In developing countries, consumers are more affected for two reasons. One is that consumers are more likely to buy raw ingredients. Without manufacturing entities to absorb some of the commodity price increases, consumers are left to absorb almost all of the increase (Ibid.). As a result, food prices have increased more in the developing world than in the developed world. Additionally, consumers in these countries already expend a significantly higher percentage of their income on food than do consumers in Western nations. Thus, demand for food in the developing world is price elastic and consumers suffer because they are unable to meet their food needs.
In the developed world, increased food prices suppress demand in other sectors of the economy, which can cause minor shocks in employment and investment in some businesses and industries. In the developing world, food price shocks can result in starvation and civil unrest. The recent wave of food price increases has resulted in protests in diverse places such as Mexico, Pakistan, Italy (Clayton, 2008) and many countries in West Africa (IMF, 2008). Thus, food prices increases are threat to political and social stability in many parts of the world.
There are several steps that governments can take to help limit the impact of soaring food prices on their economies. In the developing world, targeted subsidies can help alleviate the immediate impact on consumers (Ibid.). These subsidies should be temporary, with the goal of alleviating the impact of food price shocks until the market adjusts. In doing this, nations will stabilize food prices, which in turn ensures a degree of social and political stability. Without this stability, the government will be able to do little else to solve the problem.
Nations should also encourage increased domestic food production (Ibid.). This will have two impacts. One is that it will increase supply, which will lower prices of key goods locally. The other impact is that if the country is able to produce a surplus, the high prices of food will help to improve their balance of trade. Increasing supply is critical. Demand for food is increasing with the increases in the world's population and the world's wealth. There is increasing competition for agricultural production from biofuels and other cash crop needs. It is imperative that nations secure their own food futures by encouraging production.
Governments should also tie their food policies in with broader agricultural policies. In the developed world, ethanol demand has contributed to global food price increases. It appears that the ethanol boom is an unsustainable policy that has more negative impacts than positive ones. Governments in the developed world should take a more well-rounded view of agricultural production and develop policies that will allow them to meet both their food and their energy needs.
Part B: Question 1) an oligopolistic market is defined as a market that is dominated by a small number of firms. These can be stable, in which the firms do not change, or competitive, in which the firms do change (Bumas, 2000). There are seven main characteristics of an oligopolistic market. The first is that the market is dominated by a small number of large firms. A market in which there is a small number of firms only one of which is dominant is not considered an oligopoly. The reason is because only one firm is able to set market conditions - the other firms are presumed to be niche players that do not directly compete with the large one for the same customers.
The second characteristic is that the firms are rival conscious. When the firms in the market make decisions, part of their decision-making criteria is the expected response of their competitors. Competition in the industry is for the same set of consumers, therefore each firm makes adjustments based not only on what they feel the market will respond to, but also based on what they feel their competitor's response will be.
The third characteristic is that entry and exit barriers are high. This is a characteristic pertaining mainly to stable oligopolies, the most pure form of oligopoly. Barriers to entry prevent newcomers to the market. At times even the threat of newcomers can influence the behavior of the firms in the oligopoly. Barriers to exit prevent the firms in the market from leaving. This forces them to engage in direct oligopolistic competition with one another.
The fourth characteristic of oligopolies is that the product is typically homogenous. Differentiation can occur, but much of the time companies compete more on the perception of differentiation than on actual differentiation. Oligopolies seldom exist in markets where the product is purely commoditized but they also seldom exist in markets where the product is widely differentiated.
The fifth characteristic is that oligopolies have some control over price. Because of the relatively homogenous nature of the products, oligopolies face negative-sloping demand functions (Ibid.). Consumers are price-takers, and oligopolies have sufficient control over both their inputs and the markets that they can control price. The firms can and do engage one another in price competition, although this is seldom the sole basis for competition.
The sixth characteristic is that when the industry is stable, non-price competition is the norm. Price leadership factors into the competitive equation at times, but firms also seek to differentiate themselves somewhat, because price competition drives down profits to unsustainable levels. The high exit barriers make this scenario unpalatable for the firms involved.
The seventh characteristic is that competition arises when both price and non-price competition are practiced. If the firms compete only on price or only on non-price factors, the degree of competition is imperfect.
Collusion in oligopolistic markets can be detrimental to consumers. Firms in such markets are tempted to engage in collusion for several reasons. They are faced with high exit barriers which essentially force them into competition. However, price competition can be devastating to each company as it drives down margins and profits. However, the products are sufficiently homogenous that the firms have limited capacity to compete based on differentiation. Indeed, if significant differentiation was possible, the threat of new entrants would increase considerably, thus putting an end to the oligopoly. Therefore, the firms in the oligopoly are tempted to engage in collusion in order to maintain their profits and industry stability
Consumers, on the other hand, benefit from competition. Collusion between the firms impedes such competition. The firms will tend to keep prices higher than they would in a perfectly competitive market. The negative-sloping demand function encourages occasional price competition in order to win market share, but long-term price competition does not exist. The particular nature of oligopolies thus represents a deviation from perfect competition. Consumers, faced with relatively homogenous products and negative-sloping demand, would ordinarily be able to benefit from price competition, but the collusion prevents this competition from manifesting long-term. The result is higher prices than would exist without the collusion.
One example is with the beer industry, particularly before the emergence of microbreweries. Consumers received a standardized product because there was no incentive for the major breweries to differentiate. Moreover, prices were held higher than necessary because firms in the industry had a tacit agreement not to compete on the basis of price. One of the results of the collusion is that profits are maintained. If the firms in the oligopoly are all able to maintain relatively stable, healthy profits, they are less likely to compete on other bases. Thus, they spend less on capital investments and product development. The result is fewer new products, and overall a lower degree of product differentiation than would be possible without the guaranteed profits.
The tone of competition was instead focused on the perception of differentiation. This is exemplified in the extensive use of lifestyle advertising, and in new product developments such as light beers that are barely differentiated from the regular products, when compared with the diversity of beer types around the world. This type of competition kept the focus away from prices, allowing brewers the opportunity to remain consistently profitable.
Governments can control the worst abuses of the situation through laws that define collusion and set out remedies for consumers. In the United States, the Hart-Scott-Rodino Act allows the government to take preventative measures, by managing merger and acquisition activities to prevent such oligopolies from occurring. Governments can also influence the number of firms in a given industry through the use of tax and regulatory policy to encourage new entrants into a marketplace. Economic incentives can lower the barriers to entry. In the beer industry, it was the breaking down of legal barriers that allowed for microbreweries to emerge. Furthermore, imports were increased through the removal of trade barriers, encouraging further competition. The beer industry is thus a much weaker oligopoly than it was twenty years ago.
2) the objectives of managers of large companies differ from those of shareholders in many situations. One of the common factors in each situation is that the managers have the opportunity to…