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Economic Analysis

Extracts from this essay...

Introduction

A number of national newspapers are offered at a considerable discount at most British university Student Unions. Discuss how the frameworks of monopolistic competition and price discrimination would respectively explain this. Which framework best captures the rationale for this practice? Introduction In this essay, I intend to examine and critically analyse the extent to which the frameworks of monopolistic competition and price discrimination could be applied to the situation of selected national newspapers being offered to university students at significantly discounted prices. Monopolistic competition is one of the four main market structures in an economy along with perfect competition, oligopoly and monopoly. Originating from Edward Chamberlain (1933), the theory of monopolistic competition as a type of market structure, refers to the imperfect competition that takes place among a large amount of firms. Price discrimination is defined as, 'charging different prices to different customers for the same good or service', which 'is possible only if the supplier has some monopoly power, and can identify the customer, and the customer cannot resell the good, or it is expensive to do so' (Black 1997: 363). I will also aim to compare and evaluate which of these two frameworks can best explain the reason for the given setting. I will make these evaluations based on a comprehensive method of analysis, identifying the common features as well as the disparities. Monopolistic Competition This market structure is based on four assumptions.

Middle

There are many advantages and disadvantages, both to individual firms and the industry as a whole from the use of price discrimination. One advantage is that firms will have increased revenue and profits, which will enable some to stay in business who may otherwise would have made a loss and allow others to reinvest in research and development and innovation. Also the firm's market share will increase as more consumers that were not initially willing to pay the original price now demand the good or service. An additional advantage is that some consumers will benefit from lower prices. However, other consumers that may require the product more will be forced to pay higher prices, which will lead to a decline in their consumer surplus and cause the firm to become allocatively inefficient as prices become greater than the marginal cost. Another disadvantage of price discrimination is that there may be administration costs that are incurred by the firm in separating the markets. Moreover, extra profits that discriminatory firms receive, may be used to finance predatory pricing so as to create further barriers to the entry of new companies along with increasing inefficiency of such firms due to the lack of competition. Theories Applied to the UK Newspaper Industry The national newspaper industry is widely seen to function in a monopolistically competitive market structure. Primarily, in a sense that the industry is concentrated by a large number of small firms, and also because the market produces a set of heterogeneous products, either through content or product branding.

Conclusion

I have therefore endeavoured to examine theoretical and empirical evidence to explain the motivation of such newspaper companies to price discriminate as well as the ability of these firms to do so. Additionally, I have defined both theories and attempted to apply them to the given situation, citing both the similarities and the disparities. As I have mentioned above, both frameworks of monopolistic competition and price discrimination can be applied to the practice of newspapers offering discounts to university student unions to a certain extent. However, I have also provided evidence of how it could be argued that either framework cannot be entirely applied to this situation. Consequently, I have come to the conclusion that monopolistic competition is the framework that best captures the underlying principle of the given setting. I have selected this framework because it is evident that this market structure best explains the newspaper industry due to the following; the newspaper industry contains many firms each producing similar, but slightly differentiated products, each producer can set its price and quantity without affecting the marketplace as a whole, the market has a four-firm concentration ratio of less than 40%, which excludes it from being an oligopoly, newspaper companies are seen to keep prices relatively constant and contend through non-price competition measures such as marketing, advertising and branding and finally, rather than perfect competition, which has a perfectly elastic demand schedule, newspaper companies face a downward sloping demand curve, so firms can raise or lower prices to a degree without major shifts in demand.

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