MARKET STRUCTURES OF CHINA
Major Factor and Cause of Existence
Perfect Competition (Agricultural Sector)
Implicitly divulged by (2002), China government is the actor that primarily ignites the existence of an independent and active agricultural industry. Specifically explained by (1997), the move released regionalization of agricultural output and ended the historical separation of value chain activities which prohibited farmers selling their products or creating their own raw materials. At present, integration is pushed to most part of the country. The method also includes the existence of agribusiness firms, mostly in coastal areas, initially numbered at 3,000. They are responsible of providing needed information to all farmers that has yet to enjoy the promise of economies of scale when producing in an informed manner. In this support, agricultural workers were transformed to a farmer-entrepreneur. No more problems on where to source out expensive farm inputs because the state-owned firms provided them most of the supply. In addition, the agribusiness firms bought any output, similar to contract growing, so that the farmer has no worries on where to market its products. Lastly, technology transfer for quality output was made available including training to upgrade skills and knowledge on the usage of new developed technologies.
The state’s role is aimed to create an environment that would make the agricultural sector competitive. The incentives of farmer-entrepreneur under the scheme served as motivation to produce at highest quality. Otherwise, their output would not be purchased by the state-firms or will be priced in an inferior manner. The hidden agenda is to make them competitive and take whatever pricing the state firms deemed necessary. Obviously, pricing within state standards would result to a uniform pricing strategy. Perfect competition is needed to bring out the best from the farmer-participants that will make long-term success to China through foreign investment and export.
A 1995 book written by asked, “Who will feed China?” The question is rather a challenge to their government. With a population that topped most of the food consumption statistics, China needs to produce quality products in order to gain international acceptance of their exports. With this, the agribusiness firms are situated in such a way that it will prove to the foreigners that their food is worth buying, producing and consuming.
Monopoly (Shanghai’s Dairy Giant)
The Shanghai Dairy Group Company (SDG) has a number of factors that made it a monopoly in the dairy market of Shanghai. Cited by (1997), it owns the crucial and important factors of production. It sourced out 60-70 percent of its inputs from its wholly owned subsidiary farms. Although the remaining 30-40 percent is produced through sub-contracting, the provision of technology and training to the contractors established harmonious relationship that built the backbone of loyalty between the company and the small producers. With these two examples, inputs are generally incorruptible from the hands of the dairy giant.
The facts stated in the report had grabbed advantages for the firm. Economies of scope stemmed at the nationwide sales network of the company created the incentive to produce lower cost of additional output unlike other small firms. Also, the ownership of a milk and milk powder production bases added the uniqueness of the integration supremacy of the firm. In China, milk is not popular historically. This fact made disincentives for other firms to construct milk factories. However, Shanghai Dairy Group thought beyond short-term profitability which the later converted into market power. Lastly, to finalize the large integration network of the firm, it also owns storage companies, distribution companies and retail stores saturating the market at all levels ( 1997).
This power inherent to the company made it formidable in competition. Seemingly, it could wipe out any competition that would dare its market leadership especially in Shanghai area. The experience in the sector, knowledge of Shanghai market preferences, integration strategies, relationship with contractors and 5,000 level of labor force, it could be hard for new entrants to share the pie with the firm. To note, although substitutes are present in the market, it accounted to a minimal 5% which probably settled through highly differentiated dairy products or those produced for a specific market segment like high-end consumers, certain manufacturing company and export requirement ( 1997).
Monopolistic Competition (Foreign Fast Food Firms)
Although China is gifted with wide agricultural land and enormous labor force, it needs the penetration of the Western investors for western plate experience among others like fried chicken, pizza and other fast food offerings. These areas were not yet tapped by the country that was presently limited in the traditional noodle and tea restaurants and expensive five star dining ( 1997). This made several foreign investors successful. Most of them produced variety of foods to offer at reasonable prices. As mentioned in (2001), Kentucky Fried Chicken is named as the “as powerful and growing brand in China” and also considered as the most popular international brand. Its prominence, however, is limited to fried chicken because pizza belongs to Pizza Hut and Papa John ( 2005). Although the two are known players in the fast food industry, KFC dilemma is also their major constraint to saturate all line of products in a fast food chain.
According to (2001), monopolistic competition is comparable to perfect competition aside from the heterogeneous product offerings within the industry that somehow gives firms the capability to increase the price of its products and services. The fierce competitor of KFC in China is McDonalds ( 1997). The latter has variety of prominent products that appealed greatly to the Chinese community like French fries which was accounted to increase the demand of potatoes from United States for years to come. Also the report explained, Mos Burger from Japan targeted the hamburger consumption allowing it to gather most of its sales through hamburgers. In the pizza services area, Pizza hut and Papa John are considered close competitions ( 2005). The former offers relatively expensive menus because of the extra-ingredient added like the stuff crust ( 2005) while the other based on quality and strategic locations of its branches within cities ( 2005). Similarly other fast food firms, mostly foreign investors, are increasing in number in the country like Ronghua Chicken, California Fried Chicken, Care de Coral, Tieban Steak, Chalon and Hartz ( 1997). Their entrance to the market is characterized by perfect competition but rather their products are several. From this, they select the line of product(s) where they could gain competitive advantage from others.
The increase in competition to exploit the expensive and limited traditional cuisines of most Chinese restaurants is largely caused by the loose intervention of the government against free-trade. Consequently, monopolistic competition was the resulting product because foreign firms wanted to concentrate on one area of food service to prevent direct competition to a more established firms like KFC which penetrated the borders as early as 1987 (2001). With such tactic, its product offerings gained added premium that somehow granted its control over price. Added to the fast food business incentive is the concentration to a specific product, not totally withdrawing the line of homogenous offerings the same as industry competitors like beverages and desserts, by which marketing expenses are minimized in favor of the dearest product or service offering.
Oligopoly (Former State-Owned Communications Giant)
According to (2001), the entry of China Railcom in the communications industry had toppled the prices of local and international calls including installation charges to low levels. The decrease of its prices affected the pricing of contemporary few players like China Unicom, Ji-Tong Communications, China Netcom, and China Telecom. Since the intent of the new entrant is to cut the national average with ten percent decrease in local calls and twenty percent in overseas calls, it signaled the need for other players to bring down prices. It is no wonder that China Railcom had the liquidity and infrastructure capability because it was a former division of Ministry of Railways ( ). From the sole responsibility to provide communication services to the rail transportation industry, the company was grated authorization to serve the general public on 2001.
The eminent competitive advantages of China Railcom are derived from the heavy investment of the government during its inception. Because of this, the characteristic of an oligopoly market to bar a potential entrant ( 2001) did not affect the established infrastructures of China Railcom to penetrate the market. It was also exempted to pursue heavy marketing to be known in the market. The desirable qualities and requirements were inherited since its creation by the state. Added to its intrinsic capabilities, it also offers a wide variety of communications services like fax, telegraph, network resource lease, public data transmission, Internet access, and wireless paging ( 2003). The internet provision of the firm was strengthened by its venture with Riverstone that made possible the upgrade of virtual services for several cities for audio to video offerings.
Just like other market structure, oligopoly in China is manipulated by the government. The move to privatize Railcom created a tacit collusion in which rivals in the industry were forced to react to the price leader other than other factors that could ignite competition like quality issues ( 2001). Formerly, the market of the firm is limited to the rail transport hindering its market power by the countervailing power innate to a single consumer. But as it went public, the government investments poured to establish its railway connections that made it one of the largest telecommunication’s networks in China paid off. Although threatening to the profitability of other oligopoly players, the entrance of Railcom produced positive gains for the public for low cost communication service. Probably, this is one of the major reasons the government decided to privatize the formerly state-owned firm.
Economic Efficiency, Equity Outcomes and the Role of the Government
Using Economics for Business 2nd Edition of 2001 as reference, the following findings and conclusions are attained with the aid of the above examples.
From all the market structures, oligopoly is the most consumer-friendly. Unlike in competition structures, there are several numbers of firms which the consumer would try to select the most significant value-adding products/ services. The broader the market players, the greater the consumers’ effort to pin point the low cost or quality leader which could be limited and not attained because of transaction costs. The position of China Railcom as former state-owned communications provider not only instituted its brand name in the minds of the population but also created its low-cost capabilities and prosperous infrastructures. To maximize the important role of oligopoly, the government should try to multiply several examples of Railcom for the benefit of the local people on basic necessities and utilities. In return, this strategy should guard private firms within the industry that would eventually resist the diminishing profits due to low prices and thus withdraw its investments.
On the other hand, perfect competition has biggest impact for a firm to become efficient at levels of value chain. Unlike oligopoly and monopoly, perfect competition assures the existence of invisible hand in the free-market. This means that no one could control the prices of commodities that signal the basic cause of competitive advantage, at least in price, which is producing at the lowest possible cost. The idea posts maximization of factors of production. As a result, the macroeconomic status of a country would reach its maximum potential. Since natural or synthetic inputs are properly used, there is high occurrence of local surplus that could penetrate foreign markets. However, the government must guard exploitation of natural resources especially the bodies of land and water. To note, several explorations of mining industry had caused soil erosions. These abusive acts could result not only of several positive returns but also negative externalities that could hurt the industry in the long run.
Third, monopolistic competition could be considered the catalyst of innovation in the market. The desire of the firm to take advantage of a discovered technology or other business improvements could make the industry survive in the long run with different line of products and services to offer. For a consumer, every breakthrough is undoubtedly crucial to their everyday life. In addition, the emergence of information technology firms supplied the requirement of every industry to attain efficiency at work. The importance of innovation is countless and has no boundaries. Fast food chains tend to be creative and more customer-oriented through this kind of market structure. In this case, the government should be strict on patents to avoid disincentive for innovative ventures like research and development endeavors of firms.
Lastly, monopoly is considered the least beneficial market structure in a macroeconomic view. It brings down efficiency and innovation because it is unguarded and free from the competition. Because of this, consumer-friendliness is unlikely to result because the control in prices could result to selfish acts to recoup investments or gain more. Consequently, the government should guard if not make this market structure an oligopoly. .
Bibliography
Credit:ivythesis.typepad.com
0 comments:
Post a Comment