...Kampala International University Abdifatah Adan Egeh Course work material +256718275925 caloolgeele@hotmail.com Introduction The analysis of barriers to entry and exit is fundamental to the assessment of market power and market efficiency. A firm or firms may exercise market power for a significant period of time only if barriers to new entry exist. Thus in determining whether or not a proposed merger is against the public interest, or whether a firm (or firms) is abusing monopoly or market power in antitrust cases, analysis of entry conditions is of primary importance. One might therefore expect to see rather extensive and sophisticated analyses of entry conditions, or barriers to entry, in monopoly and merger cases that come before competition authorities in the United States, United Kingdom, or member states of the European Union (EU). One might also expect that competition authorities would have placed a great deal of emphasis and effort on achieving a coherent and consistent framework for the analysis of entry barriers in a manner that makes use of the latest thinking on the subject by industrial organization economists. However, until very recently no competition authority that we are aware of has attempted to formulate a coherent and detailed framework for the analysis of barriers to entry, despite the significant degree of effort that has been put into clarifying the related problems of market definition and the measurement of monopoly or market power....
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...Market structures are traditionally distinguished between four types i.e. perfect competition, monopoly, monopolistic competition and an oligopoly. They are determined on the basis of the number of firms in the market, the type of product, whether homogenous or differentiated and whether barriers to entry exist or not. Due to various specifications of all structures a “casual chain” is seen running from the market structure to the performance of that industry (Sloman, J. Hinde, K. pp 222) A monopoly involves one firm producing a good without close substitutes; that coincides with the firm. Barriers to entry exist thus making it difficult for new entrants to penetrate the industry and be a threat. The concept of the monopoly is relative since it crucially depends on how broadly or narrowly the product and the market are defined as. A monopoly firm can set the price as it is a price setter thus it has a certain degree of monopoly power that is determined by the difference between price charged and marginal cost expressed as a proportion of price. Monopolists can choose either the price or the level of output, but not both as it still faces a negatively sloped demand curve. Thus the monopoly firm does not have a supply curve. (Sloman, J. Hinde, K. 2007) For the monopoly firm to make supernormal profits it has to be a profit-maximizing firm. Therefore the firm shall not choose a rate of output Q that corresponds to the price inelastic segment of the demand curve. It will locate...
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...For the exclusive use of G. Alvarado, 2015. 9-707-493 REV: AUGUST 13, 2007 MICHAEL E. PORTER Understanding Industry Structure The essence of the job of the strategist is to cope with competition. The arena in which competition takes place is the industry in which a company and its rivals vie for business. Each industry has a distinctive structure that shapes the nature of competitive interaction that unfolds there. Understanding the underlying structure of a company’s industry, now and in the future, is a core discipline in strategy formation. On the surface, every industry is different. Consider the global automobile industry, the worldwide market for art masterpieces, the booming private equity industry, and the heavily regulated health-care delivery industry in Europe. At one level, these industries appear to have little in common. Industries also differ in another crucial aspect: they register sharply different levels of average profitability in the long run. For example, Exhibit 1 shows a histogram of long-run return on invested capital in the United States for more than 400 industries. The most profitable industries generate much higher returns than the least profitable. Equally significant differences arise in other countries, both advanced and emerging. To understand industry competition and profitability, however, one must look beyond their differences and view industries at a deeper level. In any industry, there are five basic competitive forces—diagrammed...
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...The Five Forces Model An industry can be defined as a group or companies offering products or services that are close substitutes for each other. Close substitutes are products or services that satisfy the same basic consumer needs. For example, tea and coffee are close substitutes. Managers have to analyze competitive forces in an industry environment in order to identify opportunities and threats confronting to a company. Michael E. Porter of the Harvard School of Business Administration has developed a framework that helps managers in this analysis. Porter’s framework, known as the five forces model focuses on five forces that shape competition within an industry: (1) the risk of new entry by potential competitors, (2) the degree of rivalry among established companies within an industry, (3) the bargaining power of buyers, (4) the bargaining power of suppliers, and (5) the closeness of substitutes to an industry’s products. A. Potential Competitors Established companies try to discourage potential competitors from entering, since the more companies enter an industry, the more difficult it becomes for established companies to hold their share of the marker and to generate profits. Thus a high risk of entry by potential competitors represents a threat to the profitability of established companies. On the other hand, if the risk of new entry is low, established companies can take advantage of this opportunity to rise prices and earn greater returns. The strength of the...
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...Activity-Based Costing and Predatory Pricing: The Case of the Petroleum Retail Industry DISCUSSION QUESTIONS: 1. What are product-cost subsidizations? When excessive costs are charged to high-volume products while insufficient costs are charged to low-volume products. One example of how this occurs is when product-costing is based on labor-hours. Products that are produced infrequently will typically require less annual man-hours when compared to major products. Calculating the costs of several products based on a traditional volume-based costing system ignores other costs that are not related to volume. These costs may be engineering, set-up time, material costs, or other variables. 2. What are possible consequences of product-cost subsidizations? When prices are based on cost, product-cost subsidization can lead to increased demand for undercosted and underpriced low-volume products, which are probably being sold at unprofitable prices. Conversely, companies experience reduced customer demand for overcosted, overpriced high-volume products and services. State and federal laws have been enacted against predatory pricing, which is the selling of products below cost as a deliberate action to drive out the competition. Alternatively, products may appear to be priced below cost because of the use of unrealistic, unit-based traditional costing systems, which results in the appearance of predatory pricing where it does not exist. 3. List alternative approaches...
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...COST ACCOUNTING FALL 2012 PROJECT The Effect of Cost Structure on Predatory Pricing To win a predatory pricing case, law enforcement officials traditionally have had to prove that a company sold products or services for less than their average variable cost. Companies with relatively high fixed costs and low variable costs are less likely to be accused of predatory pricing than companies with high variable and low fixed costs. A court case in which the U.S. Department of Justice alleged that American Airlines committed predatory pricing against smaller airlines demonstrates this point. The airline industry has relatively high fixed costs and low variable costs, at least in the short run. If one defines a “unit” as a passenger flying an already scheduled flight, the additional cost of a passenger is small—charges for credit cards, a small amount of fuel because of extra weight, a beverage or two, and not much else. If one defines a “unit” as a flight, then more costs are variable—flight crew costs, fuel, and the cost of baggage handling. Even if the unit is a flight, a large portion of the total costs are fixed. American Airlines dropped its fares when smaller airlines scheduled competing flights from the Dallas–Fort Worth airport to Kansas City, Wichita, and other cities, arguing that this was simply business competition in the marketplace. The judge in the case acknowledged that American had been a tough competitor but ruled that American had priced its tickets above their average...
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...There are three important implications for strategy: 1. When planning for the future, the managers must account for entry. 2. Managers should expect most new ventures to fail quickly. 3. Managers should know the entry and exit conditions of their industry. Entry and Exit Decisions: Basic Concepts The entrant must sink some capital that cannot be fully recovered upon exit – it is this element of risk that makes the entry decision difficult. The entrant hopes that postentry profits exceed the sunk entry costs. There are many potential sunk costs to enter the market such as specialized capital equipment to government licenses. The potential entrant may use many different types of information about incumbents, including pricing practices, costs and capacity to assess why postentry competition may be like. Barriers to Entry Structural entry barriers exists when the incumbent has natural cost of marketing advantages, or when the incumbent benefits from favorable regulations. Strategic entry barriers result when the incumbent takes aggressive actions to deter entry. Bain’s Typology of Entry Conditions * Blockaded Entry Entry is blockaded if structural barriers are so high that the incumbent need do nothing to deter entry. For example, production may require large fixed investments relative to the size of the market (high sunk entry costs), or the entrant may sell an undifferentiated product for which it cannot raise price above marginal cost (low postentry...
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...Predatory Lending Practices Predatory lending was once a major problem in the United States. This was one of the reasons for the credit crisis in 2008. Unfortunately there were a few companies that were involved in these illegal practices which will be discussed in further detail later. There are different tactics used in predatory lending and several laws were developed to help prevent future predatory lending issues. What is predatory lending? Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through coercive, deceptive, exploitative, or unscrupulous actions for a loan that a borrower can’t afford, doesn’t need, or doesn’t want. Predatory lending benefits the lender, not the borrower by ignoring or hindering the borrower’s ability to repay the debt. These lending tactics attempt to take advantage of a borrower’s lack of understanding about loans, terms, or finances in general (Krulick, 2014). Who can be targeted in these illegal practices? Predatory lenders typically target minorities, poor, elderly, and less educated people. People who need immediate cash are also targeted. For example people that need to pay medical bills, need to make a home repair, or someone that needs help making a car payment. People with credit issues or people who recently lost their jobs can be targets as well. The credit issues often disqualify borrowers from conventional loans...
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...Mutual Mistakes in Contract Law Caryn Williams Southern New Hampshire Business Law MBA--610-X4247 Geri Drelling July 13, 2014 Mutual Mistakes in Contract Law From a personal perspective, this situation is somewhat close to home. I worked as car sales professional for a year and learned many things about the process. In my opinion, Mr. Hartly should have done a bit more research about the models available. In my experience, the consumers I dealt with were more knowledgeable about the products being purchased. In many cases, the consumers would know more about the cars than I would. The internet provided the specifications about the engine and the proper pricing of the vehicle. However, when the consumer was negotiating the pricing and telling the salesperson what he wanted then the specific engine issue should have been addressed right away. As a matter of fact, the specifications of the vehicle are part of the sales presentation and should be given to consumer in the initial discussion. With my knowledge of car contracts, the sales contract is not able to be rescinded due to lack of information. The specifications of the car are on the sticker placed in the window and the information is fully disclose and displayed for the consumer. Contractual capacity is the ability to understand that a contact is being made and to understand its general meaning (Twomey ,2013). However, the fact that a person does not understand the full legal meaning of a contract does not mean...
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...international routes. In addition, Malaysia Airlines System is accused of practicing predatory pricing. It is stated there is a simple test for cross subsidy and predatory pricing. We know that the simple test for cross subsidy is the cost approach. Then it can be analysis if the revenue from a subset of outputs is less than its incremental cost, the subset is the receiver of cross subsidy. In addition, the test for predatory pricing is that any price below variable cost is predatory if it can prove that the price constitutes a threat to an efficient firm. It is stated it must be shown that the predator tries to eliminate its competitors. It is stated and analysis that once the competitors exit the market, then it must also be shown that the predator firm raises the price to recoup the losses suffered in price wars. Meanwhile, in this price war, there is no evidence of cross subsidy. Similarly, the Malaysia Airlines System aggressive pricing is not predatory. It is stated that, Malaysia Airlines System denied the accusation by Air Asia that it was using international subsidies to finance its as “Everyday Low Fares” campaign that stated in the New Straits Times on 16 May 2008 as it launched its zero-fare campaign for local as well as for Southeast Asia destinations that had been launched in May 2008. It can assume that there are accusations made against Malaysia Airlines System that it is practicing predatory...
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...1-Was Continental’s conduct illegal under the Sherman Act? Why or why not? 2-Is predatory pricing a per se violation? (Support your answer). Section 2 of the Sherman Act prohibits monopolizing and I believe Continental’s conduct is illegal under the Sherman Act because ITT is engaged in predatory pricing. ITT Continental lowered the actual cost of the bread to drive a potential competitor Inglis bakery out of the market and the lower prices earned ITT more grocery shelf space. Jennings. Marianne M. Business: Its Legal, Ethical, and Global Environment. 9th Edition. Chapter 16 page 532-533. As per the text (pg 539) price fixing is the following: Any agreement or collaboration among competitors “for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity” is price fixing, is a per se violation of Section1 of the Sherman Act. Horizontal price fixing deals with agreements between and among sellers and competitors to set up prices on certain goods. And vertical price fixing deals with agreements between a manufacturer, distributor, supplier or retailer. Jennings. Marianne M. Business: Its Legal, Ethical, and Global Environment. 9th Edition. Chapter 16 A monopoly is a situation when a company owns all or majority of the market for certain products, goods, or services. This occurs when there is a barrier to entry into the business that lets one company to operate without competition. Microsoft was convicted of having...
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...Introduction The legislation process of Anti-Monopoly Law has been indeed a long journey. The new AML is a tremendous leap forward for China, bringing China into the modern world of antitrust and competition law. The law, which aims to prevent dominance of any one company, was first proposed in 1994. But its pace was slow until 6 years later because of pressure from big state-owned companies and multinationals that had just started doing business in China. It wasn't until 2001, when China joined the World Trade Organization, did the process accelerate. In August 2007, the law was finally passed by the National People's Congress. Although the measure compromised with state-owned enterprises, which dominate industry, people tend to believe it will make way for free market competition against monopolies. It's gained a lot of praise and set a milestone in China's legal history. In our daily life, we can face several kinds of monopolistic practice, for example, if your grocery store sells you a bag of tea with the condition that you buy a pound of sugar that would be a tie-in sale. In this paper, first, I will show the detail in the China competition law, then I will specific the monopolistic practice in Price discrimination which I think we usually face most in our society, and in the last part will be the impact of the Anti-monopoly law. China competition law On 30 August 2007, after more than a decade of legislative efforts, the Standing Committee of the National People’s...
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...There are four main factors retailers consider when setting a retail price. The four factors are (1) the price sensitivity, (2) the cost of the merchandise and services, (3) competition and (4) legal restrictions. Some retailers also often use high/low pricing strategy. High/low pricing is a type of pricing strategy that usually small to medium size retailer firms’ use. Mostly firms will charge you at a high price and after the demand for the item has decreased, the firm will then lower the cost and sell it to customers at a discount price. The high/low pricing has some benefits. The advantages are that this strategy increases profits because high/low pricing lets retailers charge a higher price to customers who are willing to pay and lower the price for price-sensitive customers who are waiting for the sale price. It also creates excitement, sales and promotions are always something to look forward too. Moreover the merchandise sells. Sales allow retailers to get rid of slow-selling merchandise. (Levy & Weitz,2012, p.373). Another strategy that retailers use is the “Everyday Low Pricing” (EDLP) strategy. “Many retailers, like supermarkets, home improvement centers, and discount stores use EDLP. This strategy emphasizes the continuity of retail prices at a level somewhere between the regular non sale price and the deep-discount sale price of high/low retailers.” (Levy & Weitz, 2012, p.372). Some advantages of the EDLP are that it assures customers of low prices, it...
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...16 Pricing Strategies | Definition | 1. Cost-Based Pricing | A pricing method in which a fixed sum or a percentage of the total cost is added (as income or profit) to the cost of the product to arrive at its selling price. | 2. Product Bundling Price Strategies | An advertising ploy in which a few items are offered available to be purchased in one consolidated unit that is regularly stamped at a lessened value contrasted with the entirety of their different buy costs. Item package estimating is frequently effectively utilized by the promoting bureaus of organizations that create PC programming items, fast food suppers and digital TV associations that include assembling numerous items to make a more appealing or sparing entirety. Additionally called bundle arrangement evaluating. | 3. Competition-Based Pricing | A strategy for deciding the cost at which a specific item is sold taking into account the costs of contending items as opposed to on the expense of creation or the measure of interest from clients. Rivalry based valuing can be compelling when the normal cost of contending merchandise is discernibly not quite the same as costs recommended by generation cost or request. | 4. Every Day Low Pricing (EDLP) | It is the valuing procedure utilized by retail locations that gives low costs to the clients each and every day with no extraordinary evaluating markdown, deal, correlation shopping and so on. | 5. Penetration Pricing | A promoting procedure utilized...
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...Discussing the main factors affecting product pricing in the UK Although there are many factors which affect product pricing in the UK, there are three which stand out among all others; firm’s objectives, market structure and pricing strategies. Market structure and a firm’s objectives are usually linked, for example a monopolist will normally profit maximise, whilst a perfectly competitive firm will be forced to sell goods at the market price. Despite these general assumptions, the product’s position in its life-cycle and the firm’s choice of strategy also have significant power in affecting how a product is priced. The first major factor that affects the way that firms set prices in the UK is the objectives of the firm. There are many different objectives that firm’s may follow, each of which affects how firm’s will price their goods. The most commonly assumed objective of the firm is that of profit maximization i.e. producing at the price level where total profit is maximised, either where MC=MR (marginal cost = marginal revenue), or where total revenue - total cost is greatest (Figure 1). Although profit maximization is the most commonly assumed objective, it is not the focus of the majority of firms. This is highlighted by Shipley’s 1981 study of UK firms where he concluded that only 15.9%, of his sample of 728 UK firms, were true profit-maximizers (Griffiths and Wall 7). The dominant form of firms today is the public limited company (plc) which is usually run by...
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