What Happened to Price, Quality, and Choice in the UK Spectacles Market after Deregulation - Essay Example

?Micro and Macro - What happened to price, quality and choice in the UK spectacles market after deregulation? Market regulations and deregulations are always expected to be applied in order to affect the price and quantity combination of various goods and services and thus affecting the choice of consumers regarding these regulated or deregulated goods and services. This paper is aimed describing all the possible reasons for all the economic consequences of a deregulation in the market for spectacles in the United Kingdom (Davies et al., 2004, p.9). The paper discusses all the economic consequences including effects on prices charged of spectacles, quantities of spectacles sold in the market and also effects on the levels of choice of consumers of spectacles in the country. Deregulation: There were number of regulations and deregulations that happened in the United Kingdom in the market for spectacles. In the country, more than 70 percent of the total market for spectacles is concentrated among the four big sellers or producers. In the United Kingdom, those who produce and sell spectacles and/or contact lenses are called Opticians (Davies et al., 2004, p.4). These deregulations started in the 1900s and happened in 1948, 1958, in early part of 1960s or 1970s and in 1979. Various changes have been made during implementation of these deregulations in the country. For instance, in 1900s the demand of the Opticians regarding legal recognition of status of these opticians has been met. In 1948, provision of spectacles has been incorporated in the NHS. In 1958, “The Opticians Act established a legal monopoly for sight tests and the dispensing of spectacles, and prohibited most forms of advertising”. In 1960s and 1970s, trade restrictions have been removed by the Restrictive Practices Legislation Act in many industries across the country along with this spectacle industry. During this time this removal of restriction raised the question that whether professional service industries will be allowed to enjoy these facilities or not. The most important deregulation occurred in the 1970s when The Monopolies Commission (MC) opined after investigating the Restrictive Practices in mainly in professional service industries that advertising will be prohibited in the market for spectacles. During this time, the Monopolies Commission also concluded that this reduction in advertising of spectacles will increase the prices of spectacles and will increase the level of competition among firms in the market for these products by encouraging new entrants to enter into the industry (Advertising Association (Great Britain), 2002, pp.512-517). Finally, in the 1976 and in 1979, the final deregulations were set in the market for spectacles in the country. During these times reports of two Price Commissions (PCs) revealed that there exists lack of competition in the market for spectacles in the country and suggested that all restrictions on advertising of spectacles have to be removed. These Price Commissions also suggested that provisions for ‘sight tests and prescriptions from the retailing of spectacles’ have to be separated in the market for spectacles in the country. In 1982, further investigation by the comprehensive Office of Fair Trading (OFT) came up with the suggestion that unregistered retailers are needed to be encouraged to enter into the market and thus to help to reduce the price level. The OFT also suggested to remove restrictions on advertising for encouraging new entry, stimulating innovation in the product and also for increasing the level of choice of consumers (Davies et al., 2004, p.9). Effects of deregulation in Price, quantity and consumers’ choice: These deregulations affect prices, quantities as well as choices of consumers of spectacles in the UK market for this product. With the introduction of the deregulation in the market for spectacles new entrants entered into the market. With the help of this new entry, competition in the market was increased and hence, companies which were selling spectacles were engaged in price competition. These companies started to charge lower prices and eventually the previously fragmented market for spectacles in the country became more concentrated by small number of firms (See figure 1) (Strokes and Lomax, 2008, p.359). The amount of spectacles sold is also increased after the deregulation in the market (Davies et al., 2004, p.11-19). Figure 1: Effect of deregulation on market price and quantity The reduction in price and increase in quantity caused many large firms to exit the industry by reducing their level of profit from the sale of spectacles. During this time acquisition and merger have occurred; for example D&A acquired Pearle Vision in order to capture its large market for spectacles. However, presence of several independent firms, which was possible because of greater amount of product differentiation and differences in services provided by various firms, have caused the market share of large firms to decline significantly. These differentiations in services provided to the customers and in nature and characteristics of products, such as spectacles, contact lenses etc., have changed the preferences as well as patterns of choices of consumers in the market for spectacles in the country. Consumers are entitled with greater number of spectacles with lots of varieties and differences in quality of these spectacles (Davies et al., 2004, pp.14-15). As the immediate effect of deregulation in the market for spectacles the prices of the product declined sharply and this was happened mainly because of increase in the supply of spectacles in the market (which is clear from Figure 1). After ten years of the application of deregulation in the market for spectacles and lenses, prices for spectacle started to rise. There were two main reasons behind this increase in the prices of spectacles (Moschandreas, 2000, p.382). Firstly, after ten years of deregulation prices became more like fashion items to consumers and they tried to purchase only those spectacles which had the maximum prices. Secondly, various new featured were added during this time in spectacles in the country, such as anti-scratch coatings, designer label frames, shaded lenses etc., which increased the market price of spectacles by increasing the costs of production. After the deregulation companied started to charge the price according to the marginal cost of production, but after significant amount of time product differentiation gave them the market power to produce charge a price above the MC and hence, to enjoy the monopoly power in the market for spectacles in the country (Davies et al., pp.15-17). The following figure (Figure 2) shows the rise in price over time: Figure 2: Changes in prices of spectacles over time in UK After the introduction of the deregulation the absolute number of tests conducted on sight increased significantly. This increase in amount of sight tests occurred because of fall in prices of spectacles during the immediate period of introduction of deregulation. The Figure 3 shows the increase in the number after the successful use of the low prices in the market. Also with the introduction of deregulation in the market for spectacles with greater number of companies producing spectacles and optical lenses were increased. New entry in the market also increased the number of spectacle practitioners in the country. This increase in the amount of optical practitioners remained more or less steady through the years (Swann, 2008, pp.156-157). This is shown in Figure 4 below. After the application of the deregulation principles in the market for spectacles in the United Kingdom, large number of firms started to enter into the business and they tried to make differentiation in quality of spectacles and contact lenses. These companies also introduced various new types of spectacles which attracted consumers of all age groups and having varieties of preferences over spectacles. These changes have also made spectacles as part of the overall style statement of the entire society of the country. Hence, rapid changes in the pattern of preferences of these consumers occurred after the introduction of deregulation policies in the market for spectacles in the country. Hence, consumers’ choices and tests for spectacles as changed considerably during this time. Young generation started to include use of spectacles as their part of style statement. Introduction of contact lenses made significant changes in the preference pattern of these consumers. The willingness to pay of these consumers increased significantly which affected the prices of spectacles in the country. This further increased the level of price competition in the market for spectacles in the United Kingdom (Davies et al., 2004, pp.17-19). Figure 3: Over time changes in the number of sight tests conducted in the UK Figure 4: Changes in the number of spectacle practitioners in the UK Conclusion: With the introduction of deregulatory policies in the market for spectacles in the United Kingdom in the early 1900s to late 1900s various changes occurred in this market. One of the most important changes was rapid fall in prices of spectacles, because of new entry and increased competition, immediately after the application of those deregulatory policies. However, this sharp decline in prices of spectacles could not be sustained and prices again started to rise due to greater product differentiation. Among other important changes, the choice level or preference level of consumers increased significantly due to deregulation. Also the number of spectacle practitioners and total number of people engaged in sight tests increased due to deregulation in the spectacles market. But the application of deregulatory policies did not reduce the quality and standard of spectacles and eye-sight tests in the United Kingdom which was one of the most important contributions of this deregulation in the market for spectacles in the country. References: 1. Advertising Association (Great Britain), (2002), International journal of advertising: Volumes 11-12, UK: CAM Foundation 2. Davies, A. Coles H., Olczak M., Pike C. and Wilson C. (2004), The Benefits from Competition: some illustrative UK cases, DTI ECONOMICS PAPER NO. 9, available at: http://www.berr.gov.uk/files/file13299.pdf (accessed on February 24, 2012) 3. Moschandreas, M. (2000), Business economics, UK: Cengage Learning 4. Strokes, D. and Lomax, W. (2008), Marketing: a brief introduction, UK: Cengage Learning 5. Swann, D. (2008), The retreat of the state: deregulation and privatization in the UK and US, USA: University of Michigan Press Read More