Discuss about the Monopolistic Competition and Optimum Product.
Excessive alcohol consumption can be addictive and harmful to the consumers and the economy on general. It is therefore important that they are curbed to ensure that both the government is able to maximize on revenue while consumers are left with consumption levels that is healthy to growth and development both within themselves and the government as well. A sin tax is therefore imposed on alcohol to further discourage the high consumption rates.
The demand for alcohol is inelastic which implies that consumers are bound to pay the bulk of the tax. According to Forgaty (2006), the addictive aspect of it means that the government tax will not deter consumers from taking alcohol and so an increment in the tax is only unconsciously felt by a consumer. Therefore, determining the actual bearer of the burden of tax imposed by the government demands in-depth analysis of the elasticity of demand and supply as shown below (Boffat et al, 2009). With regard to alcohol, the highest burden of tax falls on the side with the inelastic demand which in this case refers to the buyers or rather the consumers of alcohol.
Inelasticity of demand alludes to the aspect of consumers not being responsive to the changes in price whereby the quantity demanded remains relatively high despite the introduction of a tax. The above situation indicates that demand is relatively inelastic than supply meaning consumers have to bear the burden of the tax increment according to Pettinger (2004). However, should the supply of alcohol be more inelastic than demand, then it would have indicated sellers paying most of the tax burden that has been imposed on the sin.
As indicated by the inelastic demand, the government passes a tax to the consumer without much of a change in the equilibrium quantity. For instance, assuming that the government imposes a 10% increment on all brands of alcohol and the average brand of alcohol costs $15. However, before the tax imposition, an average of 56.8 million bottles of alcohol were consumed daily that stands at a total expenditure of $852 million (Nocco, Ottaviano & Salto, 2014). After a 15% tax , the number of bottles consumed per day slightly drops to 54.2million on average and factoring all brands. The total expenditure on alcohol stands at $843million which basically implies that the consumers have to bear the burden that has been imposed because there is only a slight change in the average consumption rates. Inelastic demand comes sets this up (Ramstedt, 2012).
In diagram A, the demand curve is given as elastic while the supply curve is inelastic which implies that consumers very much aware of any changes in the market with regard to the prices of alcohol. When the government increases taxation on the product, it immediately makes consumers conscious of this change such they will reduce their consumption. There is wedge between the price paid by consumers pp and that by producers pc. In other words, the total price paid by consumers is retained by the producers and paid to the government in form of taxes. In the second instance shown in diagram B, the demand curve is inelastic while the supply curve is elastic. Essentially, it means that consumers are not responsive to any changes in the price of alcohol. The tax incidence falls disproportionately on consumers as reflected by the different between the prices they pay pc and the equilibrium price pe. In this case, sellers receive a very small price before the tax but the difference is relatively smaller than the change in the consumer’s price (Simshauser & Whish-Wilson, 2017). In summary, the elasticity of supply curve coupled with inelastic demand curve means that consumers are unresponsive to changes in the price of alcohol which again indicates consumers paying the burden of the tax increase.
Maximization of alcohol consumption in an economy is based on the notion that alcohol should be set at a level that is optimal for the society. The persistent and widespread abuse of alcohol in the society according to Stockwell & Thomas (2013), means that the social cost is not all maximized as well. A simple demand and supply model prods that a minimum price above the equilibrium is likely to cause a surplus which actually projects an increase in supply while dwarfing the demand (Dunne et al, 2013). However, with alcohol, supply and demand being elastic it means that consumers are very much responsive to any subtle change in the price of the commodity. As a result, it means that the burden mostly lies on the sellers who can then extend it to the consumer through price discrimination. In essence, it leads to market saturation.
Increasing excise taxes as opposed to minimum price on alcohol is vital when looked at from the public health perspective whereby, it may lead to a fraction of producers downgrading the quality of their products. This leads to a relatively low tax on some of the beverages despite the fact that alcohol content in it is high. However, the drawback to the Minimum price is that has the potential to increase revenue in most of its jurisdictions which then leads to inflation of the prices of its closely related commodities (Boffat et al, 2014). Furthermore, they will remain within the privately licensed alcohol retailers making the government to forego it altogether unless means of recouping it are advanced and implemented. On the other hand, there is an appeal created by the taxation because it leads to an increment in the revenue which is then collected by the government using its well-established mechanisms and hence ploughed back to the community.
In essence, circulation of income is community based while the domination of individual interests on the other side of the spectrum only leads to loss of income that is meant to compensate people for paying the higher prices on alcohol. While the minimum price offers a greater reduction in the heavy consumption at a much lower cost to consumers, it is not inclusive to all the population but excise tax does by providing incentives for the improvement of the lives of people using their own taxes as aforementioned.
Monopolistic competition exhibits a highly inelastic demand in the short run which implies that consumers are not sensitive to changes in price. As a result, firms are bound to make economical profits because they can adjust prices to maximize on revenues. The profit is therefore positive in the short run but in the long run, it starts approaching zero which alludes to an elastic demand whereby consumers are able to detect any changes in prices and either increase or reduce their consumption levels (Warren, Harding & Lloyd, 2005). In this case, firms are tempted to increase prices with the belief that it will lead to an increase in the consumption levels. On the contrary, consumers react to such changes by reducing their consumption indicating a rather a responsive attitude to producer tactics to maximize on economic profit.
In this case, the manufacturer’s price of the table will reduce in the long run because the inefficiencies in the market sets in which achievers neither of the productive value nor the allocative value. In essence, the profit maximizing level of production will lead to a net loss in both the producer and the consumer surplus (Thomas, 2012). Basically, what makes the table manufacturer to experience a reduction in the price of the table in the long run is that there is elasticity of demand. The price will move towards zero more so when there is any slight change in the price of a good. Furthermore, according to Klimex, Roberts & Xu (2017), in the long run, in the long run, a monopolistic competitive market will produce goods in which the long run marginal cost (LRMC) curve makes an intersection with the marginal revenue (MR). However, the Long run average cost (LRAC) curve will indicate the least price that a good will be sold and in this case, a table. The price that the table is sold falls on the Average Revenue (AR) curve. This implies any fall back which eventually means heading to LRAC will break the firm farther.
Oligopolistic markets have interdependence in their decision making. Situations that a firm decides for instance a massive advertising campaign, it will provoke the same course of action among its counterparts. Secondly, there are no barriers to entry and exit of firms in the market. Most of the time, firms have a lenient a meagre operational costs across the industry. It means that almost all of them lie within the same scale of operation with regard to profits and losses. However, in the long run some barriers will creep in because of the emergence of economies of scale whereby firms expand their scale of production much to the disadvantage of those wishing to enter the market. Lastly, they undertake massive advertising of their products. Firms are generally competitive because none of them exercises market dominance. So in order to increase sales, they have to spend heavily on advertising to capture the market. Australia has oligopolistic firms which can be identified based on the aforementioned characteristics. Oligopolistic markets in Australia includes Bridgestone, Hoyts, Dunlop, Coca Cola, Carlton United, Kellos Dulux among others. These firms sell quite similar products as indicated by Bridgestone and Dunlop which deal with car tyres. However, the fact that there are many of them means that they have heavily invested in adverting of their products to capture their market. Taking part in advertising as influenced by another firm also connotes to instances of group behavior as well as interdependence which is a key feature of oligopoly.
Monopolistically structured market is characterized by the existence of restrictions to entry and exit of other firms in the industry. This is down to the fact that he enjoys massive profits which make them control inputs in the market (Nikaido, 2015). Other firms cannot dislodge it as a result making it difficult to penetrate the market. Secondly, it is basically a single seller coupled with many buyers who can take part in unhealthy competition such as price discrimination to scare of other firms and hence establish market dominance. He is also the price maker. Thirdly, a monopolistically structured market is precisely based on the absence of close substitutes in its products since all his units of commodities are similar (Dhalla & Oliver, 2013). In Australia, the supermarket industry has seen a far entrenched monopoly in terms of Woolworths and to some extent Coles. These two firms although they have created another form of monopoly. They control 80% of the supermarket chains in the country (Larder, Lyons & Woolcock, 2014). Because of this, they enjoy super high profits which makes them untouchable. They then able to decide the prices of goods because others have to follow suit.
A market duopoly results when a set of conditions are met. For instance, when two firms command a greater share of the market while the rest are basically operating on a very small budget. This makes the two establish more control by using tools such as price discrimination, patent rights among others. Generally lesser firms are then unable to catch up with these two elite firms.
Mergers between two firms can also lead to duopoly. All firms may be in the same level of operation with regard to their assets, liabilities and capital and even the scope of their market. In other words, it could basically be a perfectly competitive market structure (Tyers, 2015). However, in order to control inputs in the market and generally in the economy, two firms decide to come together to strengthen their bargaining power in the allocation of resources in the market. This will then alienate the rest of the market and establish them as a monopoly. While this takes place, another group of firms may also break away to form a super alliance which will compete with the initial firm. In essence, there will be two big firms controlling the rest.
Collusion is another ideal situation that leads to the creation of a duopoly. Two firms which may control closely related products decide to form a kind of partnership to enhance their control of their individual portfolios (Tanaka & Sato, 2014). For example in 2012, Apple Company was accused of colluding with top publishers to control the e-book market by using its iBook store program.
In the above diagram two firms, say Apple Company and one of the publishing firms are represented by Q1 and Q2 in which all of them have equal interest in the e-book business that they then produce at zero costs. Each firm sells its output in a straight line demand curve as indicated by maximum output 30 units. Each of these firms therefore acts on the assumption that its competitor will sell its own output to maximize profits. In this case, Apple and the publishers decide to produce half the output each as indicated by the isoprofit curve reaction of Q1 at 15 units while Q2 is also facing the same at 15 units. This means that collusion leads to half output production by the firms. Each of them reacts with regard to the inelasticity of demand. Once consumers are aware of this, it spells chaos for the firms involved.
References
Boffa J, Tilton E, Legge D, Genat B (2009) Reducing the harm from Alcohol, Tobacco and Obesity in Indigenous Communities: Key Approaches and Actions Report prepared for the National Preventative Health Taskforce. Canberra: Commonwealth of Australia.
Dhalla, R., & Oliver, C. (2013). Industry identity in an oligopolistic market and firms’ responses to institutional pressures. Organization Studies, 34(12), 1803-1834.
Dunne, T., Klimek, S. D., Roberts, M. J., & Xu, D. Y. (2013). Entry, exit, and the determinants of market structure. The RAND Journal of Economics, 44(3), 462-487.
Fogarty, J. (2006). The nature and demand for alcohol: understanding elasticity. British Food Journal 108: 316–332
Klimek, S., Roberts, M., & Xu, D. Y. (2017). Entry, Exit and the Determinants of Market Structure. Policy, 6, 17.
Larder, N., Lyons, K., & Woolcock, G. (2014). Enacting food sovereignty: values and meanings in the act of domestic food production in urban Australia. Local Environment, 19(1), 56-76.
Nikaido, H. (2015). Monopolistic Competition and Effective Demand. (PSME-6). Princeton University Press.
Nocco, A., Ottaviano, G. I., & Salto, M. (2014). Monopolistic competition and optimum product selection. The American Economic Review, 104(5), 304-309.
Pettinger, T. (2014). Examples of elasticity. Economics Help. Retrieved from: https://www.economicshelp.org/blog/7019/economics/examples-of-elasticity/
Ramstedt, M. (2010). How much alcohol do you buy? A comparison of self-reported alcohol purchases with actual sales. Addiction 105: 649–654
Satoh, A., & Tanaka, Y. (2014). Relative profit maximization and equivalence of Cournot and Bertrand equilibriums in asymmetric duopoly. Vol 1: 819-827
Simshauser, P., & Whish-Wilson, P. (2017). Price discrimination in Australia’s retail electricity markets: An analysis of Victoria & Southeast Queensland. Energy Economics, 62, 92-103.
Stockwell, T., Thomas, G. (2013). Is alcohol too cheap in the UK? The case for setting a Minimum Unit Price for alcohol Institute of Alcohol Studies. London
Thomas, G. (2012) Price Policies to Reduce Alcohol-Related Harm in Canada Alcohol Price Policy Series, Report 3. Canadian Centre on Substance Abuse. Ottawa.
Tyers, R. (2015). Service Oligopolies and Australia’s Economy?Wide Performance. Australian Economic Review, 48(4), 333-356.
Warren, N., Harding A., & Lloyd, R. (2005) GST and the changing incidence of Australian Taxes: 1994–95 to 2001–02. J Tax Res 31: 114–4
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