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The Case:

Pakistan recently joined the 3G and 4G club by issuing licenses to Telecom companies. It is being considered giant leap for Pakistan. Four cellular companies, Mobilink, Telenor, Ufone and Zong took part in bidding. All four companies got 3G license while Zong also got 4G license. Due to 3G services faster data connectivity will be available to mobile phone users which means one can download with highest speed vis a vis faster web surfing will be a lot more fun. Due to this technology, people will attain uninterrupted video streaming on phones, enable video calls and big MMSs. Telecom industry experts hope that the number of high-speed data users will grow in Pakistan between 25 million and 45 million by 2020, which will add around Rs.400 billion to the economy and Rs.23 billion to tax revenues. Additionally the introduction of the new technology would create 100,000 new jobs and revolutionize e-commerce, e- learning, e-security etc. Launching of 3G and 4G technology will increase the demand for 3G mobile phone handsets.

Requirement:

Carefully read the above scenario and find out which theory of profit will apply to 3G mobile phone handsets dealers and why? Give reason.

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Replies to This Discussion

Monopoly Profit
Observe that the profit theories presented above were propounded in the background of the existence of perfect competition. But as conceived in the theoretical models, perfect competition is either non-existent or is a rare phenomenon. An extreme opposite of perfect competition is the existence of monopoly in the market. The term monopoly characterizes a market situation in which there is a single seller of a commodity that does not have close substitutes. Monopoly arises due to such factors as:
(i) economies of scale;
(ii) sole ownership;
(iii) legal sanction and protection; and,
(iv) mergers and acquisition.
A monopolist can earn pure or ‘monopoly’ profit and maintain it in the long run by using
its monopoly powers, including:
(i) powers to control price and supply;
(ii) powers to prevent entry of competitors by price cutting; and,
(iii) monopoly power in certain input markets.

Es Ki Theory to batao lagey gi kaun si :P

Innovation theory of profit will apply to 3g mobile phone handsets dealers because they introducing new methods of production.

n additional theory of economic profits, innovation profit theory, describes the above normal profits that arise following successful invention or modernization. For example, innovation profit theory suggests that Microsoft Corporation has earned superior rates of return because it successfully developed, introduced, and marketed the Graphical User Interface, a superior image based rather than command-based approach to computer software instructions. Microsoft has continued to earn above-normal returns as other firms scramble to offer a wide variety of “user friendly” software for personal and business applications. Only after competitors have introduced and successfully saturated the market for user-friendly software will Microsoft profits be driven down to normal levels. Similarly, McDonald’s Corporation earned above-normal rates of return as an early innovator in the fast-food business. With increased competition from Burger King, Wendy’s, and a host of national and regional competitors, McDonald’s, like Apple, IBM, Xerox, and other early innovators, has seen its above-normal returns decline. As in the case of frictional or disequilibrium profits, profits that are due to innovation are susceptible to the onslaught of competition from new and established competitors. Innovation Theory of Economic Profits.

monoply theory ha i think

Share your opinions girls and guys.What do you think

  • Frictional Profit Theory
  • Monopoly Profit Theory
  • Innovation Profit Theory
  • Managerial efficiency Profit Theory

is applicable to the mobile set dealers in the above case?

Discussion opens new horizons!!buck up!

Frictional Profit Theory

One explanation of economic profits or losses is frictional profit theory. It states that markets are sometimes in disequilibrium because of unanticipated changes in demand or cost conditions. Unanticipated shocks produce positive or negative economic profits for some firms.

Monopoly Profit Theory

There is no doubt that profits arise from dynamic changes, innovations and from making a correct estimates of future economic conditions. Another view point of profit is that monopolistic and monopolistic competition in the market also give rise to profits, the firms under monopoly or monopolistic competition have great control over the price of the product. They are the price makers rather than the price takers. As such they raise prices by restricting the level of output and thus keep profit at higher level. Monopoly power, thus, is the basic sources of business profits.

Innovation Profit Theory

First type of innovations is those which reduce cost of production, or in other words, which change the production, or in other words, which change the production functions. In the first type of innovations are included the introduction of a new machinery, new and cheaper technique or process of production, utilization of a new source of raw material, a new and better method of organizing the firm, etc. second type of innovations are those which increase the demand for the product, or in other words, which change the demand or those which increase utility function. In this category are included the introduction of a new product, a new variety or design of the product, a new and superior method of advertisement, discovery of new markets etc. if and innovation proves successful innovations either cost falls below the prevailing price of the product or the entrepreneur I sable to sell more and better price than before. It should be noted that profits accrue not to him who conceives innovation is to be introduced, it always calls for a new combination of factors or reallocation is to be introduced it always calls for a new combination of factors or reallocation of resources

Managerial efficiency Profit Theory

This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.

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