Meralco's Pricing: an Assessment
I. Introduction
Meralco is a natural monopoly. Natural monopoly exists when a firm is able to supply the total market demand more efficiently because of economies of scale that allow the firm to lower its cost as it expands capacity. However, like any firm in a market situation where there is imperfect competition or in a less-than-competitive market, a natural-monopoly firm, when left to its own, tends to limit its output to a point where its marginal cost equals its marginal revenue but charge a much higher price than what would have prevailed when there is a highly-competitive market.
In a highly-competitive market, the output tends to settle at a point where marginal cost equals marginal revenue, which also equals its price and where the unit cost of production is the lowest possible because of competition. When the price is greater than unit cost and profits are high, more firms will come to compete in the market and drive down the price back to where it is just equal to unit cost. When the price is below unit cost, the resulting losses will drive out some of the firm from the market, thus raising the price back again to where it is just equal to the unit cost of producing the product concerned.
Because a natural monopoly, like any firm in an imperfect market, charges a price way above the equality of marginal cost and marginal revenue, it also produces at a certain level of output that is less than what would have prevailed when the market is highly competitive. These twin evils (higher price than necessary and lower output than possible), which arise from the presence of a monopoly, make for a very strong case for government intervention.
In line with this, the researchers ought to know if Meralco has really an absolute control over the output produced and therefore charge the highest price to increase their profit. They also want to know the basis of pricing per kilowatt hour (kWh) and how do they implemented this to their consumer. II.
Meralco is a natural monopoly. Natural monopoly exists when a firm is able to supply the total market demand more efficiently because of economies of scale that allow the firm to lower its cost as it expands capacity. However, like any firm in a market situation where there is imperfect competition or in a less-than-competitive market, a natural-monopoly firm, when left to its own, tends to limit its output to a point where its marginal cost equals its marginal revenue but charge a much higher price than what would have prevailed when there is a highly-competitive market.
In a highly-competitive market, the output tends to settle at a point where marginal cost equals marginal revenue, which also equals its price and where the unit cost of production is the lowest possible because of competition. When the price is greater than unit cost and profits are high, more firms will come to compete in the market and drive down the price back to where it is just equal to unit cost. When the price is below unit cost, the resulting losses will drive out some of the firm from the market, thus raising the price back again to where it is just equal to the unit cost of producing the product concerned.
Because a natural monopoly, like any firm in an imperfect market, charges a price way above the equality of marginal cost and marginal revenue, it also produces at a certain level of output that is less than what would have prevailed when the market is highly competitive. These twin evils (higher price than necessary and lower output than possible), which arise from the presence of a monopoly, make for a very strong case for government intervention.
In line with this, the researchers ought to know if Meralco has really an absolute control over the output produced and therefore charge the highest price to increase their profit. They also want to know the basis of pricing per kilowatt hour (kWh) and how do they implemented this to their consumer. II.