Comparative Business Case Studies

Explanation of vegetable price hike

Discuss about the Comparative Business Case Studies.

The price of vegetable is determined by the market demand and supply. According to law of demand, when price of the product rises, quantity demand for the product increases given other influencing factors remaining the same. The law of demand depicts that, when other factors remaining same, increase in the price of the product leads to the decrease in the quantity demand for the product. On the other hand, law of supply says that, producers supply more in the market, when price increases per unit of the product. Demand curve shows the price that the consumers are willing to pay per unit of the product.

Vegetables are necessary good for human being. Due to natural calamity like Typhoon, agricultural production has been fallen drastically. Agriculture is mostly dependent on climate. Due to loss of production, vegetable supply in the Metro Manila has been fallen. Therefore, for a given demand supply has been reduced. Shortage in supply pushes the price upward.

Figure 1: Effect of typhoon on vegetable price

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The initial equilibrium point is at E₁, where price is P₁ and vegetable supplied in the market is Q₁. Production of vegetable is affected and shortage of supply occurs in the market. The supply curve shifts to the left and the new supply curve is S₂. Therefore, the new equilibrium achieved where the new supply curve cuts the demand curve, which is at point E₂. At E₂, supply of vegetables is reduced in the market to Q₂, which is less than Q1 and price hikes at P₂. As the demand exceeded the supply of vegetable in the market, suppliers have increased price to meet the demand.

Deregulation of University tuition fees by government indicates reduction in government subsidy in higher education. This decision gives freedom the Universities to determine the tuition fees on their own. When there are unique fees in the top ranking Universities within the country, students choose their favourite university based on quality. Students also get admission based on their merit. Deregulation of tuition fees may make the Universities competitive players.  The objective of the University to hike in tuition fee is generating revenue and reducing budget deficit. Low tuition fee is a form of subsidy to the richer. In this ground, hike in University tuition fee is justified. However, this decision disrupts social equity. Higher tuition fees discourage the low-income group from accessing post secondary education. Therefore, the students belong to families with low income are less likely to take admission in that top ranked University even if they have merit. This may have negative impact on the quality of study in that University. The decision of the vice chancellor to hike tuition fees is feasible in the round of social equity, as education needs to be accessible equally to all the section of the society.

Hike in university tuition fees

As QantasLink is the only service provider between the Sydney and Toowoomba’s Brisbane West Wellcamp Airport, it has monopoly power in this route. However, this monopoly power is a type of natural monopoly, as QantasLink provides service in a large scale. In case of natural monopoly, average cost is falling continuously. Therefore, the firm is able to provide product or service at a very low price. Entry of new firm in this industry would be inefficient.

Figure 2: Natural monopoly

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In the figure 2, the monopoly price is P_m and the quantity is Q_m. If the firm charges the monopoly price, this will generate maximum profits. There will be a deadweight loss by the amount of BEC. If price is set equating average or marginal cost, profit of the firm reduce. Therefore, government subsidy is required for sustaining the business. Therefore, QantasLink sets price where MR = MC.

Business traveller uses the route frequently compared to the leisure traveller. Therefore, price discrimination for two groups of customers can help to increase revenue. The company can charge higher price to the business travellers as marginal revenue would be higher for this group due to having inelastic demand curve.

 

Figure 3: Price discrimination by monopolist

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Cooperation between Qantas and China Eastern give rise of monopoly power in the airline industry. Therefore, in order to maximise joint profit, they can hike in airfare.

Figure 4: Pricing policy and deadweight loss in cartel

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In the above figure, the AEC triangle indicates the deadweight or welfare loss as aresult of cartel between two firms. P_c is the competition price, which is lower than monopoly price charged by the collude firms. Competitive supply of service is more than cartel. As the two firms together produce less than competitive output, deadweight loss is created and inefficiency in total production increases.

As the Qantas and China Eastern make collusion, this would give them significant profit compared to single operation. Both individual and joint profit would be maximised. Co-operation often helps to minimise the risk of business fluctuation. However, as far as social welfare is concerned, the monopoly creates welfare loss by charging higher price and supplying less products or services. Consumer has to pay higher price compared to competitive situation. Therefore, inefficiency increases. Stability of the cartel depends on the trust of each other.

Monpoly power of QantasLink

This section discusses effect of taxation on sales of cigarettes. Cigarette is harmful for human health. Therefore, one way of recuing consumption is taxation. Demand price elasticity of cigarette consumption is highlighted. This essay discusses about alternative policy for reducing cigar rates. Cigarette tax has mixed effect on consumption. However, the effectiveness of tax is evaluated in this essay.

If the price of one packet cigarette is increased more than $40 after taxation, this has immediate impact on sales of cigarette. As, price rises significantly, the quantity demanded for cigarette reduces as per law of demand, when other things remain same (Callison and Kaestner 2012). As shown in figure 5, tax is imposed on the sale of per packet of cigarette. Therefore, tax increases price by t per packet. Therefore, the supply curve shifts upward for a given supply (Jha and Peto 2014). The new equilibrium is achieved at a higher price P1 and a lower quantity Q1 as sales decreases. Some consumers of cigarette are left out from the market due to higher price of cigarette. They either may reduce their consumption of cigarette or may shift to other substitutes (Diaz, Chaloupka and Jernigan 2015). If cigarette is regarded as a normal good, imposition of tax reduces the sales as consumption decreases (Abadie, Diamond and Hainmueller 2012).

Figure 5: Effect of sales tax

(Source: created by author)

Demand for cigarette is inelastic in nature. Increase in cigarette does not have much effect on cigarette consumption. Law of demand is not applicable effectively in this case. The addicted people continue their consumption even after increase in cigarette price (DeCicca, Kenkel and Liu 2013). When government imposes a sales tax on cigarette, the sellers pass the effect of tax onto the consumers by reducing supply. The producer has no extra cost however, the consumers borne the increased price if consumption remains same. There are few consumers, who reduce the consumption to save money (Tauras et al. 2016).

Minimum price law or price floor policy of government imposes burden on seller by restricting them selling price below the minimum price. Price floor is termed as basic cost to the whole seller and retailer of cigarette. Price floor increases cost of doing business (DeCicca, Kenkel and Liu 2013).

Figure 6: Price floor in cigarette market

(Source: created by author)

As the above figure depicts that, the price floor is P_f, which is more than the market equilibrium price. At P_f, the supply of cigarette is more than its demand. Therefore, excess supply is created in the market (Harding, Leibtag and Lovenheim 2012). At this price, producers reduce their production of cigarette in order to clear the market. Hence, there will be underproduction in the market (Tang, Tang and Posner 2013). Underproduction creates deadweight loss in the economy by reducing some part of both the consumer and producer surplus. Apart from the price floor, there are many other alternative ways of reducing sales of cigarette such as increase in licensing fees of tobacco retail and banning multipack discounting offer (Holford et al. 2014). Increase in licensing affects the retail price of cigarette pack and may reduce the number of retailer.

Benefits and cost of Qantas and China Eastern alliance

In the view of Brown et al. (2014), increase in tax on cigarette pack reduces smoking behaviour among the young and person with low socio economic status. However, as cigarette demand is inelastic in nature, increase in price does not reduce the cigarette demand much (Schenk, Thuronyi and Cui 2015). According to World Bank report, tobacco consumption is increasing among the men in low and middle-income countries and among the women compared to the men in the high-income countries (web.worldbank.org, 2016). There is little impact of tax on the addicted and long-term cigarette smoker. They respond slowly to the hike in price of cigarette (Chiou and Muehlegger 2014). However, number of smoker, who is children and adolescents, reduces, as they have no source of income. Furthermore, the cigarette smokers have incomplete information about the risk of tobacco consumption. Hence, number of smoker is less likely to reduce even after taxation.

Conclusion

The essay highlights different aspects of taxation on cigarette. According to the demand supply model, imposition of tax on cigarette consumption reduces the supply in the market and sales of cigarette pack reduce. Demand for cigarette is price inelastic. Hence, increase in price of cigarette has not much effect on cigarette consumption. Reduction in cigarette consumption can be done in many other ways apart from taxation. When taxation is not effective, price floor, imposition of license fees on retailer, banning multipack discounting can be alternative policy.

References

Abadie, A., Diamond, A. and Hainmueller, J., 2012. Synthetic control methods for comparative case studies: Estimating the effect of California’s tobacco control program. Journal of the American statistical Association.

Brown, J., Beard, E., Kotz, D., Michie, S. and West, R., 2014. Realâ€Âworld effectiveness of eâ€Âcigarettes when used to aid smoking cessation: a crossâ€Âsectional population study. Addiction, 109(9), pp.1531-1540.

Callison, K. and Kaestner, R. (2012). Do higher tobacco taxes reduce adult smoking? new evidence of the effect of recent cigarette tax increases on adult smoking. [online] www.nber.org. Available at: https://www.nber.org/papers/w18326.pdf [Accessed 2 Sep. 2016].

Chiou, L. and Muehlegger, E., 2014. Consumer response to cigarette excise tax changes. Available at SSRN 1693263.

DeCicca, P., Kenkel, D. and Liu, F., 2013. Excise tax avoidance: the case of state cigarette taxes. Journal of health economics, 32(6), pp.1130-1141.

DeCicca, P., Kenkel, D. and Liu, F., 2013. Who pays cigarette taxes? The impact of consumer price search. Review of Economics and Statistics,95(2), pp.516-529.

Diaz, M.C., Chaloupka, F.J. and Jernigan, D.H., 2015. The effects of alcohol excise tax increases on public health and safety in Texas.

Harding, M., Leibtag, E. and Lovenheim, M.F., 2012. The heterogeneous geographic and socioeconomic incidence of cigarette taxes: Evidence from Nielsen Homescan Data. American Economic Journal: Economic Policy,4(4), pp.169-198.

Holford, T.R., Meza, R., Warner, K.E., Meernik, C., Jeon, J., Moolgavkar, S.H. and Levy, D.T., 2014. Tobacco control and the reduction in smoking-related premature deaths in the United States, 1964-2012. Jama, 311(2), pp.164-171.

Jha, P. and Peto, R., 2014. Global effects of smoking, of quitting, and of taxing tobacco. New England Journal of Medicine, 370(1), pp.60-68.

Schenk, A., Thuronyi, V. and Cui, W., 2015. Value Added Tax. Cambridge University Press.

Tang, Y.Y., Tang, R. and Posner, M.I., 2013. Brief meditation training induces smoking reduction. Proceedings of the National Academy of Sciences,110(34), pp.13971-13975.

Tauras, J.A., Pesko, M.F., Huang, J., Chaloupka, F.J. and Farrelly, M.C., 2016. The Effect of Cigarette Prices on Cigarette Sales: Exploring Heterogeneity in Price Elasticities at High and Low Prices (No. w22251). National Bureau of Economic Research.

Web.worldbank.org. (2016). Economics of Tobacco Control – Myths and Facts. [online] Available at: https://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTHEALTHNUTRITIONANDPOPULATION/EXTETC/0,,contentMDK:20365226~menuPK:478891~pagePK:148956~piPK:216618~theSitePK:376601,00.html [Accessed 2 Sep. 2016].