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Monopoly In Latvia

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Defining Monopoly

The market consists of exchanges and trades between the buyer as a representative of the market demand and the seller as a representative of the market supply, both of which, in their actions, create a market price. A competition that is perfect or imperfect depending on the way of realization is considered as a major difference in market relations. The optimal and deficient factors of the competition are defined by the level of impact on the market price of individual sellers and/or buyers. In the case of perfect competition, the nature of the market

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  1. Where many small firms are behaving and generating similar production;
  2. It’s quite easy to enter and leave the market;
  3. Where sellers and buyers have full product pricing information when no company owns such market space so it can affect product prices.

Participant in the industry in such an environment has a motivation to make good use of capital. Opposite to the perfect competition is imperfect competition, about which the University of Cambridge professor Joan Robinson discusses in this book ‘The Economics of Imperfect Competition’ (1933). Imperfect competition is regarded as capitalism’s main disadvantage. Maintaining the highest price, not as it would be in perfect competition, businesses are earning higher incomes, but customers are losing. The economy functions at this moment but does not provide as much work as possible and the production of goods and services as possible. This, in turn, causes joblessness and political instability. This market model is hegemony (from the Greek word ‘monos’ meaning only+ ‘pōlein’–to sell)–a condition in which only one company produces the full supply of a particular product, thereby having an immediate impact on the quality supplied to the consumer and on the market price. Seen broader it can be a big or not big business that has the power to dictate market price and dominates a substantial part of the market. Monopoly is when there are unique features of the market:

  1. There is only one competitor on one side of the market buyer (demand monopoly is established) or seller (supply monopoly);
  2. A part of the non-monopoly market consists of a wide number of participants whose market price effect is negligible, in comparison with the perfect competition;
  3. Unlike the perfect competition market, where the cost of the product is constant, the monopoly may freely change it, since its individual supply (demand) is also market supply (demand);
  4. Clear monopoly is only possible if there is no product on the market that can be replaced by a monopoly product or that is identical in its use;
  5. The purchaser and the seller are fully informed of the market because the distribution monopoly knows all about the consumer demand, the supply monopolist, in effect, has all the required product information. Market participants with a non-monopoly portion are fully familiar with product prices.

Different Types of Monopolies

A natural monopoly occurs in the sector where one corporation with one type of product will meet all market demand with lower average costs than in the sector where there are lots of small companies. The most common examples are the distribution of gas and water. When their acts were not controlled by the government, then this form of a company might intentionally restrict production output to adjust a cost and gain. The state regulates private monopolists or provides this type of service on its own to avoid such problems. Usually, the natural monopoly is a company with high regular expenses that minimizes average costs in large quantities of production that can meet the needs of a large region like Latvia. Natural monopolies are established in the sectors where the existence of two companies would seriously increase production costs. The consequence of the deal is an imaginary monopoly. Industries decide on the knowledge conditions, output volumes and costs. Different forms of monopoly association are formed, the main ones being:

  1. Cartel – independent undertakings retain their legal and economic autonomy;
  2. Trust – once undertakings lack freedom, they are controlled under one centre;
  3. Concern – the holding company is operated by a group of different sectoral undertakings.

State monopoly governs various sectors where appropriate (e. g. alcohol and money) State monopoly may be affected by:

  1. Law on anti-monopoly;
  2. Promoting competition by encouraging the entry of new undertakings into the sector, allowing free competition for foreign undertakings;
  3. Command of cost and tax monopolies.

When a corporation obtains a patent to create a new manufacturing method, technological system control arises. As long as this technology is not available to the competitors, the company will become a monopolist in the sector for a certain period of time. A patent is then legally available to the rivals and the corporation loses the monopoly status. The monopoly of supply and demand. Supply monopoly the only one is a manufacturer (a seller), but there are many consumers (buyers). That’s right. Market form of demand monopoly (also known as ‘monopsony’) with only one buyer, known as ‘monopsonist,’ facing many sellers. Both the monopoly of production and the supply monopoly are severe economic types and are very rarely defined in practice.

Barriers of Entry

There must be an outcome rate in the monopoly to maximize a profit where the marginal revenue (MR) is equal to the marginal cost (MC). The production price is set when the total profit is reached by the demand curve. Market entry barriers are telling the number of firms in the sector. First barrier: in particular sectors, modern technology is specific, so effective production is only possible in large enterprises. It is the consequence of the frequency of performance. Second barrier: the impact of the outcome price is very pronounced in the individual sectors and competition is unlikely or complicated. For example, companies in the fields of electricity, gas, water supply and communication. Such markets are called natural monopolies, so developing parallel market undertakings is not logical. Third barrier: the state-organized patent and licensing system. The patents allowed the manufacturer to regulate his invention, thereby offering the monopoly status. The patent system has played a major role in monopoly development history. By issuing a licensing system, a business entry in the sector can be restricted.

Advantages of the Action of Monopolies

  1. There are sectors in which competition can create unnecessary capital and product duplication. Fuel, power, water and telephone infrastructure, for example. It would not be rational if two water or electricity supply companies would compete in each city house.
  2. Dominated enterprises can yield progressively, but in small, competitive enterprises it is complicated.
  3. Monopolists have more opportunities to find means of promoting exploration and development than rival small businesses. Monopolists are also more willing to fund exploration, as any innovation can yield a profit.

Disadvantages of the Action of Monopolies

  1. Monopoly can modify a price that significantly exceeds average production costs because the distribution of a commodity can be limited by monopoly.
  2. Since monopolists do not feel the pressure from other companies because there is no competition, they may not work well enough.
  3. Customers would have a variety of products in a market where there is competition, but if the sector is monopolized there is only one distribution chain that eliminates choice.
  4. Small, newly established enterprises generally introduce new technologies and new products. Monopoly means that there may be limits to new ideas and the stream of new products.

Latvian Monopolies

In the interests of the public, monopolization has its advantages and disadvantages. Government policy is pursued to minimize the monopoly’s drawbacks and where its benefits can be manipulated. Government monopoly control is related to the distribution of products and services. The government then establishes agencies that have the function of regulating monopolies and clarifying whether their acts are against the interests of the public. The ‘Competition Law’ was implemented in Latvia by the republic’s parliament and the state president (the enactment date was in 1998). The law defines the status of dominance in Latvia as an extraordinary market participant in the relevant market in which it does not have any competitors. The Competition Commission regulates the regulation of the Competition Law. The task of the Competition Council established by the Law is to oversee the merger process by reviewing notifications and allowing or prohibiting merger based on its further potential market influence. The law also contains unfair competition prohibition clauses. Competition law extends to market participants and any type of registered and unregistered organizations of market participants, to natural and state monopolies, as well as to all firms in a monopoly position.

Latvia has three major monopolies; all of their property belongs to the state. Two monopolists dominate the energy sector in Latvia Latvijas Gaze (Latvian Gas) and Latvenergo (Electric Power Energy) and Latvijas Pasts (Latvia Post) dominate the postal sector. ‘Latvenergo’ is a state-owned, vertically integrated power monopoly (which includes all processes from electricity generation to supply and transmission), which is the major part of Latvia’s electricity generation. This consists of several hydro and thermal power plants as well as electricity distribution networks as the business is vertically integrated. More than 50% of Latvia’s electricity is generated by hydroelectric plants, with the rest being provided by natural gas, peat and fuel oil thermal plants. Nevertheless, since hydropower can only fulfil the energy needs of the country for less than half a year, significant amounts of electricity from Lithuania and Estonia were supplied at the time of scarcity.

Another monopoly Latvijas Gaze provides the gas market in Latvia and offers a full range of gas distribution services. Natural gas accounts for about 30% of Latvian energy resources and it is expected that the share will increase. In the city of Riga, over 80 per cent of the total natural gas is used, while gas is not used in other parts of the country. The largest gas consumers in Latvia are the Latvenergo electricity utility, which accounts for about half of the consumption, followed by the Riga Siltums and Liepajas Metalurgs district heating entity. All the fuel used in Latvia is supplied from Gazprom in Russia. The state-owned joint-stock company Latvia Post, founded in 1992 (VAS Latvijas Pasts, LP), provides general postal services and additional postal services to private individuals and legal entities in the postal services field, and 39 private companies provide additional postal services, primarily express mail services. Mailing services; postal and express mail; media subscription, distribution and sale; financial services; retail; IT services; philatelic.

Latvijas Pasts action is controlled by state institutions:

  1. Sabiedrisko pakalpojumu regulēšanas komisija (Ministry of Communication);
  2. LR Satiksmes ministrija.

The period since 1980 includes reorganizing the Latvian economy from the planned state to the system of free markets. All legislation, including legislation regulating postal services, has been reintroduced. The main Postal law was adopted as a regulatory framework for the LP’s operation in May 1994. The network of postal services for delivering general services (the LP system, including local offices) has remained largely intact and the industry has been replaced by new operators providing new services. All the evidence shows that all these three monopolies in Latvia are natural monopolies, normal means of dominance in the industry, where one company with one type of product will satisfy all market demand with lower average expenditures than in the sector where many small businesses are. The industry is energy supply in two situations, the key goods of electricity and gas mainly offer benefit, and it can fulfil all market demand Latvia as a whole. The supply of electrical energy is steady as demand, but lately, due to the high inflation, Latvenergo raises the price of electricity that is the cause for protests from the public. As the potential solution to this problem could be exporting electrical energy from foreign countries, not purchasing it from regional sources of electrical energy.

Summary

Monopolization has its advantages and disadvantages concerning the interests of the public. Government policy is pursued to minimize the monopoly’s drawbacks and where its benefits can be manipulated. The main advantage of the operation of monopolies is that there is substantial financial funding for the exploration and development of the industry, but as the most drawback monopoly companies do not feel the pressure of competition, so they can provide the unqualified product/service. Monopoly activities have been known from the start of national independence, but now in Latvia, there are three major state-owned monopolies Latvenergo (Electricity Power Supply), Latvijas Gaze (Gas Supply) and Latvijas Pasts (Postal Services). These monopolists have a great deal of support for the state budget as they are the biggest taxpayers.

References

  1. Eurofound. (2019). Eurofound. [online] Available at: https://www. eurofound. europa. eu/ [Accessed 19 Nov. 2019].
  2. LIKUMI. LV. (2019). Likumi. lv – Latvijas Republikas tiesību akti. [online] Available at: https://likumi. lv/ [Accessed 19 Nov. 2019].
  3. Oecd. org. (2019). OECD. org – OECD. [online] Available at: http://www. oecd. org/ [Accessed 19 Nov. 2019].
  4. Pettinger, T. (2019). Economics Help. [online] Economicshelp. org. Available at: https://www. economicshelp. org/ [Accessed 19 Nov. 2019].
  5. Tansey, M. , Ziegler, L. and Schiller, B. (1994). Study guide to accompany Schiller, the micro economy today. . 6th ed. New York: McGraw-Hill.
10 December 2020

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