Technological Change and Markets & The Case For Public Ownership of Utility Companies.

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 (a) Explain how technological change has affected the structure and competitiveness of markets such as those for telephone services, recorded music or cars. (15 marks)

Technological change is defined as where new innovation and development in technology has allowed new technology to be create or existing technology to be upgraded. An example of technological change is the introduction of fibre optics compared to old technology such as copper wires for the telephone line. Market competitiveness is defined as to the extent to which the sellers in the market compete not only on prices to provide the greater customer utility (via allocative efficiency where there is no consumer surplus) but also on non-price competition such as providing greater support for consumers to enable their product to be more competitive based on consumer satisfaction.

For the telephone service, as stated in the quote, there used to be one main supplier of the market. This is therefore a form of a monopoly and this may be discouraging to consumers due to a restricted output and raised prices – this is a form of allocative inefficiency as the monopolies are using consumer surplus in the form of greater profits and so the quantity produced is not at the socially desirable level. Furthermore, monopolies can use barriers to entry to prevent new firms from entering the market and as they are not producing on their lowest production cost curve, this is known as productively inefficient.

Due to greater technological change on the phone market, such as through the introduction of 2G technology and recently 4G technology, due to this innovation, this has allowed more than one mobile phone operator to utilise the wave frequencies in the UK. Therefore, new firms such as Virgin, Vodafone, O2, EE and Three can use different wave frequencies to provide coverage for their mobile networks. This should therefore improve the competitiveness of the market, as more firms can compete on price with each other – yet often due to the high infrastructure costs (such as purchasing the wavelength from the government and masts costs), this acts as a barrier to entry of new firms in the market. Therefore, one may argue the market behaves more in an oglipolistic manner and this may either lead to price wars or sticky prices due to interdependence between firms. However, it is worth noting due to the rise of secondary mobile phone providers where O2 for example, sells bulk discounts on SMS and voice services to other firms such as Tesco and GiffGaff which run on the O2 network. This may benefit consumers through lower prices.  This therefore leads to the structure of the market for mobile phone operators to move from a monopoly to one that is more in the form of an oligopolistic market structure.

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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 ...

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