Question

Market Structure broadly of 4 types :

1.Perfect Competition : Where there are large number of buyesrs and sellers. No individual firm has control over prices of goods and services. Optimum price and quantuquis determined based on market forces and hence, the output, thus produced is socially optimum. This type of market structure is very hard to find in real world. Kne close example would be Stock Market.

2. Monopoly : A type of market structure where a single seller controls the entire output being produced and hence have total control over the prices. Hence, the firm can create artificial scarcity by not producing the output at maximum capacity and hence can increase epri es to maximize their profits.

Example : State Grid, China

3. Monopolistic : A type of market structure where there are large number of small firms which compete against each other. The point of differentiation between perfect competition and monopolistic competition is that in perfect competition the output produces is identical with no differentiation unlike monopolistic, where each and every firms sells somewhat differentiated products. Since there is partial differentiation there is some degree of control over the prices by the firm.

Example: FMCG products.

4.Oligopoly : It is a type of market structure, where there are small number of very large producers of goods and services. Since the number is small, competition is limited. One of the problem that arises in such a structure is that of cartelization.

Ex: Soft Drink Industry.

In the context of Canada's telecommunication industry which is guarded against foreign competition, the structure can be that of Oligopoly with a lot of consolidation.As it stands now, foreign ownership of a telecommunications company is limited to no more than 20 per cent of a company’s voting shares and no more than 33.3 per cent of the voting shares of a carrier’s holding company, and an effective total limit of 46.7 per cent (as long as the foreign entity doesn’t have control). On top of that, at least 80 per cent of the board members must be Canadian citizens.

From the point of view of consumers, the best market structure would be that of perfect competition. Since such a structure does'nt exist (if it were to, then it would have not provided much inventive to the producers), monopolistic competition is the best as it provides wide choice and more bargaining power to the consumers.

From the point of view of owners, Monopoly would be the best as it provides the opportunity to have more profits without facing much competition.

b. Class, taking what you stated above, how do we characterised the market that Canada’s telecommunications industry (Companies such as Bell or Rogers) operates within? You should consult the companies annual reports to answer this question. What are the profits reported by some of these companies or the industry as a whole (I want the most recent numbers)? Given the market structure, do you think that such profit levels will exist in the long run? If so what is it about the market structure that makes economic profits in the long run exist?

c. Do you think Canadians would benefit from government involvement designed to break up the “market” power of these companies? Why or why not (use as much economic reasoning as possible). What factors present within such companies make breaking them up into smaller more competitive firms unlikely (discuss expertise issues etc)? Any ideas class? If we did successful break up such companies what would happen to the level of competition in the market? Would be better off as a society?

Answer 1

b. The market structure that exists in the telecommunication industry of Canada is that of an oligopoly market structure. Given the market structure, and given the fact foreign competition is not allowed, the telecommunication industry will face such profit in the long run.

c. Canadians would definitely benefit from the government involvement in breaking up the market power of the company. From the consumer's point of view with other sellers available in the market, there will be more choice of goods, therefore the utility will also increase. With more competition, the prices of goods will also decrease.

Breaking up the company into smaller firms is unlikely as foreign ownership of a company's voting has to be of 20%. Moreover, 80% of the board members have to be Canadian. Therefore, breaking up into smaller firms also will not enable competition until foreign competition us allowed. Moreover, the operating cost will increase, if there are so many small firms. This will raise the cost of telecommunication system.

If successfully the company is broken into smaller firms, it should turn out that the consumers must benefit. Consumers must get the benefits of telecommunication at a lower price. However, if the operating cost increase then the product cannot be sold for a lower amount. Given the fact the operating cost dies not increase much, the consumers must benefit from an increased competition in the telecommunication industry.