AP Material – Monopolies

29 11 2010




AP Material: Cost Curves, Perfect Competition and Monopolies

11 11 2010




Wal-Mart: the best thing since sliced bread.

8 11 2010

Is the world better-off or worse-off because of Wal-Mart?

Surprisingly, you will not find a Wal-Mart at every corner in Toronto but Wal-Mart’s presence is still around. For all our needs, most people turn to Wal-Mart to purchase it, expecting the lowest prices and a convenient one-stop shop. Though this business faces much criticism about being a category-killer, driving out local businesses and enabling poor labour conditions in foreign countries, the world has greatly benefited from the growth of Wal-Mart.

Taking criticism
There is no denying that Wal-Mart holds a large market share. In fact, it exists in an oligopoly along with Zellers and Target. Being the largest, Wal-Mart holds a lot of power in the marketplace, especially concerning pricing of their products. The company’s ability to offer low prices has driven local businesses away because they just could not compete. This has led to many negative views about Wal-Mart, giving the perception that it is a large corporation who does not care about social welfare. However, is it really Wal-Mart’s fault for trying to gain a competitive advantage through pricing strategies? In a free-market economy, businesses should have the freedom to produce and price items as they please, so why is there an exception for Wal-Mart?

Also, the company has been criticized for enabling low wages, not only in their stores, but at the factories of their suppliers. Many reports claim that Wal-Mart gives a low pay to their employees and do not offer any rewards or bonus packages. This means that a Wal-Mart salary is not sufficient to support a family. Let’s think about this for a moment: why would a Wal-Mart worker expect to be paid a high salary? There are no job requirements and most of the work is unskilled labour, meaning, even a high school student could work at Wal-Mart. Logically speaking, there are high volumes of people who would qualify for the position; therefore, when supply of labour is high and demand for the labour is low, wages will be low. The same could be said for the factories in foreign countries. Wal-Mart is China’s largest customer and there is reason to this. China has a large population and thus, large work force. It doesn’t take too much skill to work on an assembly line; therefore, wages are lower in factories. Wal-Mart wants to minimize costs and China can help them do that.

Leading the market
Wal-Mart is a prime example of a successful business model. They take advantage of business opportunities, are consumer-oriented, are continuously changing/adapting, and strive to maximize profits.

They are the leaders in outsourcing. Being one of the first businesses to export labour, Wal-Mart has built a strong foundation on their low fixed-cost business and has inspired other companies to follow their lead. This increases foreign investment in other countries and provides multiple new jobs in those countries that would have otherwise been non-existent.

Wal-Mart’s standards for competitive pricing puts pressure on suppliers to be more efficient. In the featured graph, Wal-Mart’s low prices decreases marginal revenue, therefore, the break-even quantity is higher and profit maximizing quantity is lower. However, if suppliers can find ways to be more efficient and produce under Wal-Mart’s price range, they gain shelf space in one of the largest retailers to exist. The mass volume of traffic alone would increase sales.

Wal-Mart pushes prices (and thus marginal revenue) down putting pressure on suppliers.

At the end of the day, it is a very basic principle: customers like low prices, therefore, businesses should satisfy customer wants and needs. Wal-Mart has done so with their pricing and by offering a wide range of goods and services in one location. They’ve gained such a large and unmatchable competitive advantage that most consumers are willing to overlook any of the company’s faults and suppliers are willing to restructure their organization in order to get their product in stores. Wal-Mart has created such a niche in the marketplace that it cannot be replaced or terminated.

In conclusion, the world is better off with the existence of Wal-Mart. They have increased globalization and trade, brought more inexpensive goods to consumers, created a source of competitive advantage for producers (in product placement), pushes competitors to improve their own operations, and show what it means to be a successful business. Without Wal-Mart, cities would be stuck in an economic plateau that protects local businesses so much that there is minimal room for growth and improvement.





The Wal-Mart Experience That Has Captured Us All.

7 11 2010

“Wal-Mart is a retail planet with a gravitational pull so strong it shapes our economic universe in ways we can barely comprehend.” – Bob Thompson, The Washington Post

The above quote sums up Wal-Mart pretty well.

From a consumer point of view, it certainly seems like a planet. If you need something, Wal-Mart has it. There’s no trouble getting there, since they’re everywhere. And once you get there, there is no problem parking in an endless supply of pavement and white lines. Inside, there is an endless supply of whatever it is you came for – and whatever it is you didn’t come for, but… its so cheap, why the heck not?

“Push” is a strategy in marketing whereby a company  “pushes” the product in customer’s faces, hoping they will buy it. These companies try to attract returning customers to build brand loyalty. Of course, there has to be an incentive for customers to come back – Wal-Mart’s incentive is economic. Wal-Mart is synonymous with the words “rollback” and “low prices”. Its cheap prices combined with our society’s love for material goods keeps customers coming back, under the guise of saving money.

When compared to other retailers, you are technically saving money. Instead of spending $10 on a shovel, you spend $4. How Wal-Mart gets you is when you don’t need a shovel. Economic theory assumes that we are all rational. In reality, that’s not true. Your eye catches the happy face with bright letters that exclaim “ROLLBACK!”, and the bold numbers that seem to yell the price at you. Immediately, you start to rationalize: “well, it’s going to be winter and I’m going to need to shovel. The one I have in the garage is starting to look old. What if I want to buy it later? I might as well buy it now and save myself another trip.” And the same thing happens with ten other items and you walk out of Wal-Mart with ten things you don’t need, and you have no idea what just happened. Read the rest of this entry »





Free To Lose – The Power of (Dr. Friedman’s version) of the Market

7 11 2010

Journal Entry Two (On Prompt Three)

The Friedman Free Market

Dr. Friedman seems to have some clear ideas of how an ideal market should operate. His ideas are so clear and one sided that some might find them irrational. He believes in a free market economy, a pure free market economy. I personally believe too much of one thing is not good. Therefore, I support a free market with certain mixed market components, not the extreme version cooked up by Dr. Friedman. I have no problem with many of the things that Dr. Friedman says but some of it is a bit too irrational and illogical. Moreover, a pure free market economy has never existed and never will as the 16th president of the United States Jean Kirkpatrick said, “There is no pure free-market economy.” Therefore, the primary purpose of this entry is not to prove that a free market will not work, as it does to a certain degree of effectiveness, but rather to prove the flaws in a pure free market as Dr. Friedman proposes.

Law And Order

The purpose of the government is to serve the people’s needs. How can the government serve the people’s need if it is not allowed to have a hand in people’s monetary matters? In a democracy the fate of the people and the government is connected, the two bodies are interdependent. In all free markets there is a certain degree of government intervention no matter what, there is no pure free market. But we have to decide on where the government can interfere and where it cannot. However, it is necessary that the government regulates and implements laws in order to prevent business fraud. Competition does not always necessitate that the best quality products will enter the market, but rather the most profitable products will. It is up to the government to ensure that product quality and business integrity is maintained. There must be a neutral body between the businesses and the consumers that prevents unethical business activities such as monopoly, price fixing and price gouging. An economic system without any degree of regulation would cause a lawless market, unless you trust firms to look out for consumer interests.

A different corporation

Moreover, as Canadians we would probably have nightmares if  something like our health care was privatized to ensure a pure free market. There will always be claims that it can be done cheaper, better and more efficiently if these sectors were privatized. However, crown corporations, government controlled corporations, have served us well. Few notable crown corporations are the Canadian Broadcasting Corporation (CBC), Via Rail and Canada Post. Don’t get me wrong, Canada ranks 7th in the global economic freedom index, one above the United States. But we still have a progressive tax system, tariffs on trade and numerous public services. As a daily commuter I can tell you that the TTC is not perfect, but it gets me where I need to. There have been global attempts to privatize public transit but all of them have failed miserably, Vancouver and London U.K are two examples. It goes to show some markets are best left public. Furthermore, the profits from crown corporations come back to benefit the public and help provide further governmental services. Moreover, there has to be a controlling body which regulates services that we cannot afford to privatize, for example the army, fire service and police. We call this controlling body the government. Unless, Mr. Friedman can enlighten us on how we can turn fire service, law enforcement and the army into private services I think we need the government.

 

You may have seen one of these notorious red boxes in your neighbourhood. Canada Post is a crown corporation.

 

Human decisions, inhumane market

In a free market economy the private entrepreneur is not out there to look out for the interest of the public, this is why we need the government. A tragic flaw of the free market is it makes few better off and leaves the rest where they are (or worse). Creating a giant gap between the rich and poor. Whereas, the mandate of the government is to ensure the improvement of the economic situation of those left behind. A free market is a market controlled by human actions, but human actions can be irrational. Money will always get in the way of ethics, morality and humanity in a free market. Even though, the market is determined by human actions, the market by no means is humane. It is up to the government to look out for the people, this is something the firms will not do. I would like to end this entry with a quote from the former head of U.N, Kofi Annan, who said “We have to choose between a global market driven by calculations of short-term profit, and one which has a human face.”

Canada ranked 7th overall in the global economic freedom index of 2010.