The Myth of Natural Monopoly, Research Paper Example

A major consideration that low-calorie frozen, microwavable food companies must consider in making long-term capital budgeting decisions deals with the cost of supplies, the profit of the item, the availability of supplies, the demand of the item, and the extent of success that the competition is having (Arnold, 2008). Since the company is currently facing increases in the costs of major ingredients, it is essential for it to consider this factor while reviewing the budget. Possible solutions to this issue are increasing the price of the product if it would still be profitable or switching to a different supplier.

To ensure that the price of the product is less elastic, it is essential for the managers to switch vendors. It is likely that the frozen food product requires a variety of materials, many of which are obtained locally in order to control prices. To ensure that the growth of local crops and maintenance of livestock does not have an impact on the ability of the company to do business, it is essential to diversify suppliers. It is essential for the company to conduct research to determine the cost of supplies from suppliers around the world and determine what the least expensive options would be. Ultimately, it would be idea for the company to sign on with and work with anywhere between 5 and 10 suppliers for each product they require. These locations should be spread out so that the likelihood of growth and weather conditions impacting operations will be minimized. It would be beneficial to include overseas suppliers in this plan, provided that the shipping costs and tariffs would be negligible compared to the overall cost.

A pricing strategy would be to increase the overall price of the product. Before deciding to do so, it is essential for the frozen food company to determine the quality and price of the products that its competitors are selling. If the price increase would negatively impact sales due to the availability of a similar product at a lower price, the company should avoid making this decision. If the company is able to offer a higher quality product at a slightly higher price, then a price change will be reasonable. For this to be worthwhile, it may be beneficial for the company to revise the product that is being sold. To ensure that the price can stay the same, it would be reasonable for the company to begin selling less food in the package than it had previously. Otherwise, increasing the quality so that it matches the price offered would be an additional solution.

According to the rules of economics, an increase in price would lead to a decrease in demand for the product. Therefore, it would be more reasonable for the company to offer less product in the package and remain at the same price it had been offering its customers. This will allow the company to continue to gain profit. If the price of the product is lowered, it is likely that the supply will be unable to meet the demand. If the price of the supplies for the frozen food product increased, this is likely due to a decreased availability. Thus, there is less raw material available and the best way to resolve this issue is to ensure that the cost of the product remains stable. Diversification of suppliers is a useful method to assist with this process.

Government policies have an effect on production and employment primarily based upon their ability to increase or reduce inflation in addition to agricultural subsidies that they grant. Since governments have control over money, they are able to determine how much to release, in addition to policies that would provide money to save banks who would otherwise go bankrupt, in addition to a variety of other policies that would impact their nation’s economy. Furthermore, governments have a direct control on the amount of production that occurs in farms as a consequence under laws such as the Agricultural Adjustment Act of 1933 (Karnik&Lalvani, 1996). This means that the government will pay farmers money to not grow a certain amount of a certain crop or to encourage growth of other crops. This is done to ensure that competition will work in a manner that allows for the consumers to access product at fairly regular prices. As a consequence, the government has direct control over the supply and demand of crops.

This is applicable to this case study because the price of the supplies for the frozen food could have risen as a consequence of government control. If too much of the product was being grown, then the government would step in to reduce it, thus protecting the farmers from cost inefficiently producing more crop than there is demand for. However, since there is less crop available, the prices will rise. In order to reduce the influence of government decisions such as these to the company, it is important for the company to hire lobbyists that work to prevent crop price increases.

Regulation to ensure fairness in the low-calorie frozen food industry is not needed. Since there are regulations in place to ensure that farmers are protected that that companies of any sort are able to obtain adequate quantities of produce, this is a fair industry. The main factor that would remove fairness from this industry would be if the government were to allow a monopoly, so that only one major low-calorie frozen food company could exist at a time (DiLorenzo, 1996). However, this is not the case. It can be clearly observed that current regulations are meant to control supply and demand, and this has little impact on the ability of a growing frozen food company to survive (Train, 1991).

Government regulation would exist in this instance if the government indicated to frozen food companies that certain companies would have exclusive access to farms while others do not. Another way this could occur is if government regulations stated that certain companies would be able to operate in certain locations while others could not. While this occurs in other industries, this does not occur in farming or food processing, so this is not applicable. Two examples of government involvement in a similar market economy include television producing companies in addition to the stores that they are sold in. Television producing companies are required to purchase a variety of supplies in order to build their finished product. These supplies cost varying amount based on their supply and demand in addition to government regulations. For example, government safety regulations would increase or decrease the price of certain electronic components. Therefore, the television manufacturing industry has a similar market economy to that of the low-calorie frozen food industry. The stores that televisions are sold in are applicable because the government is unable to control the locations in which these stores are built and operate. Therefore, the market directs where they are placed, which is often in areas in which there is the highest demand for televisions.

Two examples that are not similar to the market control previously explained occurs in the internet and power industries. Both industries have wires prebuilt under the homes and businesses of the areas in which they serve, and permission to do so was granted by the government. As a consequence, consumers do not have the ability to choose which internet and power providers they want, because the prebuilt wires under their households determine who is able to provide the service. By failing to encourage the competition, the government is essentially allowing monopolies in these instances. Therefore, the internet and power industries are relatively unaffected by the free market because the prices of these services do not follow supply and demand.

In the case of the frozen food industry, major complexities that would arise under expansion via capital projects would include the continued ability to compete, and the ability to acquire the appropriate amount of supplies in order to make more product. In addition, expansion would increase overhead costs, so there would be a need to determine whether the move would increase the company’s profit. In order to prevent or address these complexities, it is essential to first conduct research to determine the actual demand of the product. A useful way to do so would be by issuing surveys to previous and potential customers in addition to a random sample of the population. Furthermore, it would be necessary for the company to calculate a detailed figure of what the overhead costs that would result from expansion would be and to determine whether this would increase profit, decrease profit, or maintain profit.

To create a convergence between the interests of stockholders and managers, it is essential to create a method that will help increase the profitability of the company. Ultimately, increased profitability will result in the potential for expansion, which will draw more stockholders to have an interest in the company. When more stocks are purchased, the value of the stock will rise, which is beneficial for the individuals who hold a majority of the stock. Managers would be interested in an increased profit because it will appear that they are doing their job effectively, which could potentially result in raises and related workers benefits. An example of this would be if the price of the frozen food were to increase. If demand is high, the company would gain more profit. A second way this could occur is if the price of the product is kept the same, but less product is offered.

In conclusion, it is essential for the frozen food company to diversify their suppliers to ensure that cost will be controlled. Government policies have an impact on the price of crops, which is particularly relevant to the frozen food company. It is important for the company to understand that steps should be taken to send lobbyists to Congress to encourage lawmakers to reduce the price of the crops. The frozen food industry is dependent upon the free market, as principles of supply and demand apply. Raising the profitability of the product will benefit both the managers of the company and stakeholders.

References

Arnold, Roger A. (17 December 2008). Economics. Cengage Learning.

DiLorenzo, Thomas J. (1996). The Myth of Natural Monopoly. The Review of Austrian   Economics,9(2): 43–58.

Karnik A, Lalvani M. (1996). Interest Groups, Subsidies and Public Goods: Farm Lobby in Indian Agriculture. Economic and Political Weekly, (31)13: 818-820.

Train, Kenneth E. (1991). Optimal regulation: the economic theory of natural monopoly. Cambridge, MA: MIT Press.