Theoretical And Empirical Evidence Related To Managerial Economics

Introduction to Economics and Managerial Economics

Individuals have restricted amount of requirements that should be satisfied if they are to survive as human beings. Economics is the study of this allotment of resources, the choices that are made by economic representatives. In other words, it is the science of making decisions in the presence of inadequate resources. On the other hand, a manager is an individual who directs resources in order to accomplish a stated objective. The science of directing inadequate resources in order to administer cost effectually is termed as managerial economics (Milgate 2014). It mostly comprises of three branches such as, market power, competitive markets as well as imperfect markets. A market comprises of purchasers and sellers that corresponds with each other for charitable exchange. The similar managerial economics apply irrespective of the fact that a market is global or domestic.    

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The essay provides an overview about the theoretical and empirical evidence related to managerial economics that suggests about the tougher stances that are required to be taken by the government in certain circumstances. The empirical evidence of managerial economics will provide a source of knowledge that is obtained by means of senses mostly by examination and experimentation. On the other hand, theoretical evidence does not make the use of empirical data such as questionnaires however; it uses examples that are hypothetical. It illustrates the fact that the government should regulate natural monopoly in order to protect the interests of the customers. It should also take a tougher stance to prevent collusion.

Throughout the course of managerial economics, the market is treated as a place where customers and sellers come jointly to trade commodities and services without the intervention of the government. However as opined by Keat and Young (2014), government intervention takes place every time a purchaser makes a decision. It is imperative to acknowledge regulations passed by the government as a manager. They also require to consider the impact of optimal managerial decision-making. It is becomes easier for competitive markets to accomplish social economic competence without regulation of the government. The major reason that leads to government intervention is the failure of the market that always does not lead to socially competent prices. Market failure mostly takes place when a market fails to accomplish economic efficiency and as a result, it is not able to maximize social surplus. However, without a market failure no competent argument can be made by the intervention of the government in competitive markets. As a result, intervention of the government is justified if it is undertaken to overcome failure of the market. The five forms of market failure that can damage economic efficiency are market power, public goods, negative externality, natural monopolies and information issues (Bleda and Del Rio 2013).    

Empirical Evidence of Managerial Economics

It is imperative to determine the type of government intervention that will be taken into consideration. It is also required to consider the macroeconomic change in the government policy as well as the change in the economic environment of economy. It arises several questions such as the factors that the managers are looking for that comprises of whether technology or a policy. The theoretical evidence highlights the fact that it is imperative to look into the basic problem of the mangers. The problems should be related to what is faced by the manager in the business and if so what the level of output and price that they have to achieve. The profit also requires to be maximized whether the profit has a maximization goal or not (Nepal and Jamasb 2015). The fact that, whether the firm have revenue maximization objective or not should also be considered. While looking at these facts, there are few more challenges for the managers that they require to answer. This provides a way by which the managers will be able to maintain a competitive advantage. The differentiation of a commodity should be in terms of quality as well as services. The fact, that whether outsourcing alliance merger is beneficial or not should also be considered.              

Managerial economics relates economic theory and techniques to trade and administrative decision-making. There are several rules that are prescribed by managerial economics that helps to enhance managerial decisions. It helps to identify the economic forces that affect an organization as well as the financial results of managerial behavior. A decisive examination of the above mentioned statement seems timely. The concepts related to common carrier and public utility acts as a traditional ring however; they have imperative contemporary applications. The theoretical and empirical evidence of managerial economics states that the government should take tougher stance in order to regulate natural monopolies (Olafsen et al. 2015). Natural monopoly has the market power that induces a firm to set prices higher as compared to the competitive markets.  As a result, they are viewed as unlawful entities.

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The price that is set by natural monopoly prevents the economic system from meeting requirements that could be met perfectly. The theoretical evidence of managerial economics provides an all-inclusive application of economic theory as well as methodology to managerial decision-making. The government requires to make the use of price ceiling that regulates natural monopoly by enforcing a maximum probable price that is being charged. It acts as a regulatory policy that states a precise good or service that cannot be sold for above a certain price (Vikharev 2013). Another tough stance that should be undertaken by the government is the rate of return regulations that is quite identical to average pricing of cost. It diverges through facilitating a model that can generate steady proceeds for the company involved. The final way by which the government can regulate natural monopoly is by implying larger taxes on larger players as well as subsidies on smaller subsidies. In other words, according to the theoretical evidence the government can provide financial assistance through subsidies to new entrants to make sure the competitive environment is more reasonable. Mostly all who work in the field in order to fundamentally requisite, wise and inevitable, suppose regulation. The evidence also illustrates that the government should control mergers and takeovers and prevent collusion (Mallick 2014). This is mostly because; antitrust laws and the cautious control of mergers, acquisitions, joint ventures, and other strategic coalition are decisive in the regulation of natural monopolies.  

Theoretical Evidence of Managerial Economics

If a firm is under a natural monopoly, rivalry does not play its forcing role of diminishing prices to the level where a firm earns zero economic profit. Local and state authoritarian commissions mostly set the prices for natural monopoly. To accomplish economic competence, controllers require that the monopoly charge a price that is equivalent to its marginal cost. However, there is a drawback that is associated with this strategy. The average total cost curve of the firm continues to decrease while crossing the demand curve. However, if the firm charges a price that is equivalent to its marginal cost, prices will be lesser as compared to the average total cost that will lead to economic loss (Lim and Yurukoglu 2014). However, in order to break-even, most of the regulators will set the price to the level of average total cost.          

According to the managerial economics, collusion among producers to fix prices as well as carve up markets is flourishing. This is accompanied by increasing cartels that is global in scope. According to competition authorities, several large conspiracies had been disclosed. These authorities are still unscrambling a large international network of cartels among suppliers. According to Lee (2016), the makers of seat belts as well as radiators have heavy fines whacked on them. Fixing of price has infected high funds. Some of the biggest banking names stand charged of swindling interest rate and foreign exchange targets. As a result, the managers are likely to get fined heavily and are also likely to go to prison (Boroujerdizadeh et al. 2013). Collusion also involves fixing of price that leads to deadweight loss as well as other inefficiencies. It is thus clear that collusion requires to be avoided for the sake of efficiency of the economy. However, economic efficiency is not the ultimate goal of the society. Most of the cartels also operate across borders and as a result, the theoretical evidence of managerial economics induces the government to take a tough stance. The type and nature of the collusion are likely to lead to either cartel or keiretsu. This can also lead to division of territories so that each has a natural monopoly in a specified geographic area (Fugger, Katok and Wambach 2015).   

According to the empirical evidence of managerial economics, government plays a powerful role in global trade. Tariffs and quotas that manage the level of importation as well as their ability to compete with domestic firms influence this type of trade. Government makes the use of tariff to protect local industries from overseas competitors. However, the local industries in turn acts as a natural monopoly that induces them to charge a higher price that also produces more output. According to the empirical evidence of the managerial economics, the government requires to implement an antitrust law as well as antitrust enforcement (Lake and Linask 2015). The antitrust law helps to regulate natural monopolies that are mostly intended to promote competition as well as prevent the development of monopolies. The Sherman Act mostly targets that had formed to form trusts. As a result, the natural monopoly firms are able to collude. After the commencement of this law, trust disappeared however; the term antitrust law continued. In order to address the loopholes, the government passes the Federal Commission Act that gave power to eradicate unfair trade practices. The managerial economics also induced the control of mergers that indicates a trade-off between market power and efficiency. The federal government mostly controls the mergers. This is mostly because, if firms increase market power by merging they make the use of this power to increase prices as well as diminish productivity (Coase 2013). Three types of mergers require to be controlled by the government that is based on the rivalry relationships between the merging parties. Under managerial economics, the government is mostly concerned about horizontal mergers that merge between industry and firms. Under a horizontal merger, a single firm gets hold of another firm that produces and sells a similar commodity in the similar geographic area.

Types of Market Failure

The three basic competitive problems that take place due to horizontal mergers involve three basic viable issues. The first issue deals with the eradication of competition among the amalgamation companies that depends on the size that could be imperative. The second issue deals with the amalgamation of the merging operation of the firm that creates considerable market power and enables the merged entity to increase prices by decreasing output unilaterally. The third problem deals with augmenting concentration in the pertinent market, the business might make stronger the aptitude of the remaining participants in the market to organize their pricing and output decisions (Gao, Peng and Strong 2015). The terror is not that the units will employ in secret collaboration however; the decrease in the number of industry members will develop inferred organization of behavior. On the other hand, the merging that takes place firms at diverse stages of production is termed as vertical mergers. In other words, when a single firm gets hold of either a customer or a supplier they are categorized under vertical mergers. Another type of merger that the government should control conglomerate mergers that include all other attainments that comprises pure corporation transactions under which the merging parties have no apparent relationship. Some decrees authorize the directors to discard the policy at any point up to the filing of the final papers (Braid 2016).

Similarly, vertical mergers take two forms where the first form involves forward incorporation with the help of which a firm acquires a customer. The second form involves backward integration with the help of which a firm buys a supplier. However, two advantages are associated with the replacement of market exchanges with internal transfers. The vertical mergers internalize all transactions between a producer and a supplier. This in turn converts a potentially adversarial connection into something more like a joint venture. The second advantage deals with internationalization that provides management with more effectual method to monitor and enhance performance. The overall economic entities are however not diminished due to vertical integration of mergers that operates at one level of the market. However, the industrial behavior pattern might get changed due to vertical integration (Hong, Zhonggao and Chen 2015). The managerial economics illustrates that both forward and backward integration does not stop a newly acquired firm to make a decision regarding dealing with a newly acquired firm. This can also lead to loss of market share of the suppliers. These in turn increases the apprehension about the fact vertical amalgamation is likely to foreclose competitors by restricting their assess to sources of supply or to individuals. However, vertical mergers might also be anticompetitive due to their entrenched market power that impedes new trades from entering the market (Yao and Zhou 2015).

Government Interventions in Competitive Markets

The tough stance should be undertaken also due to conglomerate mergers because conglomerate transactions takes several forms that ranges from short-term ventures in order to complete mergers. A conglomerate merger mostly involves firms to function in a diverse market. It however does not have a direct impact on competition. There is no diminishing or other alteration in several firms in either the obtaining or market of the acquired firm (Markovits 2014). This type of mergers mostly supplies a market or demand for firms that provides entrepreneurs with liquidity at an open market price as well as with a major incentive to form a new enterprise. The existing managers are likely to raise efficiency due to threat of takeover in the competitive market. It also provides prospects to firms to diminish costs of capital and overhead that helps to accomplish other efficiencies. The social and political objectives of retaining independent decision-making centers will be impaired that will preserve democratic procedures.  Circumstances with the most open-minded business laws authorize an existing conglomerate to absorb an additional company by merger devoid of submitting the policy to its shareholders for support unless otherwise required in its certificate of amalgamation (Chen and Rey 2015).     

The regulation of mergers and takeovers are mostly based on the concern that mergers inevitably eradicate competition among the firms that are merging. This apprehension becomes most sensitive where the participants are direct competitors. This is mostly because, courts often assume that such measures are more prone to limit productivity as well as raise prices. According to empirical evidence of managerial economics, the tough stance that requires to be taken by the government is to scrutinize proposed mergers more cautiously. This has been highlighted because, since 1980 the federal government has become less antagonistic in seeking the avoidance of mergers. According to Pautler (2015)., despite anxieties that related to reduction of competition, U.S law has left firms comparatively free to purchase or sell overall firms or precise parts of the firms. However, according to theoretical evidence, mergers are able to bring enhanced administration and technological skills to bear on underused assets. They can also manufacture economies of scale as well as scope that diminish costs and raise productivity. The managers are likely to get discouraged due to the probability of a takeover that might to lead to diminishing profits. A business owner is also enabled by a merger to sell the firm to someone who is already recognizable with the industry and who would be in the improved position to pay the uppermost price. Antitrust law that is initiated by the government seeks to forbid transactions whose credible anticompetitive results overshadow their likely benefits (Coates and John 2014).                

Challenges for Managers

It can be concluded that the government requires to make the use of price ceiling that regulates natural monopoly by enforcing a maximum probable price that is being charged. It is often argued that augmented competition in a market leads to an increase in competence that benefits both society and individuals. However, the problem that is associated with natural monopoly is that if it is left unregulated it can lead to less output as well as induces suppliers to charge a price that is more than what is socially most favorable. This leads to the requirement for regulation of the natural monopoly. To accomplish economic competence, regulators require that the monopoly charge a price that is equivalent to its marginal cost. On the other hand, a large majority of modern merger control regime requires to be undertaken as it leads to decrease in productivity and welfare loss to the society. The existing managers are likely to raise efficiency due to threat of takeover in the competitive market. It also provides prospects to firms to diminish costs of capital and overhead that helps to accomplish other efficiencies. Vertical merger is a part of non-horizontal merger that can lead to competitive harm in the form of foreclosure. Merger leads to increase in the costs of downstream competitors by limiting their access to an imperative input. On the other hand, collusion also involves fixing of price that leads to deadweight loss as well as other inefficiencies. It is thus clear that collusion requires to be avoided for the sake of efficiency of the economy. The government requires to introduce a tough stance to reduce collusion as it leads to economic recession as well as substantial incentive to cheat on collusion treaty. As a result, the managers are likely to get fined heavily and are also likely to go to prison. Collusion also involves fixing of price that leads to deadweight loss as well as other inefficiencies.                                    

References

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Boroujerdizadeh, A., Ghobadi, A.R., Yaribakht, A.H. and Abdoullah, M.S.B., 2013, January. A novel method to reduce collusion attack possibility on watermarking. In Advanced Communication Technology (ICACT), 2013 15th International Conference on (pp. 1066-1071). IEEE.

Braid, R.M., 2016. Efficiency?enhancing horizontal mergers in spatial competition. Papers in Regional Science.

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Coase, R.H., 2013. The federal communications commission. The Journal of Law and Economics, 56(4), pp.879-915.

Coates, I.V. and John, C., 2014. Mergers, acquisitions and restructuring: Types, regulation, and patterns of practice.

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Gao, N., Peng, N. and Strong, N., 2015. Market power in horizontal mergers: Evidence from wealth transfers between merging firms and their customers.

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Lee, J.S., 2016. Schemes to Achieve a Binding International Agreement on Regulating Cartels. Springer.

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Mallick, N.C., 2014. Applications of Price Gap and Adjustment Weights in Analyzing a Natural Monopoly with a Linear Decreasing Marginal Cost Function.

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