Liberalization of Network Industries

Maastricht University
School of Business and Economics
Liege, 20th March 2021
Cavas, N.
I6236928
International Business
Academic Writing Skills EBC1009AW
Group number: 13
Tutor name: Morrison Judy
Resit Main Paper
c.cavas@student.maastrichtuniversity.nl
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Table of Contents

1. Introduction .............................................................................................................. 3
2. Monopolies ............................................................................................................... 4
3. Competitive market .................................................................................................. 6
4. Effects & Solutions .................................................................................................... 8
5. Conclusion ................................................................................................................ 9
6. Bibliography ........................................................................................................... 11
7. Table of Figures....................................................................................................... 12
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1. Introduction

In recent years, around the globe many governments have taken part into the

liberalization of network industries such as telecommunications, transports, etc. This

movement can be compared to previous ones, mainly in the late 1970s in the United States of

America and in the early 1980s in the United Kingdom. Since then, the European Commission

has introduced this liberalization reforms into some markets with successful outputs. As

mentioned previously, those reforms have known some successes in the telecommunications

and air transport sectors, which are now completely liberalized and are turning up into the

competitive market. While some other markets have not yet been fully liberalized, they are

following a right way to arrive at the endpoint of being fully liberalized. The objective of this

paper is to give an overview on how industries, companies have known drastic changes and led

to a liberalization of network industries.

This paper is starting by explaining why a company being present in a network industry, is

naturally a Monopoly (e.g., Apple). As well as, describing the situation before the

“Liberalization” by understanding why this has changed by time to an open market with a

major competitiveness. Moreover, the paper will investigate on how come that many policy

makers supported “Liberalization”. Finally, this paper provides the consequences on the

consumer as well as on the producers due to the changes, this means after the liberalization.
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2. Monopolies

Nowadays companies have much more liberty compared to fifty years ago. Indeed,

thanks to this “liberalization”, companies have switch from a monopolistic market to a

competitive market. A monopoly is globally defined as “an industry structure in which only

one seller provides a good or service that has no close substitutes” (Acemoglu, Laibson, & list,

2020). There were several reasons for the companies to be organized as a monopolistic state.

First, a market in which one firm provides a good or service at a lower cost than can

two or more firms do is called a natural monopoly (Acemoglu, Laibson, & list, 2020). In fact,

around the 1970/1980s, the telecommunication, electricity, ... sectors were completely new,

this means that there was a path for one undertaking in the market. These new inventions were

also subject to large economies of scale, in other words, the average total cost (ATC) per unit

of output decreases as total output increases.

Price

ATC
MC

Quantity

Figure 1: Graph showing average total cost (ATC) and marginal cost (MC)
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IBM a European company is known for its uniqueness being the fact that the company

is very present in the IT industry. This strength enables the company to enter and set up itself

in many sectors of the industry world (M. Rometty, 2015). This means that nobody else could

enter in this market as the capacities and competencies to compete are not met. Even Apple

was not able to compete with IBM, and obviously was acquisitive (Enderle, 2009). The firm’s

main goal is to achieve and create differentiated products and values for their customers and

shareholders. IBM is not simply a “hardware, software, services” company, it is even more

complex than that, as the company is emerging as a cognitive solutions and cloud platform

company. As a matter of fact, IBM followed the idea that Data is the world’s new natural

resource, and it is transforming all industries and professions. IBM has been building and

acquiring the capabilities necessary to lead in data and analytics, deepening their industry

expertise and growing partnerships and ecosystems. Today, their data and analytics business

are the industry leader (e.g.: generating revenue of 18 billion in 2015) (M. Rometty, 2015).

Second, in a monopoly, it is often recognised two types of market: the legal and the

natural markets. The former can be defined as “an obtained market power through barriers to

entry created not by the firm itself but by the government” (Acemoglu, Laibson, & list, 2020),

while the latter can be defined as “occurred when a firm obtains market power through barriers

to entry created by the firm itself” (Acemoglu, Laibson, & list, 2020). For both of these markets

some barriers are risen, which indeed constitutes a monopoly. Looking at the legal market

perspective, the two major barriers are patents and copyrights. Patents are privileges granted to

an individual or company by the government, which gives him or her the sole right to produce

and sell a good (Acemoglu, Laibson, & list, 2020). While copyrights are some exclusive rights

granted by the government to the creator of a literary or artistic work (Acemoglu, Laibson, &

list, 2020). To illustrate that, Apple one of the biggest company of electronics,
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telecommunication, has acquired few companies such as Shazam, as well as Beats or even Siri

(Reiff, 2020). All of those companies have been integrated into each and different Apple’s

devices. By acquiring those different companies, it authorizes the company or the companies

to grant the rights to use their services.

3. Competitive market

The liberalisation of the network industries has been a major event in history. To

understand this, looking to the example of the Swedish Post. It suggested and was in favour of

liberalisation. This would avoid threats from new technologies and new competitors in the

market, as the world was able to develop and give the opportunity to many competitors to take

the lead in development and enter competitive markets (Moyson, 2014). Most EU countries

have suggested that it would be more vigilant than Sweden Post to need a monopoly to

safeguard the Swedish Post.

After this liberalisation, Europe was slowly facing a competitive market, this means

that a lot of competitors were entering the market (Bogaert, 2005). The latter was obviously

growing considerably, although there were some negative effects regarding the revenues, the

benefits that each of the companies were making. The perfect competition has some differences

from the monopoly. Indeed, while monopolies are selling goods or services with no close

substitutes, the perfect competition is consisting of identical goods, in other terms,

homogeneous products (Acemoglu, Laibson, & list, 2020). Henceforth, this raises some big

challenges, such as making the product the company is selling, in a way that is different from

other competitors, so that this specific company attracts its clients. In the case of the Swedish
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Post, the company should had offered some services that would attract its consumers to come

and use them because they are cheaper than the rivalry.

Furthermore, the fact that there are no barriers to entry for competitors, this makes it

much easier for companies, huge, as well as small ones to enter or to exit the markets. By doing,

so, the market value is also low because some many firms are present in a single market. The

price is obviously set according to the market demand curve, by this the perfect competition is

a market where opponents are price-takers, directly linked to a perfectly elastic demand curve

(well shown on the following graph).

Figure 2: Demand Curves for Perfect Competition vs Monopoly

On graph (a) it is clearly understandable that the perfect competitor demand’s is equal

to the marginal cost (MR). While on graph (b) the demands faced by the monopolist is the

entire market and is therefore downward sloping. Say for example, if the monopolist charges

$100, it cancels one thousand units, if it increases the price to $200, it sells only four hundred

units. Compared to the perfect competition, it is actually different, indeed, whatever the

quantity sold the price will be fixed at a certain amount.

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4. Effects & Solutions

Thanks to the liberalization process which enabled the world and especially the

European continent to develop itself. Some strong evidence will be given in the following lines

of this paper. The most important and biggest development in our world is certainly technology.

It has taken a very considerable place in the lives of everyone in this world.

The technology of today is not the technology that was known a few years ago. Indeed,

after this liberalisation, technology has become the key element in every sector of the market,

be it in the automobile, aviation or even in education sector. The world has become automated.

As every change, innovation, there are drawbacks as well as benefits. High tech has facilitated

much of the work that needs to be done. This has greatly reduced costs and therefore allowed

the development of new products and services that are needed. On the other hand, the gains of

liberalisation in sectors like electricity, postal services, and rail were questioned. Since energy

is such a strategic industry, some Member States, such as France, were worried about the

market opening process and worked hard to postpone it. Postal services and rail, though

perhaps less strategic, are similarly challenging industries due to the anticipated social costs of

job cuts that complete liberalization would require.

Remaining in the scope of technology, it can be obvious that the market of mobile

phones has known a great innovation for the last years. Indeed, with the introduction of the

first mobile phone on earth by Motorola, in 1973, the world of technology has been completely

revolutionised (Hamilton & Quinlan, 2007). With this new innovation companies such as

Apple had a great advantage, as a matter of fact, the company could diversify its products, and

they of course introduced a few years later the first iPhone. The latter enables to show that
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because of the liberalisation and with the introduction of new innovations, some companies

will certainly benefit from it, such as Apple. While some other companies, mainly small ones,

quite struggle with it because they do not have the necessary technologies in this case, or in

general the necessary materials to remain into the market. To the present day, e-commerce has

become one of the essentials for the creation of any project, or to be able to diversify, as well

as to move forward in today's world.

Last but not least, the Corona Virus destroyed a large majority of physical businesses,

and this certainly allowed many companies to expand into the e-commerce market. Again, as

mentioned above, there are pros and cons to every individual. The Earth is facing somewhat a

scarcity, in other words Scarcity exists because people have unlimited wants in a world of

limited resources. The world does not have enough resources to give everyone everything they

want (Acemoglu, Laibson, & list, 2020).

5. Conclusion

Liberalisation has been a great success with low prices, better quality products and

greater innovation. Unfortunately, nothing is ever perfect, which is why there are some

exceptions following liberalisation. Now, the biggest problem has been solved. What remains

important is to ensure that European citizens will benefit from this liberalisation, especially in

this competitive world.

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In order to allow these different industries in the competitive market to develop further,

it is important to alleviate or remove those obstacles that are against the development of these

markets. As everything is in the hands of the European Commission and having the power to

initiate proposals for new legislation. This means that the sooner new directives are

implemented, the more it will allow these companies, industries to grow quicker.
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6. Bibliography

Acemoglu, D., Laibson, D., & list, J. A. (2020). Economics. Maastricht: Pearson.

Fukuda, K. (2019). ffects of trade liberalization on growth and welfare through basic and

applied researches. Japan: Journal of Macroeconomics.

Bohnstedt, A., Schwarz, C., & Suedekem, J. (2012). Globalization and strategic research

investments, Research Policy. Duisburg: Research Policy.

Bogaert, H. (2005). Reforming network industries: experiences in Europe and Belgium.

Europe: Belgian Federal Planning Bureau; the European Economic & social Committee

& the Central Economic Council.

Reiff, N. (2020, December 22). Companies Owned by Apple. From Investopedia:

https://www.investopedia.com/investing/top-companies-owned-apple/

Moyson, S. (2014). The individual in policy change: Policy learning in the liberalization of

network industries in Belgium. Louvain: University of Louvain.

Mitchell, S. (2017). The Rise and Fall of the Word 'Monopoly' in American Life. The Atlantic.

Enderle, R. (2009). IBM and Apple: Why We Love Monopolies and Then Kill Them.

TECHNEWSWORLD.

M. Rometty, V. (2015). Annual Report. New-York: IBM Inc.

Hamilton, D. S., & Quinlan, J. P. (2007). Sleeping Giant: Awakening the Transatlantic Services

Economy. Washington, D.C.: Center for Transatlantic Relations.

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7. Table of Figures
Figure 1: Graph showing average total cost (ATC) and marginal cost (MC) ........................... 4
Figure 2: Demand Curves for Perfect Competition vs Monopoly ............................................. 7