Industrial Organization and Regulation of the Market

A market could be described in simple words as a place where buyers and sellers meet to exchange goods and/or services. In this context the market does not have to take a physical location. This has been made possible by advances in technology where it’s now possible to sell/by goods and or services over the telephone or through the internet.

There are different types of markets and these markets are determined by many factors. In general we have two broad categories of markets; these are the industrial markets and consumer markets.

Consumer Markets

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• Fast-moving consumer goods (“FMCG’s”)

• Consumer durables

• Soft goods

• Services (e.g. hairdressing, dentists, childcare)

Industrial Markets

Industrial markets involve the sale of goods between businesses. These are goods that are not aimed directly at consumers. Industrial markets include

• Selling finished goods

• Selling raw materials or components

• Selling services to businesses

Industrial markets often require a slightly different marketing strategy and mix

Organization and Regulation:

In every kind of market situation mistakes just like in the public sector can and do occur. When governments fail we call it government failure but when markets fail we call it market failure. Of course, most deviations from the ideal are minor and do not impose significant costs on society. But when deviations are significant there is often a call for government to do something about the problem. For example, markets can deviate significantly from the competitive ideal — e.g., firms may acquire significant market power, undertake deceptive practices or collude like cartels in order to make abnormal profits.

When it comes to regulation and organization of markets there are usually a few goals that every industry and or government wants to achieve. These include consumer protection (from sub-standard or harmful products), price controls (to prevent over exploitation of consumers and unhealthy competition), prevent counterfeiting and black market trading. In essence thus regulation involves administrative guidance of the market in order to make it more efficient.

By efficiency we mean Economic efficiency and Economic efficiency is something much more than producing goods at the lowest possible cost. It involves providing individuals with the goods and services they desire, in the quantities, qualities, places, and times they desire them, with the least use of society’s scarce resources. Economists argue that if markets are competitive, if accurate information is available, if resources are mobile, and if individuals engaging in the transactions bear the full costs and receive the full benefits of their transactions, economic efficiency will be achieved.

Regulation can either be internal or external. Internal regulation usually involves regulation within the industry especially in the field of competition. External regulation involves control through government policies.

External regulation includes:

Social Regulation.

This involves government regulation to contain negative externalities. Environmental problems, like pollution and congestion, are hard to solve[1]. Due to this governments come up with measures to control this, these measures include: Rights to pollute and rights to use highways.

Rights to Pollute

Creating rights to pollute the air can – paradoxically – help to control pollution. A “right-to-pollute” solution for pollution control defines a right to pollute and allows that right to be bought and sold. In essence these rights are limited this makes their prices high. In order to avoid paying these huge amounts firms instead install pollution abatement equipments and these help reduce overall pollution.

This means that the level of allowable pollution can be specified, as we now do for instance to limit sulphur dioxide emissions in the United States to combat acid rain.[2] Once pollution rights are defined and a given supply is established, a market price can be determined. Then those who can reduce pollution most efficiently, that is, for less than the value of a right to pollute, will reduce pollution and sell their rights to pollute to others. Those who face higher pollution abatement costs can buy the pollution rights and use them for permission to emit pollution.

Thus, at market equilibrium, the price of pollution rights reflects the marginal cost of controlling pollution to the level that the available pollution rights will allow.

Rights to Highway Use

We pay no price for highway use. We incur the private cost of a vehicle trip between two points, including not only fuel, oil, tire wear, and so on, but also the driver’s (and passengers’) time, and when congestion is serious that time component goes up.[3] The familiar problem of excessive traffic congestion arises because each of us decides whether to make a highway trip on the basis of the average cost rather than the marginal cost of the trip to society.[4] An additional car can join a stream of cars on the highway and it will share in the average costs and delays of all the other cars. Yet that marginal vehicle causes delays to all the others, delays that the driver of the marginal vehicle does not take into account when joining the traffic stream.

A solution to the highway congestion problem can come from assigning a property right in road use — a right to delay others, like the right to pollute. Electronic devices exist now that will record time spent on a road. When placed in vehicles, these devices function like the electricity meter in your house, but they identify the time and location of your road use[5]. Technology and economics combine in these devices to make billing drivers for road use feasible, and that can avoid excessive congestion.

Such devices and fees are in effective use in Singapore[6] and many of us should expect to see them in our lifetimes. There are many other areas where social regulation

Was introduced in clumsy forms – consumer protection for example – that are improving gradually, based on economic

Ideas that improve information and market function.

Economic regulation.

Economic regulation in many markets has taken a form whereby the number of firms in an industry is determined by the government and the markets firms can serve are specified by the regulatory commission. Prices and rates of return are regulated and, importantly, entry into the industry is either forbidden or made very difficult by law. Thus economic regulation maybe in the form of antitrust laws or price fixation. In antitrust cases, courts follow either “per se” rules, under which certain facts determine guilt or innocence, or they examine circumstances more broadly and follow a “rule of reason” analysis, to determine the appropriateness of the observed behaviour.

The per se procedure is quicker and easier, and of course it gives more precise guidelines to business firms, but it requires what lawyers call “bright line,” or clear, rules. The disadvantage of such per se rules is that they may be over or under inclusive. The alternative, rule-of-reason, analysis allows courts to examine the circumstances of each case. It is in these rule of reason analyses that economics is applied far better now than in the past.

Limitations of regulation:

 Regulation leads to increased costs of conducting business. The direct and indirect costs of regulation result in higher prices and increased costs of employing workers. These costs act as a tax on job creation and employment. They also cause a decrease in productivity. The higher business costs that result from regulation are passed along to consumers in the form of higher prices (indirect taxation). To the extent that lower income individuals spend a greater proportion of their income on the goods and services affected, the higher prices are in essence a form of regressive taxation.[7]

Conclusion:

The organization and or regulation of any market has its ups and down. Markets and governments always fail from time to time. Due to this a harmonious relation needs to exist between the government and industries. This requires that where regulation leads to increased.

Reference:

Ellerman, A. Denny, et al. (2000) Markets for clean air: The U.S. acid rain program, Cambridge University Press, Cambridge.

Mills, David E. 1981. Ownership arrangements and congestion-prone facilities. American Economic Review 71: 493-502.

Phang, Sock-Young, and Mukul G. Asher. 1997. Recent developments in Singapore’s motor vehicle policies. Journal of Transport Economics and Policy 31: 205-25.

Roger Sherman, The Future of Market Regulation available a: www.seapres.wp8.htm.

Sherman, Roger. 1967. A private ownership bias in transit choice. American Economic Review 57: 1211-17.

Sherman, Roger. 1971. Congestion interdependence and urban transit fares. Econometrica 39: 565-76.

Theriault III, Rene J. 1999. The congestion crisis: An evaluation of traffic and congestion remedies for the Washington, DC metropolitan area. Undergraduate thesis, University of Virginia.

[1] Roger Sherman, The Future of Market Regulation available a:www.seapres.wp8.htm

[2] Ellerman, A. Denny, et al. 2000. Markets for clean air: The U.S. acid rain program, Cambridge: Cambridge University

Press.
[3] Sherman, Roger. 1967. A private ownership bias in transit choice. American Economic Review 57: 1211-17.
[4] Mills, David E. 1981. Ownership arrangements and congestion-prone facilities. American Economic Review 71: 493-502.
[5] Theriault III, Rene J. 1999. The congestion crisis: An evaluation of traffic and congestion remedies for the Washington,

DC metropolitan area. Undergraduate thesis, University of Virginia.
[6] Phang, Sock-Young, and Mukul G. Asher. 1997. Recent developments in Singapore’s motor vehicle policies. Journal of

Transport Economics and Policy 31: 205-25.
[7] Web article available at:www.regulation.org

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