Economics for Business: Virgin Media Services - Essay Example

ECONOMICS FOR BUSINESS Analysis of the case study Question one This is likely to affect the demand for the Virgin Media services adversely. Its likely that the demand is likely to go low this is because its customers will not get some of its services and it has no plans to compensate for the loss of channels. This has impact on 3.3 million subscribers who get cable television from Virgin Media. Because they have lost sky one, sky travel, sky news and sky sports news, though some will not get affected like the ones who free view viewers. A key determinant of the likely effect of loss of the channels is whether the services are inferior services, giffen services or veblen services. Non economists believe in the existence of giffen goods which have an up-ward sloping curve, Veblen goods are the ones whose demand decreases with decrease in the prices and the inferior goods demand decreases with increase in income. Depending on where the VM products lie, this will determine the likely shift on demand. Loyal consumers of VM products will have the services delivered on demand. Demand is the economic want backed up by purchasing power, demand curve represents the amount of a good that buyers are willing to purchase at various prices assuming all other non price factors remain constant i.e. at ceteris paribus. In a free market, quantity demanded and quantity supplied depends on the market price. In our case the decrease in demand is likely because shifts in the demand curve towards the left.1 In our case of VM the demand of the services will be affected by the non price factor. For the consumers to continue demanding its services, they have to improve their terms with them. As the VM claims that the SkyB is coerce with its customers, meaning that they are competing firms and therefore it's a substitute for the VM consumers. To mitigate these consequences of the likely decrease in demand, it can lower the prices for the customers who demand for their services and this is likely to increase its demand against that of its competitors if there is free market a d therefore has a bigger market share. It can also improve the quality of its services that it delivers to its customers; this is because the demand of a normal good is likely to increase with its increase in its quality. VM can also promote isits products through public awareness, this can be done through advertising, sales promotion, offering free services at certain time, and it can also use road shows. 2 Question two Market is a group of buyers and sellers exchanging goods that are likely substitutable for one another. Markets are defined by the demand conditions that exist; they embody the zone of consumer's choice for the goods or services. Markets exists in two dimensions- a. Product type b. Geographical area Market structure refers to the selected number of organizational characteristic of the market that establishes the relationship between buyers and sellers of a certain product; market structure analysis is therefore the study of organizational features of market that is believed to have significance for conduct behavior and performance of firms comprising the market. In simple theoretical analysis, the concept of market was traditionally defined as consisting of buyers and sellers of a homogenous good who have insufficiently close contact with each other that o single price prevails The major market structures are: Perfect competition: This is where the market has very many firms producing homogenous product. Monopolistic competition: This is also called competitive market, this is where there are very many firms and each commands a small share of the market share.] Oligopoly: This is where the market is dominated by many small firms which own more than 40% 0f the market share. Oligopsony: This is where the market is dominated by a few buyers with many sellers Monopoly: This is where there is only one provider of a certain product. Natural monopoly: This is a monopoly in which economies of scale cause efficiency to increase as the firm grows. Monopsony: This where there is only one buyer in the market.3 MONOPOLY COMPETITION Monopoly exists when one seller controls all sales in the market and the demand curve for that product is very inelastic. The inelasticity gives the seller scope to choose the level of prices as well as the output. The market share of a monopoly is at or near 100%. There are high entry barriers. There is evidence of effective monopoly control over the level and structure of the prices as shown by the BskyB who are not ready to negotiate more on the prices. The monopoly violets the efficient price equals marginal cost outcome by cutting the output and pushing the prices above the marginal costs. There is economic harm in that consumers are forced to pay more than the marginal cost. The value they place on the good is twice as high as the cost of the resource used to produce that good. The monopolist prevents consumer satisfaction by prohibiting sales between qm and qc as the shown in the diagram below. Price exceeding the marginal cost is therefore a sign of extortion away from the efficient competition level; this severity depends on the elasticity of demand.4 Inelastic demand gives smaller cost of output; the steeper the marginal cost the smaller will be the cutback on the output. The loss of BskyB powers of the monopoly market structure as IPTV enter into the market is likely to have some positive effects to the consumers in the market. This will mostly affect the prices and the output levels. These effects are: 1. Allocation of resources. If BskyB loses its monopoly powers it will mean that there will be fair competition and therefore better allocation of resources, this is because monopoly distorts the allocation of resources. The cutback of the outputs forces some of the input into other markets where their economic level is less. This distortion ripples into the adjacent and complimentary markets. 2. Distribution of wealth. The monopoly was shifting income and wealth from the consumer to the monopoly but with IPTV entering into the market this is likely to cease since there will be efficiency in the market and therefore free and fair distribution of wealth in the society. 3. Invention and innovation. With entrance of the IPTV into the market, there is likelihood of new products into the market for the consumers. There will be incentives for new products and ideas for the consumers since the monopoly power has ceased to exist. The monopoly power retards the innovation because innovation destroys the value of the existing products. 4. Price of the products. The prices of the products will improve since the competition in the market will make the marginal cost equal to price of the product or the service. For the normal goods, the consumers will buy from the firm offering the best service with the least price. The suppliers will have an option as in who to supply there produce to. 5. Other effects of monopoly. The competitive process will be restored into the market and this will lead to increase in social value and modernization increase as better products come into the markets as competition sets in and the consumer's preference for better goods increase. Freedom for choice will be restored and the consumers will have a variety of products in the market. The workers who are also consumers will also get competitive wages since they will be willing to work for the firm with the best rewards, this is because initially the monopoly[BskyB] may have been the only employer in the industry. Democracy will also be improved since the monopoly power adversely affects democracy, this is because the monopoly may use its wealth from the excess profits to buy favors and protection by political leaders and therefore expand its economic advantage. Reference: Stratton (1999) Economics: A New Introduction, McGraw Hill Publishers, New York Wikipedia the free encyclopedia (2007) market types, retrieved on 28th april, available at www.wikipedia.org Read More