Would the microchips industry benefit from an oligopical market structure?

Anti competitive behaviour is when a firm or group of firms may engage in order to restrict inter-firm competition to maintain or increase their relative market position and profits without having to provide goods and services at a lower cost or of a higher quality. I recently read in an FT article that there have been anti-monopoly investigations into the microchips industry due to allegations of price-fixing by South Korea’s Samsung, SK Hynix and US-based Micron Technology. These three firms control about 95% of the global market for dynamic random-access memory chips. This oligopical market structure means these firms cannot act independently and need to work interdependently. But to what extent is the microchip industry best suited to have an oligopical market structure, from a consumer’s perspective?

Firstly, with only a few businesses offering products or services, it will be easy for consumers to compare and choose the best option for their needs. In other types of market, it can be very challenging to thoroughly look into all the things offered by a huge group of companies and then compare prices. However, a problem that can arise from this is if the firms dominating begin to collude and choose to produce very similar products with little investment into research and development to save costs. Generally, companies in oligopolies become very settled with their ventures, as their operations and profits are guaranteed. This means that they would no longer feel the necessity to create new innovative ideas. This means products can be produced with low quality and there may be no variety at all in the market for microchips, which is bad for consumers with different needs and wants.

On the other hand, an advantage for consumers of the microchips industry operating under an oligopical market structure is that the prices in an oligopoly are stable. Changing the price of their microchips can have potential risks for a firm, whether it be lowering or raising the price. If a firm decides to lower the price of their microchips, although in the short term they will see an expansion in demand due to customers being willing to buy more of their products, this is not permanent and they could potentially lose their market share in the long term. Therefore keeping their prices stable is a rational strategy for the three dominating firms in the microchip industry. This is beneficial to consumers, as they do not need to change their budgets in response to changes in the price of these goods. 

Is the significance of government intervention overlooked?

A common discussion in the field of economics is the extent of which government intervention can benefit an economy. Government intervention is any action carried out by the government or a public organisation with the direct objective of having an impact in the economy, beyond the current provision of public goods. Government intervention can be essential in correcting market failures or to achieve a more impartial distribution of wealth and income. However, many economists are more inclined to raising awareness to the benefits of a free market. However, I disagree with this and believe there is a need for government intervention.

An economy operating under a free market means that private individuals and firms take economic decisions. In a pure free market, there would be no government intervention at all in the economy. Adam Smith in his book ‘The Wealth of Nations’ strongly supported the idea of a free market due to the theory of the invisible hand (something I have talked about in a previous article). In a free market, people attempt to maximise their individual utility, which can indirectly lead to the best outcome for others in the economy. However, this can have its disadvantages.

A significant problem is inequality. A free market provides no social security net for those who are unemployed or on a low income. The nature of a free market is that the benefits tend to accrue to a small number of people who have the advantage of property and monopoly power, leading to less equitable distribution of wealth. Moreover, large firms can dominate certain markets, even when there is competition by exploiting suppliers and consumers to maximise profits, leading to monopolies.

Furthermore, the lack of public goods in a free market can be seen as a problem. A public good is a good with the characteristics of non-rivalry and non-excludability, which is usually provided by the government. In a free market, individuals will be looking to profit maximise and therefore won’t see the need for the development of essential public goods like street lighting or national defence as they’d believe the opportunity cost is too high.

Similarly, due to profit maximisation being the biggest motivation for firms, the quality of goods and services may decreases in an attempt to reduce costs unethically and increase profit margins. This may be in the form of harm to the environment through polluting landscapes (which is likely to occur when there are no restrictions from governments) or by exploiting workers. These are some reasons why I believe a free market would be damaging to an economy and government intervention is a necessity to prevent multiple market failures.

The Productivity Problem: How can the UK fix it?

I recently read an article in the Economist about the ‘Productivity Problem’ and how the UK’s productivity is 20% below the average of other nations in the G7. It got me thinking about what solutions there are to fix this problem. Productivity is a measure of the efficiency of factors of production. Supply side policies are policies, which are used in order to increase aggregate supply. These can be used to improve or increase the factors of production, hence increasing the UK’s productivity.

One example of a supply side policy might be to improve education and training, as this will result in workers becoming more productive as they have an improved skill set and will hence provide a higher quality of labour. However, it must be understood that this is not a policy that can have an effect overnight, as there will be an inevitable implementation lag for new training and education schemes to be designed and for these to significantly improve the quality of labour, it may take more than one economic cycle. Furthermore this is a very expensive project for the government so you would have to consider the opportunity cost and whether the government spending could be put to better use like an alternative supply side or even demand side policy.

Another supply side policy that can be implemented by the government could be introducing a reduction in income tax. This would be effective in increasing the quantity of labour as this would act as an incentive for potential workers to get into the labour force, as they will be encouraged by the idea of having to pay less tax. This increase in the quantity of workers will result in productivity in different industries increasing as there will be more workers for the same projects. However this policy will be more effective if there is equal attention into fiscal policies that increase aggregate demand in order to keep the level of capacity utilisation high.

Another policy that could be done by the government is to abolish the minimum wage as this can reduce the cost of production for firms as it is argued that minimum wages fix wages in the labour market above the equilibrium wage rate, which causes excess supply and therefore inefficiency. Getting rid of the minimum wage will bring wages back down to the equilibrium wage rates in the economy, which therefore reduces the cost of production for firms, which makes the labour market more efficient and therefore increases the productive capacity of the UK economy. However, although this may increase the efficiency of the labour market, it may result in the quantity of labour being reduced, as the lower wages will put off workers from accepting the jobs as they may feel that they are not being paid enough.

Can fear define an economy?

Behavioural economics is an aspect of economics, where elements of psychology are added to traditional mathematical models in order to better understand decision-making. I have become fascinated by these studies and have recently read many books regarding different behavioural economic researches. Economics is a study of understanding the choices individuals within an industry make and I believe taking into account emotions is a pivotal aspect in making economic predictions.

Lets look into the issue of fear within economics. It can’t be denied that the fear of future global events and economic history influence economic decision-making. A main cause of fear within an economy is uncertainty as handling large sums of money is not made easier when events occurring in the global economy make it hard to predict what will happen. That is one of the main concerns of Brexit, the uncertainty.

Hysteresis is an idea that can show the impact of fear on consumer behaviour. Hysteresis is when people are influenced by events in the past. Even if circumstances are different in the present and there is strong evidence of improvements from past events, this still remains a strong influencing point within people making economic decisions. One study I did which seemed to support this theory is the fluctuation of demand for inferior goods within an economy.

An inferior good is a good a consumer would demand less off if their income level increased. Examples of companies that operate for the sale of inferior goods are Primark and Poundland. Traditionally, companies selling inferior goods would see an increase in sales during times of recession and a fall in demand during strong periods of economic activity. However, recent research I did into businesses that fall under this category suggested signs of continued growth even during this period of recovery since the 2008 recession.

Companies like Primark and Sports Direct have continued to see exponential growth post the recession, which contradicts past trends. I believe the theory of hysteresis can be argued as a cause of this. Consumers who may have lost money during the 2008 recession may be incentivised to spend their money more carefully and purchase goods from these companies in fear of another recession occurring.

The issue of fear is a very real problem in economics and it is one that must be taken into account when studying economic trends. It’s important to view things from a consumer’s view, who may have inadequate information about things occurring in their economy (inflation rates, economy growth rates etc). When fear influences an individual’s decisions, it can contradict any mathematical model that has solely been formulated off past trends, essentially altering the way we have been looking at an aspect of economics.

How contestable is the low-budget airline industry?

I was recently taught about contestable markets and I began to investigate which industries fall into this category. A contestable market exists when there are one or a number of firms which profit maximise. The key aspect of a contestable market is the low barriers to entry or exit, allowing new businesses to easily enter the market and rival existing firms. Contestable markets are both productively and allocatively efficient and are likely to be efficient in the short run as well. A contestable market is common in most industries, even when it seems that there are only a few dominant businesses with significant market power (an oligopoly). A common argument is whether or not the low budget airline industry can be viewed as a contestable market.

A low cost airline is an airline without most of the traditional services provided in the fare, resulting in lower fares but at the same time less comfort. An important aspect of organisations in this industry is to make up for revenue lost in decreased ticket prices, the airline charge for extras such as food, seat allocating, baggage and priority boarding, In recent years there have been several organisations that have dominated the industry like Southwest Airlines, Ryanair and EasyJet. There is evidence to suggest that characteristics of the airline industry reflect that of a contestable market.

Firstly, the freedom to market is high in this industry. It is easy for a new company to enter the market and advertise their flights due to the introduction of websites like Expedia and Skyscanner which advertise all flights travelling to certain destinations and find you the best deals. Websites like these make it easy for new companies to expose their services to potential customers. Users of these websites are able to view all flights without being restricted to only the big name airlines. As a result of this, new companies are able to rival existing firms by price penetrating (setting prices at the lowest price possible) to attract their target market. This freedom to market shows us how there are little barriers to entry for firms in the low budget airline industry.

On the other hand, it can be argued that this industry is actually a non-contestable market due to the high sunk costs. These are costs that once you pay for, you can’t get back. To get into the industry, the company will have to invest millions into acquiring licenses and following safety measures to be allowed to provide their services for customers. These are costs that you can’t get back so therefore this can be considered as a high barrier to entry, which are typically not there in a contestable market. Additionally, (although minimal in the low budget airline industry), there can be strong brand loyalty for some airline, especially those that offer airmiles to returning customers. This means new firms will have to invest a lot into a advertising, a sunk cost that is non-recoverable. This makes the market less contestable. However, for many customers, brand loyalty is not existent in the low budget airline industry due to more focus on getting cheap prices.

Furthermore, the UK low budget airline industry can be seen as a contestable market ever since the deregulation of the industry between 1987 and 1997, where air transport within the EU was deregulated. With deregulation, subsidies that were previously given to national carriers were removed, allowing fair competition between European carriers. This allows new companies to easily enter the market and compete with existing firms. The UK low budget airline industry is growing and becoming more competitive due to an increasing demand, which is beneficial to new companies as an increase in the number of consumers using flights means there can be an increase in the number of firms providing these services.

I am convinced that the low budget airline industry is a fairly contestable market due to the ease at which new firms can attract new customers through existing flight websites and the theory of perfect knowledge where all firms have access to the best technology. However, there are still barriers to entry and exit present like high initial sunk costs that can result in a loss for new firms. For this reason, it is not perfectly contestable.

Is economic growth bad?

To most people, the achievement of economic growth would be seen as a complete success for an economy in any circumstance.  Economic growth is measured by the increase in a country’s total output or real GDP compared from one period of time to another. The UK’s GDP growth rate has fluctuated over recent years, with the economy being in one of the slowest recovery stages. Yes, economic growth can have many benefits for the UK economy, but it can be argued that unsustained growth can be more damaging to the economy than beneficial.

One of the main aims for the UK government is to lower unemployment. When there is economic growth caused by an increase in aggregate demand, firms are incentivised to create more job opportunities. This is because there will be an increase in demand for labour, as firms will want to produce more in order to capitalise on higher demand. This therefore lowers unemployment. Lower unemployment reduces the strain on the government and taxpayers to support a population of unemployed people. Furthermore, with more people in the labour force, there is more people for the UK government to receive income tax. This is beneficial because the government can use this increased revenue to reduce the level of government borrowing and spend more on public services and investment in the country’s infrastructure.

This investment in public services can help improve the long-term performance of the economy. For example, better infrastructure enables lower cost of trade. However, this can have negative externalities in the form of third party costs caused by pollution and resource depletion. Future generations will not able to function in the same way if resources are lost so it can be argued that if the economic growth is not controlled, it can be unsustainable.

Another problem caused by economic growth driven by a rise in aggregate demand can have negative effects on inflation, potentially causing it to go above the MPC’s target rate of 2%. The AS/AD graph below shows us how an an increase in aggregate demand (an outward shift) would result in the price level (inflation).

The Phillips Curve also shows us how if unemployment is low, there will be high rates of inflation. On the other hand, if the economic growth is caused by improvements in the supply side of the economy, inflation may be actually be reduced in the long term.  However, it can be argued that this increase in economic growth can have negative effects on the current account deficit as it can lead to a rise in the value of the pound and result in a rise in the import rate, as there will be a high marginal propensity to import in the UK. With economic growth, the pound value increases, as there will be more business opportunities in the UK, therefore increasing the demand for the pound, increasing its value. A stronger pound causes exports to become more expensive for foreign countries, which will negatively affect the balance of trade.

In contrast to this, if the economic growth is driven by an expansion in the sales of domestic goods and services in other countries, it may not be a problem. This will generate a flow of money for the UK from abroad, which can be used to strengthen the domestic economy and raise living standards. However, this is a risky strategy as there is high dependence on foreign markets and can be faltered by a recession in foreign countries, which is out of the UK government’s hands. It also depends upon foreign demand and whether producers in the UK can produce goods that will make high sales in other countries, taking into account import taxes.

The consequences of economic growth highly depend upon the causes of it: whether it is aggregate demand driven or aggregate supply driven. Economic growth is obviously better than an economic decline but only if it is controlled to prevent negative externalities.

 

 

Profit Maximisation vs. Revenue Maximisation

I’ve been reading ahead in my A-level economics syllabus and was fascinated by the topic of business objectives. Businesses have two main goals: revenue maximisation and profit maximisation. Revenue maximisation is when a business employs strategies to increase its sales to the highest attainable level. Profit maximisation refers to activities involved in the company’s effort to boost net profit to the highest possible degree given the firm’s available resources. Different roles within a firm focus on either profit or revenue maximisation.

The primary responsibility of a marketing or sales manager is to achieve sales targets over a given time period. In addition to achieving sales targets, a sales manager is expected to maximise sales to provide growth for the business and increase its profit margins. Profit maximisation is a task that is pursued by the general manager or CEO. That person is the one who is in control of all aspects of business operations. He must plan, organise, direct and control all business resources to earn the highest attainable net profit in order for the firm to not become insolvent.

I partially agree with the idea that revenue maximisation is a more realistic and achievable business objective than profit maximisation. To achieve revenue maximisation, a business must concentrate solely on revenue transactions and this can be accomplished by employing various sales strategies and programs. Profit maximisation entails a more complex program of business plans and activities that does not concentrate on sales alone. It encompasses both revenue and expenditure. A business manager must increase revenues, decrease costs or do both to increase net profit. However, it can be argued that profit maximisation in the long run is essential for a business to stay afloat.

On the other hand, when looking at a business’ objectives in the short run, their number one priority would be revenue maximisation. Revenue is the total number of sales being made a business. By maximising this, a business would be able to grow a larger customer base, which would consequently lead to the firm obtaining a larger market share. This would be beneficial to the business when their main goal becomes profit maximisation, as having a strong share of the market makes it easier to increase prices or reduce expenditure (in order to increase profit margins).

For example, a firm which has a large market share would be able to get good deals from suppliers and would therefore be able to use economies of scales to produce more for a lower price. This therefore reduces expenditure and also means the firm can increase revenues as they have a higher level of production, there being able to maximise profits. However, this depends upon the type of business. A small business with minimal financial investments might struggle to sustain their business activities without healthy profits. Furthermore, a business with many shareholders may also put focus on profit maximisation in order to provide large dividends for them.

How do Google make their billions?

I was recently asked a question concerning Google. How do Google make their billions when their core service (their search engine) costs nothing for users? As of 2018, Google is the third most valuable brand in the world with a brand value of $120.9 billion. Although this figure has increased from last year by 10%, Google has been overtaken by Amazon and Apple in the rankings of most valuable brands in the world (where Google was number 1 in 2017). But how are Google able to compete with such large companies. The answer to this is advertisements.

Approximately 85% of Google’s revenue is generated through their advertising platforms. Next time you search for something on Google, you may notice several ads on the results page. These are essentially Google’s “money-makers”. Google’s two main platforms for advertising are Google Adsense and Google Adwords. Search engines can generate money from ads by working through a “pay-per-click” scheme, where they are paid a percentage of money every time someone clicks on an ad they have displayed.

Companies will bid for the advertisement rights of specific keywords or phrases that are searched on Google in order to grab the attention of their target markets. When these words/phrases are searched on Google’s search engine, the ads of the company that have won the bids will be displayed. For example, JD sports might own the rights to the keyword “trainers”, so every time someone searches a phrase like ‘new trainers’, ads from JD sports will be displayed around Google’s search results. So essentially Google earn revenue just by displaying ads from advertisers, earning more when users actually click on the ads.

However like every other wealthy business creator, the owner of Google and his team have looked for other ways to earn its revenue with successful results. An example of this is the ‘Google Play Store’ on android devices. Google receives at least 30% commission on all app sales that are generated by app developers on the Play store. The number of installations that occur on this store is increasing every day and it’s no surprise that Google’s 30% share of sales is generating an insane amount of revenue for the company. In 2014, Google reported that it had earned $10 billion from Android apps and that number is obviously a lot larger today. However apps aren’t the only thing. Google also make profits from movies, E-books and music on the Play Store.

Furthermore, Google also delved into the technology sector with particular focus in the hardware industry. Their most successful output from this business venture was the release of their line of Nexus and Google Pixel gadgets. The first gadget by Google was the Nexus one, which was released in early 2010 and the popularity of this smartphone brand increased exponentially with there being 8 new phones released in the next 5 years. However the Nexus brand was eventually discontinued in 2016 and replaced by the new Google line ‘Pixel’, which has been a great success with the release of phones, tablets and laptops.

But what next for Google? It’s almost certain that the new innovations from Google will not stop here with the brand showing glimpses of their future projects involving robotics, self-driving cars and even space exploration. Maybe these new business ventures can help get Google back into that number one place in the rankings for most valuable companies.

Will robots replace human labour?

An article in the FT a few weeks ago discussed the effects the automation of industries can have on the labour market. Industrial automation is essentially the use of computers, robots or information technologies to replace human beings in handling different processes of an industry. A concern amongst many individuals is the possibility of there being no need for human labour in the near future, potentially increasing unemployment.

The article spoke about how the ADB (Asian Development Bank) claimed that the expansion of robots in various industries could potentially create more jobs for potential workers rather than take them away. This seems odd, considering these industrial robots and others forms of artificial intelligence are replacing humans in many jobs by being able to do them better.

However, it can be argued that although there have been huge developments in technology compared to 10 years ago, there is no evidence to suggest that the need for humans to manage and sustain this technology will decrease. Past trends show us that although the use of technology in industries has grown exponentially, there has still been a steady decline in unemployment since the 2008 recession.

It can’t be accurately predicted whether the automation of industries will boost or harm jobs and to what extent, but what can be studied is the impact it will have on an economy. The main desired outcome from industries when they invest in technology is growth, both in productivity and their businesses. Investments in machines, computers and robotics drive productivity growth as the quality of labour in industries increases.

Most goods that are currently manufactured require machines to be able to maintain sustainable total factory productivity (TFP). The expansion of robots within a factory essentially make the machines within production more efficient, as even if the human component remains the same, increases in efficiencies through robotics leads to an even higher TFP, which results in a higher overall output within an economy, resulting in a growth in GDP.

What this shows us is that although robots may take away low-skilled jobs, they are creating demand for high-skilled human labour to be able to supervise robots. These jobs will have higher pay which will act as an incentive for potential workers and future generations to improve their education and skill set to acquire these higher-skilled job, which in the long term will result in an improved workforce within an economy.

The Invisible Hand: Is Greed good?

The ‘Invisible Hand’ is a theory that proves how there is nothing wrong with people acting in their own self-interest. In a free market, the combined force of everyone pursuing his or her own individual interests is to the benefit of society as a whole, supplementing everyone. I was recently taught about this idea and it helps explain why free markets have been so essential to the growth of complex modern societies.

There are two aspects to the invisible hand theory: a seller/producer trying to make a profit from selling goods and a consumer looking to purchase cheaper goods. Both of these contribute to create a more efficient economy which can lead to market equilibrium in different industries.  People pursuing self-interest can contribute towards societies’ well-being even if they don’t mean to.

However, not all implications of the invisible hand are positive. A main problem that can arise from this is monopoly power. With no government regulations and price controls, firms with monopoly power can push prices above the equilibrium. As a result of this, firms can become inefficient due to a lack of competition making them potentially stagnant.

Furthermore, the invisible hand theory can be used to support selfish actions that could actually negatively affect society, which is an incorrect approach. It is important to be able to distinguish between self-interest and pure selfish greed when implementing a free market economy. Someone purely driven by greed might choose to cheat the law in an effort to benefit himself to the loss of others.