Thursday, August 27, 2009

Challenges for the Free Market

The English Premium League (EPL) likes the telcos to compete for the rights to their shows, as the competition will increase the fees payable to them. SingTel and Starhub had been competing against each other for the rights, leading to higher charges payable by the viewing public.

There is some suggest that SingTel and Starhub will work together to submit a joint bid. EPL will object and may reject it. More importantly, is this a monopoly in reverse, where the combined buying power will bring down the price?

A similar situation has happened in the pricing of iron ore and other mineral products. China is a big buyer of these products. Two companies in Australia are big producers. There has been some dispute on the pricing of these products.

These are examples of the failure of the free market to determine the correct prices. When certain producers or buyers have a dominant share of the market, they can exercise pricing power to the detriment of the other party.

It is quite dangerous to rely on the free market for pricing, when it can be subject to many practical challenges. There must be some other ways to ensure a fair price, rather than depending on the free market blindly. The new approach requires the people in charge to exercise their judgement, using a more transparent process where all the affected parties are able to present their views.

There are many aspects of life in Singapore, where the reliance on the free market to determine prices has not worked well. They are in the public transport, power, water, health care and financial services. I hope that a new approach can be taken on these matters.

Tan Kin Lian


Michael Lim said...

This is a classic example of free market in cable TV not working to the advantage of the consumer. I hope the regulator will look into this matter before prices head further north (not that it hasn't). Consumers don't exactly have a freedom of choice here.

Tan Kin Lian said...

Like luxury goods, consumers have the choice of going without them. The same argument applies to the EPL.

If we find the price to be too high, we can boycott the EPL and go for other forms of entertainment, such as the movies, DVD and other sports.

There is no need to complain about the high price for EPL. If the demand comes down, the price will come down. This is an example where the free market works well (but not for the other areas that I have mentioned).

Anonymous said...

EPL is a product competing with other products like La Liga, Serie A etc. Nothing wrong with auctioning to highest bidder. But something's wrong with monopolies like SMRT fixing the price and profit they want.

Parka said...

This is an example of a Prisoner's Dilemma. Applied in economics, it means if the parties don't work together, they will work to destroy each other.

There are standard solutions to solve this dilemma, but it depends on the incentives and goals of these companies.

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