Also, due to the rise of Skype which can utilise voice over internet protocol (Voip), this has increased competition due to providing discount rates on internal calls that other operators could have competed on in the past, now due to this competition from skype, companies such as Three have now teamed up with internal service providers so customers can use their phones abroad without any additional cost. Skype uses the internet which lowers the barrier to entry that was in the market before and so this has made the market structure more competitive.
Through the use of the increase technology, recorded music has also moved from cassette tapes and physical music to music that can be downloaded from iTunes to be played on an iPod and MP3 player. Through the increased technological advances in the internet this has allowed new music streaming services such as Spotify. Using the internet, this has reduced barriers to entry within the market as setup costs such printing music is now not required as the non-tangible music downloads are perfectly elastic of supply and so the costs of production are far less than owning a music printing factory. In regards to Apple, they could be argued to act in a more of a monopolistic market structure with recorded music, as if you own an iPhone or Apple device then you have to purchase all your music through iTunes, and so this has led many people ‘locked’ to Apple in the future as all their songs are on there. Yet, on the other hand, music streaming sites are competitive such as Spotify and now YouTube Music and Pandora Radio in the USA as these all compete directly as they don’t have the power to control the music market and so are more likely to behave in competitive market behaviour and competition has increased.
2. Discuss whether utilities such as gas, electricity and water, are better left in the private sector and open to competition or whether all, or some, should be taken back into public ownership.
Utilities such as gas, electricity and water, can be argued to be better off for both consumers and producers if they are left in the private sector – which is defined as the sector of the economy that is run and owned by private individuals. Unlike public ownership, they are not run by the state. On the other hand, utilities could be argued to be beneficial for both consumers and producers if they are taken back into public ownership. Public ownership is defined as where the government owns a firm and uses money such as tax revenue to pay for the companies running costs. An example of a public ownership firm is BBC and up until last year, Royal Mail.
Firstly, utilities can be argued to be better off for both producers and consumers if they are brought into the private sector open to competition. By ensuring the utility market is open to many firms, this may encourage competition in the market and may lead to lower prices for consumers. This is because, if we assume that the firms act in a more of a perfectly competitive manner, firms may choose to compete on price with each other, therefore assuming there are low barriers to entry within the market, the firms cannot make supernormal profit in the long run and so if they do, this will only attract new firms into the market. Therefore, the firms will be price takers based upon the socially optimum level and therefore this means that allocative efficiency occurs as no consumer surplus is extracted as the firms need to compete on prices as consumers can easily switch providers based on perfect information and so this should bring the price down. Also, the firms have to set the market clearing price and so as they produce on the lowest point of their average cost curve, this also promotes productive efficiency and so in the market, this may be beneficial as the private firms allocate resources where there are best utilised to gain the greatest customer satisfaction. This can be shown in the diagram below where both allocative and productive efficiency are shown in the perfectly competitive model.
However, we are making a generalising assumption that the firms were compete on price within the utility market. Yet, we need to consider the question of the high start-up costs, especially in the case of utilities where pipes and infrastructure is required to setup. Therefore, these barriers to entry may mean that firms act in an oligopolistic market and behave in a more monopolistic manner through the use of colluding together by restricting output, increasing profits and therefore taking away consumer surplus. Also, in the case of utilise, it may be argued that promoting completion would be inefficient as only ‘natural monopolies’ can survive due to the high minimum efficient scale required by firms in order to produce. Therefore, by privatisation and promoting the free market through competition, this may be unlikely in the market especially due to costs to setup and so it is likely that there will be one dominate firm which could exploit its power and act in a monopoly. Thus, this brings the question of ethics especially if utilities are involved and so those people who are at low incomes may not be able to pay for the utilities which may be argued as a necessity. Therefore, the government may need to regulate firms, as we see today with OFGEM, and so if the costs to regulate firms that have been privatised to ensure they are not exploiting consumers, is greater than the revenues gained by privatisation, then this may be argued as a form of government failure.
Furthermore, one other point to argue that the government should privatise firms is due to the fact that the money raised in privatisation can be used in other sectors of the economy and so the government may spend this money is a more useful way such as tackling issues of demerit goods such as cigarettes through campaigning against their use. Therefore, the money generated may have greater use for the government and so the government may intervene within certain markets. Yet, one point that needs to be considered is the extent to which the government sells the stake in the company, as seen with Royal Mail where some analysts argue that the government could have sold Royal Mail at a higher price – therefore this could in fact lead to the issue of government failure where the government sells the firm at a lower rate and so does not gain the potential amount of money.
On the other hand, it can be argued that utilities should be taken back to public ownership, primary due to the fact that current private companies are not fair towards consumers and exploit their monopoly power in certain places where consumers don’t have any choice but to purchase from them. Therefore, this leads to the case that especially low income consumers, it is unfair that they should pay a higher price on energy bills. In recent news, this also led to the question of how energy firms have not lowered their rates even though the cost of gas has decreased – therefore this does suggest that energy firms perhaps which are part of an oligopoly act more in an oligopolistic manner. Therefore, if the government nationalised the utilities then due to having a market share of the whole country, this can be argued to allow the public sector firm to exploit economies of scale and purchase energy and water supplies in greater bulk quantities and as the public ownership will not be trying to make profits and ‘satisfice’ (which is in the case of private limited company) and so the government would be able to ensure the savings are passed onto consumers. As utilities can be argued a necessity, then the government will be able to pass onto lower costs of production and so people, especially on low incomes, will have utilities at a lower price.
However, one key underlying issue in assuming that the government will pass on costs is the argument that public companies such as the BBC which are financed through tax payers will mean that there is no need to be efficient and competitive and which may lead to X-inefficiency where they produce on a large scale but do not benefit from lowers costs of production. Therefore, if the government public firms are X-inefficient, then the profits are unlikely to be invested into research and development which we see private listed firms do in certain industries to compete with their competition.
In conclusion, perhaps in order for consumers to be better off in regards to utilities through a product cost for water, electricity and gas, the utility industry should be open to competition in the private sector. Yet, as seen in the UK today, utility companies do act more in the form of a natural monopoly and this leads to the question whether this could be improved in the long run. Perhaps through correct government legalisation, this would allow companies to share facilities together such as fibre optics or copper cables, this would reduce the barrier to entry to enable new firms to enter the market to make it more into a competitive market structure. Yet, it is often ‘easier said than done’ as it is not simply the case of ensuring firms share infrastructure as laws need to be in place to begin with and these changes may actually deter existing firms to continue in the UK market. However, utilities are a necessity and so perhaps by using private sector firms which may promote innovation through research and development that may not be seen in a public firm, then the government may need to issue tougher penalties on firms that exploit their monopoly powers (such as charging higher gas prices even if the price of gas has fallen) and also ensuring there is tougher regulation. Thus, in order to make this regulation more efficient, perhaps the government should ensure that all utility companies are transparent in their finances to promote competition so they do not exploit their monopoly powers.
by
alexdarcy3gmailcom (student)
