Business Opportunities Innovation and Governance

Question: Discuss about the Business Opportunities Innovation and Governance. Answer: Introduction: The market structure for soft drinks in Australia belong to the oligopoly market structure. The explanation is that this market is dominated by few large firms. This market is far from being considered a monopoly in that soft drinks have several substitutes. So the participants lose the ability to utilize monopoly powers. If for instance there was an increase in the price for coca cola products, a consumer may choose to consume other drinks whose prices are lower. The coca cola company in this case may end up losing some market share. Since none of the large participants may be willing to lose some of its market share, the price of soft drinks remain low despite the large number of consumers. Any firm that implements the strategy of cutting prices gains some market share and the other firms are forced to follow to maintain their market share. Since the high demand for soft drinks does not attract high prices, this industry fails to be considered competitive. In competitive markets, price goes up as demand rises. In addition we can conclude that it differs from competitive markets in that we have noted the number of sellers is small and large; the participants for competitive markets are many but small with no influence on the prices. This behavior of only following a price cut strategy but not a price rise one is present in oligopoly market. It can therefore be concluded that its true the market structure for soft drinks in Australia belong to the oligopoly market structure. Oligopoly participants can only compete in terms of output mostly. However they may collude to earn them some monopoly powers. The participants come together and sign agreements to follow price change by the leading firm of their choice (Riley, 2016). Price offered by cartels is higher than when no cartel is practiced as shown in the diagrams below; the kinked demand also vanishes (Welker, 2015). One of the criticism of the kinked demand models is that its beginning of the analysis is on an equilibrium price and quantity of which there is no explanation for the same (Riley, 2016). The second is the fact that it doesnt take into consideration the possibility of collusions which mostly exist in the oligopoly markets (Guru, 2016). The kink is absent with collusion. Price discrimination is not a bad thing. The reason for this is that it acts as a form of income distribution; those with higher incomes are made to pay more for the goods. Those with low income obtained the goods at a lower price. The ability to purchase the goods is maintained for everyone. The government has an important role in perfect markets despite their ability to allocate resources efficiently. The forces of demand and supply that regulates the perfect market without the intervention by the government do not take into consideration the distribution of wealth. Based on the initial wealth endowments, different optimal level may be achieved. If there was a proper distribution of initial wealth endowment, then the optimal point to be achieved would be better. Schlag Mercado (2012) argued that the intervention by the government is required to solve for externalities, redistribution and promoting competition. Externalities cause market failures. An example of externality is air and sound pollution, here the government employs taxes and tradable permits. The government also has an important role in ensuring that there is perfect information (Hargroves and Smith, 2005). Information asymmetry is therefore a source of market failure. Mostly, the concern is on advertising where the government requires that information provided on a product is honest and not manipulative to the consumers. It also make sure that technical information is provided publicly. Steen (1999) noted that markets fail and firms practice monopoly powers. Governments intervention is required in solving this externality by improving resources allocation. Market imperfections is another cause of market failure. The government here uses policies such as antitrust policies or tax policies for RD. The role of the government here is to prevent firms from employing monopoly powers; this is a form of promoting competition. The last cause of market failure is the presence of public goods. Due to their characteristics of being non-rival and non-excludability, they may be underprovided in the absence of the government. The government is the sole provider of public goods. In this case it employs its RD and the public procurement policy. Owing to the harsh threats posed by the impacts of global warming, there are many policies that has been put in place. The gas mostly responsible for global warming is carbon dioxide. The policies are therefore formulated with the aim of reducing its proportion in the atmosphere. One of the policy is shifting from using non-fossil fuels and using other sources of energy that are free from causing additional of carbon dioxide to the atmosphere. Some policy recommenders argue on the fact that plant use carbon dioxide to make food. So they recommend reforestation as the best policy (Nordhaus, Dornbush, and Poterba, 1991). The third policy involve the government imposing a carbon tax on the carbon emitters depending on the extent of pollution. This makes them to become cautious. Basing my argument on the analysis above, the poor economic growth represented by low growth rate of GDP, high unemployment rate and the low inflation rate, I would conclude that Australian economy is falling into a recession. There is an inflationary gap since there is still growth of output as government expenditure expands above the equilibrium point of full employment. As we noted earlier that the components of GDP = C + I + G + (X M), any increase in any of these components shift the aggregate demand (AD) curve to the right. The equilibrium in the long run is determined at the point where the AD curve, the Short run average supply curve and the long run average supply curve intersect. The fig: panel (b) above shows only the intersection of LRAS and the SRAS at a price level below P1 and real GDP level Yp. The initial AD curve is taken to be at this equilibrium point. After the inflationary gap caused by expansion in the government expenditure, the new AD curve is AD in panel (b). The AD has shifted to the right along the SRAS. This has resulted in a rise of price from equilibrium to P1. The inflationary gap is represented by (Y1 Yp). In order to close an inflationary gap, the government may either employ some nonintervention policy or stabilization policy (Schmitz, 2012). By nonintervention it means that the government should allow the economy to adjust on itself. Stabilization policy (contractionary policy in this case) include the fiscal and monetary policies that will restore the economy to real GDP potential level. The government may either cut its spending or raise taxes (fiscal policy). Minimum wages have a negative impact on poverty. It is the wage fixed by the government below which firms are not allowed to compensate their workers. Though its aim is to redistribute income, it ends up causing the poverty level to go up. Since the minimum wage is fixed above the equilibrium price and the workers may have unqualified skills to get that salary increment, it raises the cost of hiring. Employers are discouraged from hiring at the high cost and the unemployment gap expands as shown in the figure above (Grannis, 2014). More people are pushed to poverty rather than improving their living standards. References Grannis, M. (2014). Who benefits from minimum wage legislation? | The Libertarian Party of Maryland. [Online] The Libertarian Party of Maryland. Available at: https://lpmaryland.org/benefits-minimum-wage-legislation/ [Accessed 30 Dec. 2016]. Guru, S. (2016). The Kinked Demand Curve Theory of Oligopoly. [Online] YourArticleLibrary.com: The Next Generation Library. Available at: https://www.yourarticlelibrary.com/oligopoly-market/the-kinked-demand-curve-theory-of-oligopoly/37335/ [Accessed 28 Dec. 2016]. Hargroves, K. and Smith, H. (2005). The natural advantage of nations: business opportunities, innovation and governance in the 21st century. London, Earthscan. Nordhaus, D., Dornbush, D. and Poterba, M. (1991). Economic approaches to greenhouse warming. In Global warming: Economic policy approaches. Cambridge, MA: MIT Press. Riley, G. (2016). Oligopoly - Tacit Collusion. [Online] tutor2u. Available at: https://www.tutor2u.net/economics/reference/oligopoly-tacit-collusion [Accessed 28 Dec. 2016]. Schlag, M. and Mercado, A. (2012). Free markets and the culture of common good. Dordrecht, Springer. https://public.eblib.com/choice/publicfullrecord.aspx?p=972033. Schmitz, A. (2012). Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium. [Online] 2012books.lardbucket.org. Available at: https://2012books.lardbucket.org/books/macroeconomics-principles-v1.0/s10-03-recessionary-and-inflationary-.html [Accessed 20 Dec. 2016]. Steen, M. (1999). Evolutionary systems of innovations: a Veblian-oriented study into the role of the government factor. Assen, the Netherlands, Van Gorcum. Welker, J. (2015). Ways firms may collude in Oligopolistic markets. [Online] Economics in Plain English. Available at: https://welkerswikinomics.com/blog/2015/02/25/ways-firms-may-collude-in-oligopolistic-markets/ [Accessed 28 Dec. 2016].