Example of Perfect Competition in the Philippines

“A term paper submitted as a partial fulfillment of the requirements in Microeconomics”
Submitted by : Jake Kevin P Borja BSBM – IIB

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Date of submision : October 10, 2012

I. Introduction
Any study of economics has to begin with an understanding of the basic market structure of the country. An economy is made up of producers of goods and services, of traders who make these goods and services available in the market, of consumers who buy the goods and services and so on. Philippine is an industrialized country wherein there is a lot of establishments and firms inside it.

A of lot competitions here like retail trade, including restaurants, clothing stores, convenience stores, gasoline stations and etc. We all have the freedom to enter a new business firm, we just need the extensive knowledge of prices and technology. The real world is widely populated by competitors whereas half of the economy’s total production comes from competitive firms. A market structure is characterized by a large number of small firms but not identical products sold by all firms. These are the four basic market structure in the Philippines, Pure competition, monopoly, oligopoly and cartel.

Competitors have typically small firms, absolute and relative and capital requirements are low. Competitive industries is relatively easy but we have to know the market structure where we will establish our own business because if not nothing prevents an competitor from holding a going out of business sale and shutting down.

II. Pure Competition

The market consists of buyers and sellers trading in a uniform commodity such as wheat, copper or financial securities. No single buyer or seller has much effect on the going market price. A seller cannot change more than the going price, because buyer can obtain as much as they need at the going price.

In a purely competitive market, marketing research, product development, pricing, advertising and sales promotion play little or no role. Thus, sellers in these markets do not spend much time on marketing strategy. A market said to be purely competitive if :

  • 1. There is a large number of buyers and sellers of the commodity each too small affect the prices of the commodity.
  • 2. The output of all firms in the market are homogenous. Example: The product of any seller is considered as exactly alike in all respects to the product of any other seller and :
  • 3. There is perfect mobility of resources. Example: There is freedom of entry into and exit in the industry. Perfect competition : To the far left of the market structure continuum is perfect competition, characterized by a large number of relatively small competitors, each with no market control. Perfect competition is an idealized market structure that provides a benchmark efficiency.

Example of Pure Competition :

Wheat Farm – There are great number of similar farms; the product is standardized; there is no control over price; there is no nonprice competition.

However, entry is difficult because of the cost of acquiring land and from present proprietor. Ofcourse, government programs to assist agriculture complicate the purity of this example.

III. Monopoly

A market with a sole supplier of good and services or resources for which there is no close subtitute. In addition, there is barriers to entry of new firms. In economics, an industry with a single firm that produce a product, for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profit is called Pure Monopoly.

One firm ; unique product ; with no close substitutes ; much control over price ; price maker ; entry is blocked ; mostly public relation advertising.

* There is Market Power

* Single Seller

* One product ( Limited or no group substitutes )

* Barriers to entry The Meralco Electric Company is a perfect example of Monopoly in the Philippines. The only supplier of electricity in our country Birth of Meralco in 1903. Meralco started its electric service to Manila by taking over operation of La Electricista’s system.

However, Meralco built its own steam generating plant on Isla Provisora near the Ayala Bridge which powered the streetcar system and eventually also the electric service. Getting Started, 1903-1905 On April 10, 1905, Meralco’s street railway system was formally inaugurated. By year-end, the completed system consisted of about 40 miles (63 km.) of track crossing the business section of Manila and beyond. It passed the busy streets of Binondo, Escolta, San Nicolas, Tondo, Caloocan, Malabon, Quiapo, Sampaloc, Santa Mesa, San Miguel, and other strategic parts of Manila.

Constituting for a long time the largest single investment of private capital of any nationality in the Philippines, it reflected a pioneering act of faith in the future of the country Over the years, Meralco’s transportation service grew and improved. Bigger and better streetcars with double wheel-trucks and closed sides were added. The Electric Service Within less than a decade from 1905, the annual earnings of Meralco’s Electric Department began to surpass those of Transportation. When war broke out in 1941, Meralco’s earnings were roughly 80% electric, 10% autobuses and 10% railway.

There are two types of Monopoly:

  1. Regulated Monopoly
  2. Non – regulated Monopoly

Regulated Monopoly : The government permits the company to set rates that will yield a “fair return”.

Non – regulated Monopoly : Company is free to price at what market will bear

IV. Oligopoly

One characterized by small number of firms where quantity sold by any one firm is influenced by its choice in respect of strategic variables ( such as prices, product, design, research and development, advertising and sales location ) and these choices are strongly influenced by other firms in the industry.

In economics, the market consist of few sellers who are highly sensitive to each other’s pricing and marketing strategies. There are few sellers because it is difficult for new seller to enter the market. Each seller is alert to competitor’s strategies and move. Few firms ; standardized or differentiated products ; some control over price in a narrow range ; relatively easy entry ; much nonprice competition ; advertising ; trademarks ; brand names. In the middle of the market structure, residing closer to monopoly, is oligopoly, characterized by a small number of relatively large competitors.

Each with substantial market control. A substantial number of real world markets fits the characteristics of oligopoly.

* Small number of firms

* Product differentiation may or may not exist

* Barriers to entry

Examples : 1. Hometown Supermarkets – Supermarkets are few in number in any one area ; their size makes new entry very difficult, there is non – price competition. However, there is much price competition as they compete for market share and there seems to be no collusion. In this regard, the supermarket acts more like a monopolistic competitor.

This may vary by area. 2. Steel Industry – within the domestic production market. Firms are few in number, their products are standardized to some extent ; their size makes new entry very difficult ; there is much nonprice competition ; there is little if any, price competition ; while there may be no collusion, there does seem to be much price leadership.

V. Cartel

A cartel is a group of companies, countries or other entities that agree to work together to influence market prices by controlling the production and sale of a particular product.

Cartels tend to spring from oligopolistic industries, where a few companies or countries generate the entire supply of a product. This small production base means that each producer must evaluate its rivals’ potential reactions to certain business decisions. When oligopolies compete on price, for example, they tend to drive the product’s price throughout the entire industry down to the cost of production, thereby lowering profits for all producers in the oligopoly. These circumstances give oligopolies strong incentive to collude in order to maximize their joint profit.

Members of a cartel generally agree to avoid various competitive practices, especially price reductions. Members also often agree on production quotas to keep supply levels down and prices up. These agreements may be formal or they may consist of simple recognition that competitive behavior would be harmful to the industry. A cartel is formed when a group of independently owned businesses agrees not to compete with each other in areas such as prices, territories, and production.

A cartel agreement is considered a collusive agreement in that the different parties agree not to allow market forces to determine their pricing, production, and other business practices. Rather, the members of the cartel agree on such matters as what price to charge, how much to produce, and which markets to serve. * Rice in the Philippines is cartelized. There are seven rice cartels here in the Philippines, all controlled by Filipino-Chinese traders. Cartels use legitimate rice traders cooperatives or farmers cooperatives to get rice importation permits.

These permits are then used to procure rice from abroad. What traders do is put aside the whole milled rice with that of the broken. Normally, when we buy a kilo of rice. A kilo of rice differs in prices depending on the composition of whole and broken rice. Normally, its 70-30, meaning 70% whole grains with 30% broken ones. The percentage of broken rice decreases if the trader wants to increase price. So price really depends on how small or how little the percentage of broken rice you have in a kilo. If you buy a kilo of whole grain, that is higher than that of all broken rice.

VI . Summary

We have seen that there are four basic market structure in the Philippines. Producers are led by the profit motive to produce those goods and services which the consumers want. They try to do this at the minimum possible cost in order to maximize their profits. Moreover, there is a competition among a number of producers, they will each try to keep the price of their product low in order to attract the consumers. The goods produced are made available in the market by traders. They also act in their own self interest. VII. Analysis

The Philippines economy is the world’s 43rd largest in the world as of 2012. The Philippines has undergone a transformation from being an agricultural based country to a industrialized country. The economy is now vastly dependent on the services and manufacturing sector. The country has a total labor force of around 38. 1 million. Labour and capital intensive industries can be distinguished in terms of their employment generating potential. A labour intensive industry or method of production, can be considered to be one which generates more employment per unit of investment.

VIII. Conclusion

Therefore I conclude that the operation of market forces brings out the best results when there is Pure Competition in the economy. Pure competition is a situation where there are a very large number of firms producing the same product, and size of no firms is so large that can exercise dominating influence over market. Under these conditions, the competition between the firms is such that they tend to manufacture their products at a very competitive price and a high level of efficiency and productivity prevails in the market.

IX. Recommendation

I therefore recommend that the monopoly company in the Philippines to lessen their price cost for the consumer because as we all know that they are only supplier of the electricity in the country. All of the people over the country pay for their business and if they will do that the whole country will benefit on it and it will not affect their firm even if they got 1 peso per consumer because every Filipino purchased their product (Electricity) and one of the most important thing in a business is electricity.

And for cartels to be fair in doing their products, arrangements and mergers that limit competition. Traditionally, when we fail in fixing the economy, and fail to anticipate the rise of this basic staple, sure enough, expect a potential crisis in the streets. And if we do not balance the competition between one another there will be no effect in the growth of the economy of our country. X. References http://www. scribd. com/ http://www. britannica. com. ph/ http://www. investinganswers. com/ http://www. enotes. com/ http://www. newphilrevolution. com/ Economics for managers

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