This week we discussed the concept of predatory pricing, which is the act of setting a low price to drive competitors out of business with the intent to establish a future monopoly. Specifically we discussed some of the practices of Wal-mart and the accusations of predatory pricing against them.
I would argue that this is just another business practice that is done on a daily basis in business. If Wal-mart drops the price of certain DVD's from $20 to $5 for a period of time then they are not only going to sell more of those DVD's but they will also have traffic through their store to purchase other items as well. Convenient Stores do this all the time as HESS has times that they sell soda for $2 per 12 pack. Obviously the store is not making money on this particular item but they are making money on other items that are purchased.
When a large retailer can sell an item at cost or even at a loss but increase their business because of that reduction then I would consider it a smart business move. That company should not be penalized for having success that allows them to operate at a more productive level than a local retailer.
Sunday, April 25, 2010
Sunday, April 18, 2010
Monopolistic Competition
This week we discussed monopolistic competition and realized that most of the real world markets are monopolistically competitive. An interesting aspect of this market is in the area of product development and marketing. We looked at innovation and differentiation and questioned whether all innovation was really innovative. By keeping up with technology or spending money on advertising a company could increase the value of their product. Looking at a shift of the demand, production costs, and price we saw that this innovation did not always increase the profits of the company. I would wonder how long this would be the case though as if nothing is done to advertise the product or keep up with technology then sales will eventually decrease and production costs will increase. Less profit now could still result in more profit in the long run which shows that this could be a case of making a long term business decision based on short term data.
Thursday, April 8, 2010
Monopolies
This week we are discussing the concept of Monopolies and, being a sports junkie I am interested in the relation to professional sports. The definition of a monopoly includes the following criteria:
- A market with a single supplier
- No close substitutes
- Barriers to entry
I would like to examine these requirements in relation to Major League Baseball in order to determine how much of a monopoly the sport truly is.
First off, the criteria of a market with a single supplier is both true and not so true in that we can consider minor league baseball as a division of the MLB so they are not competition for the big club. In a worldwide sense there are other popular professional leagues like the Japanese League but none as popular as MLB. Some people would stop there and determine that MLB meets this criteria but I would argue that we can also group the NFL, NHL, NBA, and other professional in with the MLB and say that there is some competition. Often times the public is forced to decide to spend money at one event and not the other so this would disqualify MLB from being the single supplier.
The second criteria of no close substitutes is also disqualified by the other professional leagues for many consumers but a die hard baseball fan will not be accepting of a basketball game instead of a baseball game. That fan may be able to substitute a local high school baseball game instead of going to a major league game though, so ultimately this criteria depends on the individual and not the group.
Finally, there are a great number of barriers to entry involved in professional baseball which make it impossible for someone off the street to just start a team. A rival league would take not only a lot of money but it would require the collaboration of multiple cities and businessmen making it very unlikely.
After breaking Major League Baseball down into the three requirements I would conclude that there is not a clear cut answer to whether or not MLB is a monopoly. If you are a potential major leaguer or an avid fan of baseball then in many ways it is a monopoly. However, if you are a casual fan or a die hard sports fanatic then the numerous options for enjoying different professional sports make this not a monopoly but rather another option in the sports market.
- A market with a single supplier
- No close substitutes
- Barriers to entry
I would like to examine these requirements in relation to Major League Baseball in order to determine how much of a monopoly the sport truly is.
First off, the criteria of a market with a single supplier is both true and not so true in that we can consider minor league baseball as a division of the MLB so they are not competition for the big club. In a worldwide sense there are other popular professional leagues like the Japanese League but none as popular as MLB. Some people would stop there and determine that MLB meets this criteria but I would argue that we can also group the NFL, NHL, NBA, and other professional in with the MLB and say that there is some competition. Often times the public is forced to decide to spend money at one event and not the other so this would disqualify MLB from being the single supplier.
The second criteria of no close substitutes is also disqualified by the other professional leagues for many consumers but a die hard baseball fan will not be accepting of a basketball game instead of a baseball game. That fan may be able to substitute a local high school baseball game instead of going to a major league game though, so ultimately this criteria depends on the individual and not the group.
Finally, there are a great number of barriers to entry involved in professional baseball which make it impossible for someone off the street to just start a team. A rival league would take not only a lot of money but it would require the collaboration of multiple cities and businessmen making it very unlikely.
After breaking Major League Baseball down into the three requirements I would conclude that there is not a clear cut answer to whether or not MLB is a monopoly. If you are a potential major leaguer or an avid fan of baseball then in many ways it is a monopoly. However, if you are a casual fan or a die hard sports fanatic then the numerous options for enjoying different professional sports make this not a monopoly but rather another option in the sports market.
Sunday, April 4, 2010
Technology Changes
This week we discussed the idea of the perfectly competitive markets and the effects in the change in supply, demand, and technological changes. The perfectly competitive really does not exist but the requirements for a market to be perfectly competitive are as follows:
-Many sellers, many buyers, identical good
-No barriers to entry or exit
-Buyers and sellers enjoy perfect information
-Established firms have no built-in advantage
The requirements of a market being perfectly competitive make it more of a mythical idea but the effects of changes can be applied to markets that are nearly perfectly competitive. I am most interested in the effects of a technological change on this perfectly, or near perfect, competitive market.
The theory regarding the technological changes is that the new technology will improve effecience thereby lowering costs and lowering prices. But in order to implement this new technology a firm must have the funding as well view it as a beneficial change for the future. While most instances where conforming to the technology changes would be necessary there are examples of firms reacting to the changes instead of conforming with them.
One example of this would be in the banking industry with the bank Charles Schwab. While most banks have utilized the technology provided with the ATM's Charles Schwab chose instead to react to the changes by eliminating the need for their own ATM's. All banks charge a usage fee for using their machines so if a Bank of America customer withdraws money from an ATM owned by Wachovia then they are charged a fee. Charles Schwab chose to pay their customers back that fee that is charged instead of attempting to operate their own ATM's. Instead of competing with the other banks by utilizing the technological advances they utilized the advances of the other banks which increased their customers available ATM's to all of the ATM's in existence.
-Many sellers, many buyers, identical good
-No barriers to entry or exit
-Buyers and sellers enjoy perfect information
-Established firms have no built-in advantage
The requirements of a market being perfectly competitive make it more of a mythical idea but the effects of changes can be applied to markets that are nearly perfectly competitive. I am most interested in the effects of a technological change on this perfectly, or near perfect, competitive market.
The theory regarding the technological changes is that the new technology will improve effecience thereby lowering costs and lowering prices. But in order to implement this new technology a firm must have the funding as well view it as a beneficial change for the future. While most instances where conforming to the technology changes would be necessary there are examples of firms reacting to the changes instead of conforming with them.
One example of this would be in the banking industry with the bank Charles Schwab. While most banks have utilized the technology provided with the ATM's Charles Schwab chose instead to react to the changes by eliminating the need for their own ATM's. All banks charge a usage fee for using their machines so if a Bank of America customer withdraws money from an ATM owned by Wachovia then they are charged a fee. Charles Schwab chose to pay their customers back that fee that is charged instead of attempting to operate their own ATM's. Instead of competing with the other banks by utilizing the technological advances they utilized the advances of the other banks which increased their customers available ATM's to all of the ATM's in existence.
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