According to the article "Owners allege overcharging by Tenaga National Berhad (TNB)" published on The Sun, 25 October 2011, several factories and
residential property owners who claimed they had been overcharged by TNB after their meters were
changed without consent called on the Energy Commission. First of all, TNB is a utility giant
which also known as Oligopoly in Malaysia.
Oligopoly is from a Greek word meaning "a few" where
there are a few firms dominate the market for a good and services. The product the sold could
be homogenous or differentiated. Homogenous products are petroleum products, aluminum, metal,
steel and electricity whereas differentiated products are airline, cars, beer and
cigarette. Although they have control
over price by manipulating the quantity of the product supplied which
means price can be reduced but they usually are not simply because it makes greater profits, often by
restricting output and this would make low-income earner suffer. Oligopoly has strong entry barriers
just like monopoly. In my opinion, government should start regulating these type of company in Malaysia.
Firstly, a lot of consumers has been complaining "After the new meter was installed, their
monthly electricity bills rose from around RM50 to RM60 monthly to about RM150." In addition, we
consumers have no rights to refuse TNB's request to change electricity meter and no evidence showing that
current meter are faulty. Oligopoly firms may or may not choose to maximize profits. However, Tenaga National Berhad choose to maximize their profit but this will result in price rose. Price will exceed marginal
cost of production and result in misallocation of resources. They usually denied wishes of consumers
because they are not willing to sell at lower price.
I think
the reason TNB overcharging is because they are lack of competition which may
result in exploitation of consumers and lack of incentive to improve
quality of product. There are also complaints by consumers "I made several calls to TNB Subang Jaya.
Sometimes the calls were put on hold, and on those times I got through I was passed from one department
to another and subsequently cut off.", this shows that TNB has reduction in customer services. There are
some company entered the market, one named "YTL Power" entered the market but there are
barriers to entry which makes TNB hard to maintain its position. One of the barrier, TNB may have access
to cheaper inputs where TNB able to purchase its capital and machines at concessionary rates and
this will provide TNB with an cost advantage over new firms. Secondly, non-collusive oligopoly
faces 2 possible demand curves which is highly elastic and highly inelastic. The kinked demand curve
will formed if it met the two requirements. If one firm raises its price, consumers can buy from other
firm at cheaper firms so that more expensive firm losses sales. In general, rival firms will not match
price rises but will match reduction in price. Increase in price causes a loss of sales revenue and loss of
market share. However, only very successive advertising and brand allegiance could avoid these to
happen. The top half of the demand curve represent " rival ignore" demand curve where
relevant for price increases. On the
other hand, if one firm decides to lower its price, the rival firms tend to
follow otherwise they would lose the market share to the competitors.
The second half of the demand curve represent "rival
follow" where competitors follows when price cuts. Therefore, the fact that rival firms will always
follow price reductions but ignore price increases produces a kink in the industry demand curve.
Moreover,
there are also collusive oligopoly and cartels where firms in an industry reach
an covert agreement to fix prices, divide up market share or
restrict competition between themselves. There is a tendency for collusive oligopolists to behave
just like monopolist by maximizing joint profits. The pink segment shows the
supernormal profit earned by the oligopolists with collusion.
However, differences
in cost and demand conditions, secret price concession and cheating act
as an obstacles to collusion. If firms have identical or similar
demand and cost conditions, they will tend to behave collusively and maximize joint profits, price and
output will be same as those monopoly firms. Since Tenaga Nation Berhad is a electricity company,
measured by cent/kWh, costs will be the same. In Malaysia, electricity company is controlled by government,
so the effect will not be that bad because of regulation.
Cartels
is a form of collusion which involves a formal written agreement about price
and production. For example, output must be controlled and the
market must be shared in order to maintain the agreed price. However, there are obstacles to collusion,
first of all, demand and cost differences as stated above. Secondly, number of firms is another obstacles
to prevent collusion, this is because when there are more firms in the market, the more difficult it
will be to achieve collusion. Also, cheating among oligopolists will also makes collusion difficult. Some
firms will engage in somewhat "secret" price cutting so that they can make additional business for
themselves. Last but not lease, collusion will fail if recession occurs during that period because slumping markets
cause average costs to rise.
The
performance of oligopoly is very complicated. Many economists would argue that
the outcome of oligopolistic markets will be similar as in
monopoly where production occurs where price exceed marginal cost and this is short of that output where
average cost is minimized. Neither allocative nor productive efficiency is likely to occur. However, some
would say oligopoly is less desirable than monopoly because monopoly is often subject to government
control or regulation to avoid abuse of market power. Collusion may give similar price and output as
monopoly, but maintaining the outward appearance of several competing firms. Oligopoly firms are
dynamic efficient because of competition, it provides a strong incentive to be technologically
progressive. Cost-reducing production technique and improved product that may make TNB unique among competitors.
In short, both short term profits and long term survival makes oligopolists under continuous
pressure to innovate.
In
conclusion, government may want to make the market more competitive so that
there won't be market failure and inefficient company that wasting
resources. By doing this, it will help low-income group to afford cheaper electricity and it would help
consumers to compare price between the firms. Also, if the firms want to gain higher sales, the price will
be even lower, therefore, this will benefits the consumers.
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