Natural Monopoly for Theory and Strategy - myassignmenthelp

Question: Discuss about theNatural Monopoly for Theory and Strategy. Answer: Economy of a country is like the oxygen which enables the country to live breathe and prosper. In the world of global economic development China is a country where the monopoly of its economy is kept intact and with great pride (Baldwin, Cave Lodge, 2012). Monopolizing its economy has paid great dividends to the economy of China as it has pulled a large part of its population out of poverty. Workers of China have moved from a low-productivity job to high-productivity jobs which are yielding them higher incomes. Monopoly of economy has its own features such as rapid urbanization, concentration of wealth, disparity among citizens, diversified social status of people and many more. China is endowed with almost all the resources to make it an economic superpower (CHEN ZHU, 2012). But having resources and using them wisely are two different issues altogether. To go in depth of the nature of monopoly discussion on the nature and the way of business done by companies of China should be do ne. In the various research papers about the Chinese economy it is written that it has a comprehensive strategy to keep the monopoly intact and to improve it further. There are many things to be found out in this discussion and the most important thing will be the how and why of the regulation the Chinese government imposes on the price setting of a natural monopoly. In the following discussion, it is imperative that the aspects and characteristics of the Chinese monopoly over its economy will be thoroughly discussed in detail and with proper analysis. It can be easily speculated that when it comes to monopoly of economy everything which Chinese government produces and controls comes in the ambit along with the political and administrative aspect of China as well (Crozet, Nash Preston, 2012). But the emphasis will be on the economic part as the discussion is about natural monopoly on pricing. Natural Monopoly Graph Source: (Created by Author) The first thing which comes into mind when the topic is raised about monopoly of pricing is the natural resources produced in China. Industries which are based in China are dominated mainly by the State Owned Enterprises which gives its government exclusive authority andcomplete autonomy over the natural resources produced. When the survey was done in the Guangdong province of China it was found that the State owned enterprises have access to almost eighty industries whereas foreign companies have access to only sixty out of which private owned companies are allowed to enter only 40 industries (Foster McChesney, 2012). This shows the grip of Chinese government over manufacturing through its own enterprises. When it comes to the Energy Resources Chinese use their franchise to maintain their monopoly as it is also binding by the Mineral Resources Law. This ensures the leash over one part of the energy sector of China. Another vital part of energy sector is the oil industry in which th e roots on monopoly are very deep. China National Petroleum Corp., China National Offshore Oil Corp., China Petrochemical Corp are some of the franchise who have exclusive rights of oil exploration both inside and outside China and without their permission entry of any other company is prohibited (Haucap Klein, 2012). Along with this the corporations owned by foreign partners working with the Chinese franchise are also kept on a tight leash. Another prominent restriction which is applied for doing business is that the procedure of examination for foreign companies. Any foreign entity that wishes to enter into the oil industry has to comply with the contractual terms of the Chinese government which are very rigid. The government authorized state companies negotiate, conclude and execute all the contracts. Apart from this, the investment which is being done by foreign entities is also scrutinized by the investment department. Economies of Scale during Natural monopoly Source: (Created by Author) Due to rapid digitization of the world one industry which has become like a lifeline is the telecommunication industry (Jun-hao, 2013). It is also a prominent part of the economy of China. The country is the most populated one in the world and has been like this for recent decades. The number of telecommunication users derived from its population gives it huge importance and economic value. China exercises the same kind of monopoly on telecommunication industry as it does on the previously discussed industries. All the more, telecom industry provides a much refined example of the monopoly on private and foreign sector infringements in China (Joskow Wolfram, 2012). There is a permit system which restricts foreign and private entities to enter into this industry as the terms and conditions are very firm with very less leverage. The paraphernalia set by the Chinese government is very tough as it includes a registered license, qualification of a legal person, having deep financial resou rces and manpower, decent track record of the company in the field of telecommunication. Other than these, the company should provide a feasibility study reportwhich contains business strategies, analysis of potential market, investment benefit analysis and speculated quality of services (Liangchun Wei, 2012). There are other many clauses in the contract which are very hard to comply with which makes the entire telecom industry highly monopolized. Now coming on to the main part of monopoly of an economy which is monopoly pricing it can be stated that the State controls all the prices which are allowed to be set higher or lower to as per the convenience of the State to maximize the benefits of the stakeholders (Lin Lin, 2015). Price being a dynamic entity is controlled by many implements owned by the State or within a specific domain of the business which can control the volume of production and can set prices according to the volume of products that are produced. There are several methods by which the price control is conserved throughout China. Government pricing, hybrid pricing and directive pricing are those methods (Minamihashi, 2012). At first we will discuss government pricing. The areas where government pricing are deployed are railways sectors, electricity and tobacco. There is an administrative department for Tobacco Monopoly under the council of State which allows only specific brands and the administration departme nt of Price. There are non-representative brands of cigarettes which are also marketed. The prices of these cigarettes are determined by the administrative department of Tobacco monopoly at the level of the provinces. Then the prices are reported to the pricing authority set up for the provincial level. But since 2003, the Bureau for State Monopoly has taken up the system of unified approval of prices. Almost all the pricing monopoly is tackled by the departments of administrations which formulates the feed-in tariff and sale prices and are approved thereafter. There is a Railway Act which provides the mechanism to set up the prices for railway transportation (Paltsev Zhang, 2015). Another technique used for Pricing Monopoly is Government Directive Pricing. It is said to happen when the government bodies or the quasi-government bodies fix the prices of the commodities according to the trends of the market. But the control on the commodities remains with the government and the quasi-government bodies. It was seen before 1982, oil prices were fixed and controlled by the government. But between 1982 and 1994, implementation of dual pricing system was done (Shaikh Ji, 2016). As a result, the monopoly price of oil was limited to 100 million tons and the surplus production was sold to foreign entities at international prices. But as the market status of oil changed in both domestic and foreign markets between 1994 and 1998 merger of prices of both the markets was done. This unified the prices of the oil in both markets which resulted in acute monopoly of the oil prices. After the implementation of these monopolies, in 1998 announcement was made by the National Devel opment and Reform Commission (NDRC) establishing a mechanism for price regulation of crude oil and other products made by oil (TANG GUO, 2012). The policy was to cater the rapidly changing rates of oil prices in the international market. But since China had its own price monopoly under its government it was made clear that from now on the price of crude oil will be determined by the international market. Now, there was a change in the pricing system as the benchmark rate was to be determined by the NDRC according to the international rates of the oil. The prices of domestic oil were to be synchronized with the price of oil in international market on the first day of June every year. The prices of other products of oil were to be geared with the same on fifth day of June every year. The latest amendment in the oil pricing was done on nineteenth day of December 2008 which stated that oil prices of domestic land will be linked to the prices of international market (TANG GUO, 2012). B ut the determination of the oil prices will rest with the government and its authorized enterprises. The last method of pricing monopoly which is executed by the Chinese government is of Hybrid Pricing. It is the type of pricing where there is a coexistence of market prices, directive pricing and government pricing. The most known field where such a coexistence exists is the telecommunication field. The value added prices for telecommunication and the market prices are determined by the government. Since there is much competition in the market the tariffs of the telecommunication industry are regulated. There is another department of Information Industry which manages all the hybrid pricing and tariffs for the services of telecommunication. The department is owned by the State Council which consults with the pricing department of the States Council. Once the approval is given by the States Council, implementation and promulgation of the prices are done. It has been observed that the hybrid pricing is a result of a pricing structure followed before 1978 (WANG WANG, 2012). It was bef ore this period that government controlled all the prices of telecom industry. But later on in the beginning of 1996,China approved various vertical modifications to the tariffs of telecom industry. After that the changes were made in the years 1997, 1998 and 2001 (Minamihashi, 2012). This allowed the competition to flourish with the services to be rationally allocated. But still the government controls major part of the pricing and tariffs of telecom sector. When we talk about the relevance and desirability of a natural monopoly there exists a staunch challenge to the policy of competition. There exists a natural monopoly when the fixed costs far exceed the average costs. But in the case of governments natural monopoly is used as a weapon to exercise complete control on all types of economic affairs. It creates a firewall for the foreign entities who are subjected to severe rules and regulations if they want to do business in China (Zhang Paltsev, 2016). This gives the government enterprises the superiority to talk terms and to bend the terms as per their interests. Most of the enterprises which are deemed to exercise natural monopoly are the ones who provide resources of the services which are very basic to the need of the citizens of China and have a huge market base of consumers. From the beginning till the end everything related to pricing monopoly is in the hands of the government and their enterprises who see to it that their grip on pricing stays strong no matter what the situation comes. Indeed there are regulations and amendments but are very few in number and are done with a huge time gap. It is quite interesting that one government enterprise is able to manage and maintain the entire industry for which it executes the monopoly. As for example energy resources, oil industry and telecommunication industry are such big fields of work where outsourcing or incorporating other foreign entities are required (Zhang, Yang Shackman, 2017). But to maintain the hold on every minute aspect of economy the Chinese government tend to monopolize it. As we can read in the above discussion that there are upsides and downsides of the price regulation of a natural monopoly it is a choice which is made by the Chinese government. It could have allowed investors and foreign companies to take part in the growth of their economy by partnering in their government enterprise or by investing in their ventures. But instead they choose to keep the foreign parties away from their business and do it on their own by exercising price monopoly on almost every segment of business. Since they have been doing this for quite some time, China has mastered the art of monopoly in its true sense. It cannot be negated that they have done anything wrong as the growth of economy has been humungous and majority of the people living in the country have benefitted from it one way or the other.We have discussed earlier that how and why China executes monopoly, the types of methods used for exercising them and the efficiency with which they have done it. Pricing monopoly shows the dominance of the government on its subjects and also at the international level. This shows that they are self-sustainable and can manage the economy by their own. But the downside is also very prominent. Natural monopoly tends to breed corruption in the subjects of government enterprises. There is no sense of competition in the market. 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