Meralco's Pricing: an Assessment

Topics: Economics, Monopoly, Metro Manila Pages: 9 (2485 words) Published: April 20, 2013
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. Methodology
The descriptive research method was used in this research, as it points out conditions and relationships that exist or do not exist. Furthermore, this method emphasizes more on descriptions rather than on judgments or interpretations.

Descriptive research is thus a type of research that is primarily concerned with describing the nature or conditions and degree in detail of the present situation. (Landman, 1998:59)
Descriptive data for research are collected by using different methods. It may be presented qualitatively or in verbal forms or symbols, or quantitatively in mathematical symbols, depending upon the nature of the material and the purposes for which one is doing research. III. Respondents of the study

The respondents of this study consisted of Meralco consumers and some people from the Department of Energy (DOE). The above-mentioned respondents qualified to the most needed criteria of the researchers, who were currently situated at the survey site.

IV. Discussion
A. Overview of Monopoly
A.1 Definition of monopoly
Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. A.2 Characteristics of Monopoly
Here are the main characteristics of pure monopoly:
a. Single seller. A pure, or absolute, monopoly is an industryin which a single firm is the sole producer of aspecific good or the sole supplier of a service; thefirm and the industry are synonymous. b. No close substitutes. A pure monopoly’s product isunique in that there are no close substitutes. Theconsumer who chooses not to buy the monopolized product must do without it. c. Price maker. The pure monopolist controls the totalquantity supplied and thus has considerable controlover price; it is a price maker (unlike a pure competitor,which has no such control and therefore is a pricetaker). The pure monopolist confronts the usualdownward-sloping product demand curve. It...
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