Oligopoly not Monopoly

In this country we tend to fear the rise of Monopolies. Most Americans probably think our country does a good job at keeping them at bay. But what if the main heavy-hitters in our economy were oligopolies? Are we any better off?

The consumer may think that when they go to the grocery store or chose a cellphone plan they have many options to choose from. Though there may be many toothpaste brand names for instance, in actuality more than 80% of toothpaste brands are controlled by two companies: Procter & Gamble and Colgate-Palmolive Business Practice - Oligopoly. A monopoly is when a market is controlled by one firm who has unlimited market power. When a small number of firms control the market we call that an oligopoly and it is more common than we may think. The oligopoly firms are too few to create any sort of competition and they make parallel pricing and production decisions. If these few firms were under one company name we would call it a monopoly.

Cellphone service providers are another classic example Big Cellphone Companies. If you feel like you're getting ripped off by your cellphone provider you are probably right. There are four main companies, AT&T, Verizon, Sprint, and T-Mobil, with AT&T and Verizon controlling two-thirds of the market Big Cellphone Companies. Although some smaller companies attempt to make the market competitive often times they end up being bought out. For a long time T-Mobil has made the same type of market controlling decisions as the other cellphone companies, like high overage charges, binding contracts, etc, but now they are going out on their own. T-Mobil is attempting to move in on the market by making better decisions for the consumer. They will set themselves apart by ditching contracts and roaming charges  Big Cellphone Companies. This makes them a target for acquisition but hopefully they can bring some competition to the market, a market that so many American's rely on.

Russia Wielding Monopoly Power

Monopolies can do more than just harm consumer surplus they can translate to substantial political power. Russia's government owned natural gas company, Gazprom has shown itself to be a huge player in the Ukrainian annexation. Gazprom holds control over many European natural gas supplies and the closer the country is to Russia the more dependent they are for Russian gas.

Gas Prices in Europe

Russian gas control has translated into strong political muscle. Acting as a monopoly Gazprom is able to raise prices on natural gas at will. Ukraine is somewhat helpless because they rely on Russia for half of their total gas needs. Gazprom "The chief executive, Aleksei B. Miller, said Gazprom had stepped up the price by an additional $100 per 1,000 cubic meters, to $485, far more than Gazprom charges utilities in other countries." Ukraine Struggle This influence has also been a factor in preventing intervention from other European Countries. Most of the continent is dependent on Russia for their natural gas supply. In order to be strong politically many are pushing for Europe to be independent from Russian natural gas. This however would be no small feat; it would cost Europe "$160 for every single person in Europe." Gas Prices in Europe If big changes don't come Europe may be "stuck with Russian gas" Gas Prices in Europe. One option is to get gas to Ukraine from other Europe how pay less to Russia, which could cause more harm than good. The other is to look elsewhere for a natural gas supply for all European, which would come from countries like the US or find some natural gas substitutes fast.

Car Cartel

When we hear the word 'cartel' we may only think of oil-powerhouses or drug lords. But unfortunately cartels exist in many areas of business, most illegally. To form a cartel multiple companies enter into an agreement where they agree to set a monopolistic level of supply thereby incurring a monopolistic price and profit. Sometimes these agreements are simply referred to as 'price-fixing'.

Last September several Japanese auto parts companies were prosecuted. These companies, including Mitsubishi Electric Corp. were setting high-prices for their auto parts which they sold to American car companies. These prices eliminated the competitive market and elevated the prices on 25 million vehicles from GM, Ford, and Chrysler, to name a few Autoparts Cartel.

Luckily this type of activity is highly prosecuted. These auto part companies pleaded guilty and face $740 million in fines Autoparts Cartel. The main legal issue is the harm to consumers, which for this case that encompasses many individuals.

How Cartels Work

Cartels gain profits and divide them among their members by taking away some consumer surplus 'A' and leaving dead-weight loss 'B' or money on the table in a competitive environment. Cartels are a huge harm to the economy; "the consumer losses more than the cartel wins" How Cartels Work.

Price Discrimination

Often we see various discounts for all sorts of things. As long as you belong to some demographic group you may be eligible for some type of discount. There are discounts on a college education, car repairs, or coffee. One of the most common price discrimination is senior citizen discounts. We might not be apt to look at these discounts as price discrimination, but that's exactly what they are: charging different groups of people different prices for the same product or service.

Our initial reaction may be either "that's not fair" or "it's good to cut someone a break who has a lower income." Let's take the last reaction: Does price discrimination help senior citizens because they are on a fixed income. The truth is, "A 2007 study shows that poverty rate among adults ages 19 to 64 is 15 percent but among people 65 and over is only 13 percent. Certainly there are struggling seniors, but as a group they are actually better off than the general population." price discrimination. So the real motive behind this price discrimination is increasing business revenues. Price discrimination takes advantage of groups who in one way or another have spending power. "Price discrimination exists because it is profitable. It allows sellers to capture demand along different parts of the demand curve." Just Marketing Blog Senior citizens in America “hold 80 percent of the country’s personal net worth" seniors. Making them a target market for many industries. If a senior citizen is going out to get a cup of coffee you might as well make sure they buy your cup of coffee. 

Now our other reaction to price discrimination, "that's not fair." Using senior citizens as an example; they have enough money but still get a discount, that doesn't seem right. Remember price discrimination happens all the time in more discreet ways that we accept. Like charging different prices on soda based on packaging or different prices on a meal based on location. In the case of senior citizens I may not have a satisfactory answer but it is just not strictly fair. As far as business goes its good for the economy. "Thirty-five percent of our population is over 55 years old, and these very affluent senior citizens control almost 45 percent of the disposable income of our country." senior citizen purchasing power. It is good for everyone to have a group of people with money to spend, to use it and fuel the economy. Price discrimination is one of the ways to incentivize that spending.

Greek is Good for New York

The dairy market is experiencing a surge in production. But why? Do Americans drink more milk than at other times? Not necessarily. However, Greek Yogurt has become quite fashionable. It is perceived to be healthier than other types of yogurt and at the same time seems luxurious.

Two of biggest producers in the Greek Yogurt market have facilities located in the state of New York. Because of such high demand there are plans for building even more plants to keep up. The growing Greek Yogurt market has lead to an increase in demand for its key input: milk. Greek Yogurt requires more milk to produce than regular yogurt. It takes 3 lbs. of milk to produce l lbs. of Greek Yogurt Greek Yogurt Boom. Luckily for New York Dairy Farmers this provides a reliable buyer for their milk. New York Diary Farmers would have to increase milk production by %15 in the next two years to keep up with demand Greek Yogurt Boom. Milk producers have begun increasing their herd sizes. Because of the proximity of the growing milk market transportation prices have fallen dramatically.

Perceptions have a lot of power for change “It’s nutritious. It’s safe, it’s healthy and it’s delicious. How can you be any better?” - John Sanford, a dairy regulator with the Tennessee Department of Agriculture Greek Yogurt Boom

Cost of Healthcare

A big determiner for whether or not to invest in a market is whether or not a market's price is greater or less than the average cost of production. One struggling industry we could easily apply this concept to is healthcare in America. It is no secret to the average American that our nations healthcare is under going major changes, reconfiguration, and exits.

Healthcare costs are also increasing for the consumer: "Between 2005 and 2013, average premiums for individual plans increased 37%." Rising Premiums But of course preceding consumer costs is the rise in costs for providers. The cost of malpractice systems, expensive drugs and devices, and tighter regulations (among many other variables) lead to increasing costs to maintain a feasible hospital. Some added regulations have come with the Affordable Healthcare Act that makes it mandatory to provide certain “essential health benefits” Rising Premiums. In 2011 a study found that "The average American worker costs their employer $12,000 annually for health care benefits and this figure is increasing more than 10 percent every year." 1/3 Hospital Closing

One study of the Massachusetts Hospital Association from 2008 showed that between 2004 and 2008 hospitals experienced a 50.2% wage increase for RNs alone. Massachusetts hospitals also saw an annual increase of 8.7% in Patient Care Supplies and Other Expenses. Hospitals also do a lot of their business with the government. With insufficient Medicaid and Medicare reimbursement hospitals sustain heavy losses. In the FY 2008 alone Massachusetts hospitals experienced Medicare payment deficits of $317 million MHA Costs. 

With healthcare costs only rising some think the new Accountable Care Organizations could provide an answer. Does the problem of rising costs really come from the payment-for-treatment system? Will hospitals be able to operate on a "payment-for-healthy-patient" system? Many hospitals are finding the average costs of operation too high and are closing their doors. The fourth hospital in two years in the state of Georgia has recently closed Hospital Closing. Another harsh side-effect is that these closings are more common in poorer areas. Some are even predicting by 2020, 1/3 of all hospitals will close their doors or be completely reorganized 1/3 Hospital Closing.

One big idea in economics and a key to understanding a countries economic health is inflation. First what is inflation? and Why does it happen?

Inflation simply put is when there is "a sustained increase in the supply of money" which leads to the increase in the prices of goods and services. For the longest time I thought there was a little magic involved or someone at the capital must sit at a desk and guess at the worth of the dollar that is currently circulating. Now that I understand the concepts of supply and demand it would be logical that currency should follow the same rules.

The Federal Reserve, through the request of banks, is in charge of meeting the demand for money. Banks request the money they need to meet their customers demand and the Federal Reserve issues the currency while backing the notes with collateral in the form of Government Securities or Gold Certificates. Banks also return money in the form of a cash deposits with the Federal Reserve. The Fed in turn removes the bills that are unfit for circulation and destroys them. Then a request is put in to the Bureau of Engraving and Printing to replace the old money with new. The Fed When the Federal Reserve is seeking to meet the demand for currency they do not simply "print more money". "The important concept here is that every time the Fed creates money, that money does not increase the total money supply in the economy, it increases the size of the Fed's balance sheet." Inflation The more appropriate name might be an "asset swap" on the Feds balance sheet. 

So how does inflation happen. What I didn't understand before was that inflation is a process. If the supply of currency increases that increases the demand for all goods and services because the average person has more money to buy them. Before production can match demand stores would have to set prices higher to avoid shortages. Even if this didn't occur producers respond to the spike in demand by increasing production. But increasing production happens at a price causing an increase in consumer prices. Each time prices across the board rise that means the dollar can buy less. Now you need more of them to buy what you did before with less. 

On the flip moderate inflation can be a good sign. A rise in prices signals healthy demand. Money in circulation makes for a moving economy. Inflation can be good?