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Copy of Meralco and its Market Structure

A discussion on Meralco and the energy industry market structure in the Philippines

Jean Sherina Berdan

on 9 February 2013

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Transcript of Copy of Meralco and its Market Structure

Meralco and
Its Market Structure Questions engaged in power distribution
covers 22 cities and 89 municipalities
awarded 25-year franchise in 2003, covering
9.3 thousand square km. and around 25% of
Phils. total population
boasts 97% coverage rate
purchases primarily from NAPOCOR and from smaller IPPs (Independent Power Producers)
diagnosis: monopolistic firm Factors contributing to high barriers of entry:
economies of scale
government licensing and other legal barriers
control over an essential resource economies of scale
bigger firms can achieve lower average total per-unit costs
if assets are liquid, barrier of entry may not be significant
legal and political barriers
protects business from potential competitors
examples: taxes, tariffs, exclusive franchises, licensing Background of Meralco Monopoly High Barriers of Entry From Greek words meaning "single seller"
single seller of a product for which there are no good substitution
high barriers of entry to other firms into the market Monopoly Patents
gives inventors property rights
gives exclusive commercial rights to products
copying requires permission of patent holder
generally leads to higher prices for products already developed High Barriers of Entry Control over essential resource
protects the firm from potential direct competitors High Barriers of Entry Profit Maximization How Does Monopoly Lose Money? where MR = MC
if average total curve is above demand curve at any level of output Competition vs Monopoly Welfare Implications deadweight loss results from the differences
between monopoly pricing and competitive pricing, as well as monopoly output and com-
petitive output.
Consumers are losing out on some consumer surplus (CS). Under perfect competition, P = MC. Under a monopoly, P > MC. CS goes down because of two factors.
(a) There are some people that would have gotten the product (and some CS) under
perfect competition that are no longer getting it (triangle B).
Welfare Implications (b) Those that are still getting the product have to pay more for it than they would
under perfect competition, so the dierence between marginal benefit and price
has decreased (rectangle A). Note that rectangle A is not deadweight social loss

2. Surplus loss also occurs due to producers not selling as many units as they would under
perfect competition (triangle C). Welfare Implications Rectangle A is not considered deadweight loss, even though it is no longer consumer
surplus. This is because it is now going to firms in the form of profits. So even though it
isn't CS anymore, it hasn't "vanished" like the deadweight loss area, it has just changed into
producer surplus. Since the monopoly outcome is not the (efficient) perfectly competitive outcome, there has to be deadweight loss Welfare Implications
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