Based on 17th of July 2012 the Star (http://thestar.com.my/news/story.asp?file=/2012/7/17/nation/11676472&sec=nation), poultry
farmers in Malaysia is said to have enjoyed a 20-year period of monopoly in
fixing the prices of broiler chicken, without much government intervention.
This was made possible by virtue of their monopoly control over the entire
supply chain of the industry. The monopoly situation does not guarantee
fair and reasonable pricing for the benefit of consumers, as price movement
from ex-farm level to retailers cannot be competitively priced. This
situation also allows room for abuse of dominant position in the market as
controlled by the poultry farmers. With their dominance in the market,
traders could easily raise prices to increase profits.
In
economic terms, monopoly is a market with a single firm that produces a good or
service for which no close substitute exists and that is protected by a barrier
that prevents other firms from selling that same good. Hence, a monopoly
firm sells a good that has no close substitute no matter what. Also, a
barrier to entry can be considered as a constraint that protects a firm from
potential competitors. There are three types of barriers to entry. They are
Natural barrier, ownership and legal barrier. Natural monopoly is a market in
which the economics of scale enable one firm to supply the entire market at the
lowest possible cost created through natural barrier. Ownership barrier to
entry occurs when one firms owns a big portion of a key resources. This
can be seen in De Beers which its company used to control up to 90 percent of
world’s supply of diamonds. A legal monopoly is created by the legal
barrier to entry in which the competition and entry are restricted by the
granting of a public franchise, government license, patent, or even copyright.
Hence, the chicken broilers have been given a government license in which they
were allowed to control the price of the chicken.
As
we know, monopoly is called price maker as they set their own price in the market.
They have two different pricing strategies which help them set the price in the
market. The pricing strategies used are single price strategy whereby the firm
sells each unit of its output at the same price to all its customers and price
discrimination strategy is when the seller sells different unit of a good or
service for different price. It captures the consumer surplus and converts it
into economic profit by asking the consumer to pay a price close to their
maximum willingness to pay. There are two broad ways the seller
discriminate the price. They discriminate the groups of buyers which exist due
to difference in buyer’s characteristics and among the units of a good.
Therefore, I strongly believe that the chicken broiler industry in Malaysia use
the single pricing strategy as the price of the chicken in Malaysia’s market
are the same for every group inconsiderate the age, sex, and other
characteristics during my last visit to the market.
A
monopoly set the price of the goods they are because the demand for the
monopoly’s output is the market demand. In order to sell a larger output, the
monopoly must set a lower price for its goods. Total revenue of the
chicken can be calculated by multiplying the price of the chicken and the
quantity sold. Marginal revenue is the change in total revenue that
results from a one-unit increase in the quantity sold. For a single-price
monopoly, marginal revenue is less than price at each level of output.
Based on Diagram 1, the
chicken price is set at RM8 each and 2 units were sold initially. Then the
price is reduced to RM6 to sell 3 units of chicken. It loses RM4 of total
revenue on the 2 units of chicken which was sold at RM8 each. But, it gain RM6
of total revenue from selling the 3rd chicken. The total
revenue gained by the chicken seller is RM2 which is also the marginal
revenue. Thus, we can see that the marginal revenue is less than the
price at each quantity.
In Monopoly, demand is
always elastic. Hence, a single-price monopoly never produces an output at
which demand is inelastic. The chicken broiler’s demand is also always elastic.
No matter how high the price, the consumer still buys the chicken. For me, I will
always buy chicken because I like to eat chicken as compared to other meat in
the market. Therefore, I will buy chicken no matter how costly it is as
compared to other meat.
Based on Diagram 2, the
quantity produced for perfect competition is at QC and the price is PC. Whereby
the marginal social benefit equals to the marginal social cost and the total
surplus is maximized. But in monopoly, the quantity produced is only at QM and
the price is raised up to PM. The consumer surplus shrinks, the monopoly gains
and a deadweight loss arise.
To overcome this
situation, I suppose the government to intervene and regulate the monopoly.
Regulations are rules administered by a government agency to influence prices,
quantities, entry and other aspects of economic activity in a firm or
industry. In Malaysia, the government passed the Competition Act
2010, which prohibits anti-competitive agreements and abuse of dominant
position in the market. Another Act of Parliament which had been
passed to address monopoly situation is the Price Control and Anti-Profiteering
Act 2010, where traders who had marked an increase in their pricing need to
justify their actions. To implement the rules and regulation, the
government establishes agencies to oversee and enforce the rules. In
this case, the government in Malaysia formed a Malaysian Competition Commission
(MyCC). Its role is to review the entire broiler supply chain and
price movement from ex-farm level to retailers. This review has the
objective of ensuring fair competition among traders which translate to consumers
benefiting from reasonable and fair pricing.
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