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Commentary 1
Title of the article Commerce Commission denies Vodafone, Sky
merger
Source of the article Otago Daily Times -
https://www.odt.co.nz/business/commerce-
commission-denies-vodafone-sky-merger -
Accessed 6 March 2017
Date the article was 23 February 2017
published
Date the commentary 14 March 2017
was written
Word count of the 795
commentary
Unit of the syllabus to Microeconomics
which the article relates
Key concept being used Efficiency
Article
Commentary
The New Zealand Commerce Commission denied the merger between Vodafone and
Sky TV as the report says. As it might result in competitor losing, and the uncertainties
in the future, they turned it down due to the likely consequences of monopoly and
inefficient allocation of resources.
Monopoly is a situation when there is only one firm in the market who is a price maker,
also there are no close substitutes and there are strong barriers to entry the market.
When a firm like Monopoly wants to make maximum profit, it would produce the output
where at marginal cost (MC) is equal to marginal revenue (MR). As Diagram 1 shows,
the monopolist will produce at quantity Qm and price Pm, where cost is Cm. It does
not achieve neither allocative efficiency nor productive efficiency. Allocative
efficiency is when MC is equal to AR, when the consumers pay a market price that is
equal the private marginal cost. Productive efficiency is when the firm is producing at
lowest average cost. Because of this, market failure would occur when there is
monopoly exists. Form the graph we can see that in this market, the product is
overpriced, under-produced and a triangle-shape deadweight loss occurs when the
monopoly is making supernormal profit, which is the triangle with sides AR, MC and
dot line Qm.
As the report says, half of the households in New Zealand have Sky TV. With this large
number of customer base, once two firms merged, it is very likely that in the future,
more and more households switch to Vodafone from Vocus or 2degrees due to the
bundle sell. Eventually they might push other firms out due to the large number of
customer base and gain significant monopoly power. Then they could raise the price
and possibly decrease the quality of services as explained above. What is more, due
to the possible consequence that the consumers of other firms might switch to them,
other firms would have less customers and less revenue, therefore, they are likely to
have insufficient funds to innovate. These firms would not be able to become more
efficient by gaining economies of scale. From this perspective, it is reasonable that
the Commerce commission denied the merger to prevent the monopoly happens.
Arguably the price might become lower due to the economies of scale, as the
diagram2 shows. As two firms merged together, the average cost might decrease as
the possible efficient gain of administration and the bulk buying, etc. Therefore, from
the graph we can see that the average cost (AC) shift down to form AC’, where at this
point, the cost has decreased from Cm to Cm’. Possibly they would drop price as the
AC decreases or they might improve the quality of service while maintaining the price.
In addition, as they would be making supernormal profit, arguably they would have
more funds to innovate, besides, they could provide communication convenience due
to their large customer base as the CEO of Sky TV claimed.
Last but not least, the Sky TV has already taken half of the market share, and
Vodafone is also a large firm. This would further increase the chance that the new
entity become monopoly, which is unfavourable situation to have for households and
the Commerce Commission.
In consider of the possibility that the new entity does not necessarily decrease the
price or maintain the quality of services once the monopoly happens, and the negative
consequences are very likely to happen according to theory, the deny of the merge
seems to be reasonable as the Commerce Commission doesn’t want to take the risk.
In conclusion, the Commerce Commission has made a wise decision to deny the
merger on the basis of the relative efficiency gains and losses. Although the merged
firm could arguably gain economies of scale and be more productively efficient, it
was felt that this could be outweighed by the potential loss of allocative efficiency
due to possible higher prices for consumers and the prevention of competing firms
gaining efficiencies themselves as customers may be lost to the new firm.
Commentary 2
Title of the article Emmanuel Macron plunges head-first into
labor reform
Source of the Politico – www.politico.eu/article - date
article accessed 15 June 2017
Date the article was 23 May 2017
published
Date the 30 June 2017
commentary was
written
Word count of the 796
commentary
Unit of the syllabus Macroeconomics
to which the article
relates
Key concept being Economic well-being
used
Article
Source: www.politico.eu
Commentary
The balance of power between workers and employers in the labour market in France
is an important issue. The trade unions in France are v e r y p o w e r f u l . T h e y
“opposed similar reforms…. last year” indicating that they were
a b l e t o p r e v e n t s u c h r e f o r m s . Newly elected president Emmanuel Macron
has prioritised the market reform as “The reform he wants to pass first” although they
could “trip his presidency before the end of the year”. He clearly sees labour market
inflexibility as a major obstacle to the promotion of economic well-being, but there
will be major opposition.
Macron has targeted solving the issues of inflexibility of contracts and trade union
collective bargaining through the use of market orientated supply-side policies and
more specifically labour market reform.
The inability to alter wages based on individual company performance often results
in struggling firms having to raise their wage rates, something that they can’t afford to
do. As shown by the graph, this leads to an excess supply of labour as employers are
not willing and able to offer jobs at the higher wage rate of W1. By lowering wages to
W2 , firms are able and willing to hire more workers and therefore the quantity of
employed workers increases from Q1 to Q2 . In addition to this, lower costs of
production enjoyed by the firms, could lead to higher profits from firms and therefore
more investment into new technology and research and development.
The main effect of this change, however, is its effect on unemployment. As shown
on the graph above, a fall in the wage rate has increased the quantity of labour
employed, which means that there are fewer unemployed workers in the French
economy. The natural rate of unemployment has thus decreased.
The other, more significant, detractor of supply-side policy and in particular labour
market reform is the effect that the policy has on the distribution of income.
Although the long-term effects of a reform would benefit the entire economy, in the
short run, reduced union power, cut unemployment benefits and lower wage rates for
low income earners would all contribute to inequality in the distribution of income.
Because of these effects, proposed reforms by previous presidents such as Jacques
Chirac and Francois Hollande have been blocked by mass protests.
Despite this, Macron’s shock victory in the presidential election and his party’s
overwhelming success in the parliamentary elections suggest a tide is turning in
French politics and a labour reform may be met with a positive reception. Macron has
stated that he wants to “convince and divide”, with the primary role in this plan being
to convince unionists that these changes are in the best interest of the country, while
past presidents have been unable to carry this out. The sixth highest unemployment
rate in the EU and little to no economic growth since 2008 may have been enough to
persuade the French public otherwise.
Commentary 3
Title of the article Exporters demand devaluation of currency
opposed
Article
Exporters demand devaluation of currency opposed
12th May 2017
Devaluing the weakest currency in the south Asia will increase cost of debt
servicing, stoke inflation and make imports costly which are already double than the
exports, said Patron Islamabad Chamber of Small Traders Shahid Rasheed Butt.
He said that government should not compromise the interests of masses to benefit
a cartel of industrialists which is addicted to subsidies, bailout packages, tax breaks
etc.
Shahid Rasheed Butt said that foreign debt has already touched mark of 79 billion
dollars, four years ago it was 63.5 percent of the GDP but now it has reached to
66.5 percent of the GDP.
The export sector which has never accepted challenge of facing competition should
improve their competitiveness leaving demand of exchange rate depreciation as it
will damage masses.
He said that further erosion in the value of rupee will hit importers and masses and
it will send a very negative signal. Devaluation will not support the exports as
expected therefore the export industries should focus on cost reduction, skill
development, value addition and upgradation, he added.
The business leader said that masses should not pay the price for the
weakness of exporters and decision to appoint incompetent officials at key
positions.
Atif Ikram Sheikh said that government should announce a comprehensive policy
to promote domestic commerce and consider establishing a separate ministry for
its promotion.
The business leader said that road and rail network should be improved, GT Road
should be upgraded, motorway should be made affordable for commercial vehicles,
and ports as well
as dry ports should be developed to make business a bit easy.
He said that the issue of intellectual property rights should also be tackled as
weak implementation continues to damage local brands while legal system
delays resolution of dispute for decades which is a great impediment.
Commentary
This article discusses the opposition to proposed measures to devalue the Pakistani
rupee in order to benefit their export sector, and the negative effects of such a
devaluation. Although a key theme is the extent to which governments should
intervene in the allocation of resources, the driving concept for the arguments is
equity, as a devaluation would harm “the masses” and benefit “a cartel of
industrialists”. Devaluation is a reduction in the exchange rate under a fixed
exchange rate system. Such a devaluation will affect the general populace,
increasing the price of their imports, debt servicing costs, and inflation. However, it is
desired by the export sector as it makes their products relatively cheaper, thus
increasing demand for exports.
This would mean that they don’t need to increase their productive efficiencies in
order to lower their prices. This is described as a criticism of the export sector,
saying that such devaluations “deprive them of incentive to upgrade machinery,
improve quality”. If the currency remained stable they would have to become more
productively efficient and cut costs, meaning that currently, these industries are
relying on the government. Not implementing this policy of devaluing the rupee
could force increases in productive efficiency, increasing international
competitiveness and comparative advantage in the long term. This can be shown in
the following diagram:
This shows how before the use of “subsidies, bailout packages, tax breaks” which
the exporting companies are used to, there are imports of Q1 to Q2, whilst after the
imposition of the subsidy, shifting the domestic supply curve from Sd to Sd+Subsidy,
there are lower imports of Q3 to Q2, and a higher price received by the domestic
producers, shown at Ps, showing how these measures lead to a higher price
received by producers, and increased quantity sold, reducing the need to cut costs,
and allowing them to export at this lower price, undercutting international
competition and increasing revenues.
The article discusses the negative effects which a currency devaluation will have on
Pakistan, such as increased costs of debt servicing. This occurs as the interest on
the debt which Pakistan has is from foreign sources, and as such must be paid back
Overall, a devaluation of the rupee would lead to higher revenues for exporting
companies, at the expense of the populace, which would see increased prices for
imports, higher inflation, and increased uncertainty. Therefore, it is argued that such
a policy is inequitable, as the industrialists who are already rich will become richer
while the “masses”, many of whom are in poverty, will suffer a reduction in their
economic well-being. This combined with the government having higher debt
servicing costs and a large opportunity cost mean that this is most likely not a good
policy to implement.