the burden of the tax falls entirely on buyers. If the price paid by cigarettes buyers rises by a lesser amount than the tax, then the burden of the tax falls partly on buyers and partly on sellers of cigarettes. And if the price paid by cigarettes buyers doesn't change at all, then the burden of the tax falls entirely on the cigarettes sellers.

A Tax on Sellers

The effects of this tax causes on the sellers of cigarettes can be seen, on the demand and supply in the market for cigarettes. In the graph below, the demand curve is D, and the supply curve is S. With no tax, the equilibrium price is $3 per pack and 350 million packs a year are bought and sold. A tax on sellers is like an increase in cost, so it decreases supply. In order to determine the position of the new supply curve, we add the tax to the minimum price that sellers are willing to accept for each quantity sold. You can see that without the tax, sellers are willing to offer 350 million packs a year for $3 a pack. So with a $1.50 tax, they will offer 350 million packs a year only if the price is $4.50 a pack. The supply curve shift from S to S + tax on sellers._. Equilibrium (e) occurs when the new supply curve intersects the demand curve at 325 million packs a year. The prices paid by buyers rises by $1 to $4 a pack. And the price received by sellers falls by 50¢ to $2.50 a pack. So buyers pay $1 of the tax and sellers pay the other 50¢.

A Tax on Buyers

A tax on buyers lowers the amount they are willing to pay sellers, so it decreases demand and shifts the demand curve leftward. To determine the position of this new demand curve, we need to subtract the tax from the maximum price that buyers are willing to pay for each quantity bought. As seen in the graph below, that without the tax, buyers are willing to buy 350 million packs a year for $3 a pack. So with a $1.50 tax, they are willing to buy 350 million packs a year only if the price including the tax is $3 a pack, which means that they’re willing to pay sellers only $1.50 a pack. The demand curve shift from D to D – tax on buyers. Equilibrium (e) occurs when the new demand curve intersects the supply curve at a quantity of 325 million packs a year. The price received by sellers is $2.50 a pack, and the price paid by buyers is $4.

Taxes and Fairness

The benefits principle is the proposition that people should pay taxes equal to the benefits they receive from the services provided by government. For example, CEO’s pays a higher tax to the government because of their positions at the high level of the corporate business world – higher income while construction workers pays considerably less tax since they earn considerably less.  Another example would be, according to the article, is that higher taxes would be imposed on cigarettes sellers who bought a large number of cigarettes packs than those who bought much smaller packs that to be sold. This arrangement is fair because it means that those who benefit most pay the most taxes. It makes tax payments and the consumption of government-provided services similar to private consumption expenditures. The ability-to-pay principle is the proposition that people should pay taxes according to how easily they can bear the burden of the tax. For example, a rich person can easily bear the burden than a poor person can, so the ability-to-pay principle can reinforce the benefits principle to justify high rates of income tax on high incomes.

Therefore, increasing the taxes on cigarettes actually affect both the cigarettes buyers and sellers. For instance, for cigarettes sellers, without the tax, they are willing to offer 350 million packs per year for $3 a pack. So with a $1.50 tax, cigarettes sellers are only willing to offer 350 million packs per year only if the price is $4.50 a pack. Meanwhile, for cigarettes buyers, without the tax, they are willing to buy 350 million packs per year for $3.00 a pack. So with a $1.50 tax, cigarettes buyers are only willing to buy 350 million packs a year only if the price including the tax is $3 a pack, which means that they’re willing to pay sellers only $1.50 a pack.  

Microsoft ruled a monopoly / Court finds firm abused its power

http://www.sfgate.com/news/article/Microsoft-Ruled-a-Monopoly-Court-finds-firm-2899336.php

Microsoft ruled a monopoly / Court finds firm abused its power

Summary of main article

In a stunning setback for Bill Gates software empire, the judge in the Microsoft antitrust trial ruled yesterday that the software giant is a monopoly that wielded its power to stifle competition. Federal law generally bans companies from maintaining monopoly power through illegal business practices, but not from achieving success by selling popular products or making shrewd business decisions. A defiant Gates, appearing at a news conference in Seattle, defended his company's business practices. "Microsoft competes vigorously and fairly," the firm founder and chairman said. However the judge in the antitrust trial wrote that Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products," He continued: "Microsoft enjoys so much power in the market that it could charge higher prices for its Windows software, and some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest."

Founded by Bill Gates and Paul Allen on April 4, 1975, Microsoft is the world’s largest software maker measured by revenues. It is also one of the world's most valuable companies. Microsoft has captured 90 percent of the personal computer operating system market with Windows and 73 percent of the Web browser market with Internet Explorer. Does this mean that Microsoft is being run as a monopoly (or, at least, a near-monopoly)? Let’s have a closer look at things.

In the year 2000, Microsoft was found guilty of violating the Sherman Act by taking several unlawful actions designed to maintain its monopoly of operating systems for personal computers. A lower court ordered that Microsoft be split into two competing firms. However, the court of appeals upheld the lower-court finding of abusive monopoly but rescinded the breakup of Microsoft. Instead of the structural remedy, the eventual outcome was a behavioral remedy in which Microsoft was prohibited from engaging in a set of specific anti competitive business practices.

Some major issues that are brought up in the antitrust case are:

        (a)    Monopoly

        (b)   High barriers to entry

        (c)    Lack of alternatives

        (d)   Threat to partners

        (e)    Monopoly through pricing

        (f)    Monopoly through technology

  

      According to the case study of Microsoft, which can be seen in this link, http://www.scribd.com/doc/26240599/Case-Study-of-Microsoft, even though the Department of Justice (DOJ) alleged that Microsoft has exerted monopoly power in the market, the end result of the case is that Microsoft has been ruled as not guilty of being a monopoly. A monopoly is a market with firm that produces a good or service for which no close substitute exists and that it is protected by a barrier that prevents other firms from selling that good or service. Next issue that arises in the court case is high barrier to entry. Microsoft is said to currently have approximately 70000 software applications in the market. Therefore it is difficult for another company to enter the market easily. Moreover, lack of alternatives can be seen where software developers produce software that is compatible only in windows and that windows has the largest market share. In addition, threat to partners is also one the issue discussed in the case. For example, several companies’ transacted business with Microsoft and Microsoft practices intimidation and threatening because these companies claimed that Microsoft forced them to close their software developments that are competing with Microsoft applications. For monopoly through pricing, the Department of justice claimed that Microsoft has set low prices for their products in the market. The reason to this could actually be due to the economies of scale, where Microsoft gain more output for a given input by using large machines to produce their products. Lastly, it’s monopoly through technology. Microsoft is believed to have exerts monopoly practices by using the latest technology and software to improve their products in order to nick ahead of their rivals in the computer software market. This can be explain in terms of economies of scope, where when Microsoft increases the range of products being produced, the cost of producing each one reduces. This enables them to produce more goods or products at a much lower cost (cost of production).

Monopoly arises for two key reasons, which are no close substitute and barrier to entry. If a good has a close substitute, even though only one firm produces it, that firm effectively faces competition from the producers of the substitute. A monopoly sells a good or service that has no good substitute. For example, software developers produce software that is compatible only in windows enabling only Microsoft’s products to be sold in the market. Meanwhile a constraint that protects a firm from potential competitors is called a barrier to entry. There are three types of barriers to entry, which are natural, ownership and legal. A natural barrier to entry creates a natural monopoly where a market in which economies of scale enables one firm to supply the entire market at the lowest possible cost. An ownership barrier to entry occurs if one firm owns a significant portion of a key resource, in this case, Microsoft controls the software market and has thus far captured almost 90 percent of the personal computer operating system market with Windows while a legal barrier entry creates a legal monopoly: a market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright.

A major difference between monopoly and perfect competition are that monopoly is the price maker (controls the total quantity supplied and thus has considerable control over price), while perfect competition is the price taker (no control over price). In doing so, the monopoly faces a market constraint: To sell a larger quantity, the monopoly must set a lower price. There are two monopoly situations that create two pricing strategies: (a) single price and (b) price discrimination. A single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers. Other price-setting strategy of a monopoly firm is price discrimination. When a firm practices price discrimination, it sells different units of a good or service for different prices. For instance, Microsoft sells its Windows and Office software at different prices to different buyers. Microsoft gave OEMs (Original Equipment Manufacturer) an incentive to distribute Microsoft products with every computer sold. They gave the best prices for Windows to those OEMs that also sold or distributed Microsoft’s other products.

All the issues and characteristic mentioned above are showing that Microsoft is practicing some business strategies that are of a monopoly. Next, let’s take a look at some other characteristics which are actually pointing that Microsoft is not a monopoly.

Microsoft faces a great deal of competition, from existing firms and from potential new entrants to the market. For instance, Microsoft faces competition from existing operating systems that run on Intel-compatible hardware such as OS/2, BeOS, Linux, UnixWare, Solaris, and so on. Microsoft also faces competition from operating systems running on other hardware, such as the Macintosh (Apple) and proprietary hardware from other firms. Furthermore, Microsoft actually prices Windows at a cheaper price because of several types of substitution available in the market, such as Apple’s Macintosh. In addition, the elasticity of demand for Windows is similar to that of many narrowly defined brands for which there are many substitutes. Therefore, it appears that Microsoft sets its prices as if it believes that it faces the kind of highly elastic demand curve that characterizes firms that produce products for which there are many readily available substitutes. And even though Microsoft charges low prices for Windows, it has steadily improved the quality of its operating system not because it is benevolent but because of vigorous competition that has forced Microsoft to behave this way. Microsoft has also faced plenty of competition since it released its first operating system in 1981, and it continues to face competition till today. Following all these characteristics, Microsoft is still not being a natural or pure monopoly in the market.

Therefore, some characteristics of Microsoft, in terms of the strategies they adopt for their business activities leads to a monopoly while some of it doesn't. For example, Microsoft practices a natural monopoly's characteristic when they sell their software products to the suppliers for different prices whereas they doesn't practice a natural monopoly's characteristic when they charges relatively low prices for Windows and faces plenty of competition in the market with companies such as Apple and IBM. In a nutshell, I believe that Microsoft is not a monopoly. The reason is because (1) they haven't captured full control of personal computer operating system market (90% only). (2) They face plenty of competitions in the market with companies like IBM and Apple. (3) They charges relatively low prices for Windows.