Consumer Utility Maximization and Monopolistic Competition

This document discusses the concepts of consumer utility maximization and monopolistic competition in economics. It explains the importance of indifference curves and the marginal rate of substitution in maximizing consumer utility. It also explores the entry of new firms in the market under monopolistic competition. The document further analyzes the pricing strategies of Royal Mail as a case study. Students can find study material, solved assignments, and essays on economics at Desklib.

ECONOMICS1
Business economics
By (Name)
Course
Instructor’s Name
Institutional Affiliation
The City and State
The Date

ECONOMICS2
Part 1
Question one
In consumer utility maximization, there are two important aspects and they include; the price
of goods within the bundle and the indifference curve good bundles of the consumer. Hence,
the consumer utility maximizing bundle maximizes the overall benefits gained from specific
goods to the point of the Budget constraint (Roth 2012).
The indifference curve represents all combinations of consumer bundles graphically. Hence
each bundle on the indifference curve posses the same utility to the overall consumer (Mankiw
2014). The marginal rate of substitution is represented by the slope of any point on the
indifference curve. The marginal rate of substitution implies the overall willingness to give up
some goods for other goods by the consumer. In other words, this means moving from a
specific likely bundle to another bundle which the consumer is indifferent.
On the graph where there is good y and x. the marginal rate of substitution is the slope among
(x2, y2) and (x1, y1). Also, each and every bundle will be (x, y) coordinate point. Hence, in this
case, the budget constraint where utility is being maximized against must be considered. In
simple terms, a constraint of the Budget is regarded as a function in which B is equal to p2 =
price of good y and p1 = price of good x. Therefore the overall likely bundles or good
combinations, in this case, are B=p2y+ p1x. Therefore given that there is an equal utility on the
entire indifference curve, it is important to find out where the indifference curve intersects with
the Budget constraint in order to effectively maximize it (Free 2010).

ECONOMICS3
The ratio p1/p2 considering the y/x quantities is the tradeoff between the points on the Budget
constraint. This offers a representation of the MRS among the commodity bundles and thus
where the p1/p2 = MRS = dx/dy the Budget constraint effectively intersects the indifference
curve. This implies when the ratio of price is equal to the marginal rate of substitution the utility
maximizing bundle is attained.
Graph 1 showing the Marginal rate of substitution (Diaz 2012)
Question two
New firms can enter into the market in the long run under monopolistic competition. In most
cases, new firms are attracted to the market due to the profits enjoyed in the short run period
under monopolistic competition. The entry of firms into the monopolistic market, in the long
run, is facilitated by the absence of barriers to entry. In other words, firms are free to enter and

ECONOMICS4
exit the industry making it easy for firms to effectively penetrate the market in the long run.
The monopolistic competitive market is not like a monopoly market where there are barriers
(Diaz 2012)
.
The long-run equilibrium of a monopolistic competitive market is illustrated below(Diaz 2012)
Thus there is an increase in the supply of differentiated goods due to the entry of new firms
forcing the demand market curve of the firm to move to towards the left. The firm's demand
curve keeps on shifting to the left as more firms enter into the market. The shift continues up to
the point where the firm's demand curve is tangent to the AVC curve at the output profit
maximizing levels as illustrated in the figure above (Crosetto and Gaudeul 2017).
Therefore at such a point, there are zero economic profits and thus new firms cannot penetrate
into the market due to no incentives. The reason why new firms are attracted to the market

ECONOMICS5
under this form of market structure, in the long run, is the higher profits enjoyed in the short
run. Thus once the profits disappear, new firms are not able to enter the market. Henceforth
one concludes that normal profits are earned in the long run due to competition arising from
new firms entering the market (Carlin 2009).
Part two
Royal mail
Introduction
For this part of the paper, the domestic public limited company chosen which has some degree
of market power is royal mail. Royal Mail is one of the leading providers of universal postal
services in the United Kingdom. Since the year 2012, royal mail has undertaken a number of
research studies mainly focusing on innovation and efficiency in order to remain relevant in a
highly competitive industry. The company has undertaken a number of pricing strategies and
tactics to increase its overall levels of sales, market share and revenues despite operating in a
very fragile ecosystem characterized with structural declines in the postal sector and intense or
stiff competition (Cambridge Economic Policy Associates for Ofcom 2016).
Royal mails pricing strategies undertaken to achieve sales, market share, and revenues
Royal mails pricing strategies are based on the parcels competition, intensive upstream access,
addressed letter volumes and the overall levels of competition from other media. To effectively
avoid the tipping point, royal mail in its pricing strategies ensures that prices are set in a way
that the increasing long term rate of e-substitution is taken into account.

ECONOMICS6
Over the years royal has been undertaking a reasonable and at the same time fair pricing in
consumer letters. Most of the company’s services are affordable to the customers due to
favorable prices. It is only in the year 2012 and 2011 where material stamp rises were noticed.
Second class stamps overall pricing levels fall below the Ofcom set price cap (Deloitte for Ofcom
2016). Such as a pricing strategy plays a crucial role in attracting customers, increasing the
overall levels of market share and profitability.
Also, royal mail prices are highly constrained by intense parcels competition. It is important to
note that there is stiff competition that evident in the parcels market. It very clear that there
exists highly competition levels, disruptive models of business and higher disintermediation. In
some market segments, the overall prices of royal mail have been generally affordable. The
company has undertaken huge investments in a number of innovations processes and products.
To effectively deliver better value for money to the customers of the parcel, a number of
concerted efforts, strategies, and tactics have been undertaken by royal mail. The company
engages its self in broadened eligibility for services which are value-added like account
discounts, tracked account services for parcels, price promotions and decreases among others
(Cambridge Economic Policy Associates for Ofcom 2016).
It is also clear that royal mail company has exhibited a high degree or levels of freedom when it
comes to pricing that it was provided in the year 2012 in a responsible and fair way (Cambridge
Economic Policy Associates for Ofcom 2016). It is important to note that a better understanding
of price has enabled Royal mail to recover from significant negative cash flows and insolvent
balance sheet reporting (NERA Economic Consulting for Ofcom 2013). The company has over

ECONOMICS7
the years decided to ensure that the RPI is effectively given proper and effective consideration
on pricing strategies and tactics undertaken by royal mail (WIK 2013). It is clear that the high
levels of price restraint have also been influenced by the presence of digital alternatives in the
market. In other words in case of any form of unfavorable pricing, consumers are capable of
substituting royal mail products to the available digital alternatives. In the processes of
undertaking pricing decision, it is clear that the royal mail executives give specific variables
proper and urgent attention in order to remain relevant in the market. For instance, the
Transactional can be given as an example of some of the important factors or examples of
structural constraint being exhibited by royal mail (Post & Parcel 2015). It is important to note
that royal mail has over the years been prudent in its pricing strategies. For instance since in the
period of the year 2014 to 2014 the level of price increased was only 0.9 percent (Critique
2014).
Furthermore, the overall pricing record of royal mail can effectively speak for its self. The
organization has over the years been involved in pricing around or at RPI since the essential
recalibration to bring royal mail to profitability (Cambridge Economic Policy Associates for
Ofcom 2016). This has been undertaken in a very strategic and consistent manner. Following
the 2012 letter prices recalibration and 2013 prices of the parcel, the general prices rises were
able to return to a specific level which was comparable to those there were observed under the
old regime in 2010(Cambridge Economic Policy Associates for Ofcom 2016).
It is evident that in real times, the overall revenues of UKPIL have been drastically
reducing. By continuing the volume decline, the increases in prices were higher than the offset.

ECONOMICS8
The above shows the overall presence of important or significant royal mail pricing constraints.
As price increases in real terms, a number of strategies are undertaken by royal mail company
(UK Mail 2013). It is important to note that over the years when compared to other substantial
letter products, price increases for advertising were generally low. The above Cleary reflects
the overall level of stiff competition from other advertising forms and access operators. It is
clear that since the year 2012, the overall advertising mail price s on average has raised by c.
0.6% p.a which is relatively below the RPI. Following the price rises in the year 2013, there was
a general real reduction of prices on c. 1% p.a. average.
Also, there has been an increase in price by c. 1.8% p.a. below RPI for the case of parcels of
consumers following the April 2013 structural changes (Cambridge Economic Policy Associates
for Ofcom 2016). It is important to realize that royal mail also engages in nonpricing strategies
or behaviors. The company has been engaging and at the same time working with various
access operators to bring about a great service in receiving and sending in order to serve the
customers better (Postcomm 2010). Therefore the proper understanding of pricing has seen the
overall royal mail access market developed since the year 2004 when it was introduced. Royal
mail as of current data and information is being regarded among the largest European postal
access market. Recent information and data show that over seventy percent of all addressed
letter posted by big or large businesses are handled by access operators (Cambridge Economic
Policy Associates for Ofcom 2016). The overall nature of pricing in that time was not very
different from that of 2005, 2006, 2009 and 2010 when there was the existence of Avery
restrictive price control regime. It is that when setting prices in the letter's royal mail company
effectively ensures that there is an exhibition of a high level of commercial judgment

ECONOMICS9
(Consuming for Barclays 2014). Commercial judgment is important in maintaining a relatively
bigger base of the volumes of letters to the coming years for purposes of sustaining the overall
universal service. Variables that are outside the measured price elasticity’s are also considered
when developing pricing strategies by royal mail. It is clear that royal mails give a strong
consideration of other forms of media channels as very vital constraints.
The overall management undertakes proper research and is very alert on the price variations or
changes in other channels of the media like the television. Hence when developing prices that
will increase the level of sales, market shares, and profitability other media channels are given
proper attention. It is clear that for all letter segments the estimated average price elasticity's
are generally low (Davy Research 2015). Measured price elasticities are not reflected in the
pricing strategies undertaken by royal mail (Consumer Focus 2013). When deciding which
pricing strategy to undertake, the company is prudent about the likely future market changes
such as new product introduction together with other likely alternatives.
Price movements in other media of adverting like new papers and televisions are given keen
and urgent attention when setting prices for advertising mail for purposes of maintaining a high
level of prudent in pricing strategies undertaken by royal mail as a company. There is
asymmetric risk that is likely to trigger mass digitization arising from high prices according to
what royal mail believes in. There are a number of research studies undertaken by royal mail to
find out the steeper decline potential risk (CWU 2013). In the face of higher price increases
making customers to undertake more aggressive e-strategies of substitution, such cases are
very evident. When there is an undertaking of coordinated action by large mailers there is a

ECONOMICS10
considerable increase in the level of risk (Cambridge Economic Policy Associates for Ofcom
2016).
Royal mail has realized that there would be significantly higher price elasticity’s which are
estimated as a strategic response to increases in the pricing levels. There is a high level of e-
substitution associated with Business mail and all royal mail address accounts. The likely tipping
point impact of price increases resulting into mass digitization coupled with competitive
pressures caused by the internet heavily influence or constrain the pricing decisions on letters
undertaken by royal mail(DX Group PLC 2013).Generally, the overall prices pricing consumer
letters by royal mail has been reasonable and fair over the years.
In the period between 2011-2012 material prices increases were evidenced for retail
customers. This was a very significant re-calibration relevant to ensure that profitability levels
are enjoyed by royal mail (Sparrow 2009). As a way of ensuring that the company remains
relevant in the market, royal pricing has undertaken a number of innovations mainly targeting
pricing and products in letters of consumers. In all the pricing techniques undertaken by royal
mail, the consumer is always put at the focal point. Due to better pricing, there has been a 15
percent general fall of the total consumer complaints since the period of 2012(Ofcom 2012).
When setting prices for contract letters, royal mail company ensures that they are cost-
oriented, fair and reasonable. There have been a general complaint by Ofcom that changes in
pricing and contract terms may be as monopolistic strategy being undertaken by royal mail to
prevent or discourage expansion and the level of competitive entry. However, royal mail asserts
and maintains that its overall pricing has been very prudent. Royal Mail in its pricing ensures

ECONOMICS11
that the prices have not the capacity of putting an efficient end-to-end competitor at a
competitive disadvantage, there always cost-oriented and at the same time they are in line with
the law governing competition in the United Kingdom (Campbell 2011).
For purposes of ensuring that there is a high level of cost-effectiveness in processes and
products, royal mail engages in the structuring of its prices (Cambridge Economic Policy
Associates for Ofcom 2016). It is clear that royal mail effectively encourages adaptation of
highly automated products to encourage efficiency and effectiveness. The above strategy
comprises of setting prices of access which offers the proper and right customer incentives to
undertake various investments and at the same time move to new processes and technologies.
For purposes of incentivizing migration to mail mark, the company involves itself in structuring
[prices for bulk letter and access customers.
It is clear that there high levels of cost-effectiveness associated with mail mark both for the
customers and royal mail (Hope 2012). This is informing of relatively lower prices and high
levels of mailing visibility. There high levels of cost-effectiveness prevalent in utilizing pricing as
a way of enabling customers to move to trays from the provision of mail in bags. For purposes
of given mail producers and customers time to migrate, it is clear that there has been an
increase in differentials for both tray prices and mail mark.
On the move to mail mark, various consultations were undertaken involving customers. It is
clear that high price is capable of triggering a tipping point given that there has been a decline
of transactional mail. A number of customers have now appreciated and switched to the
available digital alternatives. Royal since the year 2012 has been engaging in price increased for

ECONOMICS12
inland mail. It is important to note that prudent organizations both small and big undertake
initiatives and strategies aimed at accessing the market and determining which pricing strategy
to undertake. Pricing plays a big role in the short and long run survival of an organization
whether small or big.
For the case of royal mail, the company has undertaken considerable efforts to ensure that
both the needs of the customer and the company are given proper and effective attention in its
pricing strategies (Mackie and Glassman 2012). The company has over the years been engaging
in fair pricing as a technique of eliminating or reducing the level of competition or preventing
entry of the industry by new companies and at the same time ensures that considerable sales
levels are made by the organization. High sales levels, in turn, results in increased market share.
Market share can't be increased if there high prices that deter customers from enjoying the
company's products and services and resort to the available substitutes.
The current technological changes have also increased the level of prudence in all pricing
strategies undertaken by royal mail if it is to survive in the united kingdom market both in the
short and long run period. It is clear that in the United Kingdom alone an estimated eighty-four
percent of the population can effectively access internet meaning that the general decline of
letters in the market is very massive. Therefore such changes called for a need of putting clear
and urgent attention on pricing if the company is to survive in the market. To put down the
overall pressure on price, royal mail has over the years been engaging in capacity investments
which have helped in maintaining greater levels of market share capacity (Mackie and Glasman
2012).

ECONOMICS13
Conclusion
Conclusively, royal mail has over the years been engaging its self in competitive pricing
strategies aimed at increasing the overall levels of sales, market share and profits. The pricing
approaches adopted by royal mail are fair in the sense that they put both the needs of the
customers and the company. Royal mail is aware of the stiff competition and technological
change in the industry, therefore to remain relevant in the industry it has been engaging in
research and serious reforms to ensure there is increased efficiency and effectiveness in its
product and service delivery mechanism. Various pricing innovations have been undertaken by
royal mail to suit the overall market changes. That is why inspire of stiff competition, high levels
of uncertainty, technological changes and other market changes, royal mail is and still remains
one of the popular and the same time reputable service providers in the united kingdom with a
relatively high level of market share. To attain a high level of marketing share, royal mail knows
that pricing is very important since it has a multiplier effect in attracting and retaining
customers both in the short and long run period.

ECONOMICS14
References
Cambridge Economic Policy Associates for Ofcom. 2016. Relevance of Margin Based
Approach.Retrievedfromhttp://stakeholders.ofcom.org.uk/binaries/consultations/royal-
mailreview/annexes/relevance-of-margin-based-approach.pdf
Campbell,S, D. 2011. Masters of the Post – The Authorized History of the Royal Mail. Penguin
Books. ISBN 978-0-241-95766-0.
Carlin, B.I. 2009. Strategic price complexity in retail financial markets, Journal of Financial
Economics , 91, 278–87.
Conlumino for Barclays. 2014. ‘The Last Mile: Exploring the online purchasing anddelivery
journey’.Retrievedfromhttps://www.home.barclays/content/dam/barclayspublic/docs/
BarclaysNews/2014/September/the-last-mile-report.pdf
Consumer Focus. 2013. Consumer Focus response to Ofcom's Call for inputs, Review of Mail
Integrity and Postal Common Operational Procedures, 23.
Retrievedfromhttp://stakeholders.ofcom.org.uk/binaries/consultations/mailintegrity/
responses/Consumer_Focus.PDF
Critiqom. 2014. Critiqom response to Ofcom’s 2014 consultation document,
RoyalMailAccessPricingReview,24Retrievedfrom,http://stakeholders.ofcom.org.uk/binaries/
consultations/rm-accesspricing/responses/Critiqom_Limited.pdf
Crosetto, P., Gaudeul, A. 2017. Choosing not to compete: can firms maintain high prices by
confusing consumers? Journal of Economics and Management Strategy , 26, 897–922.

ECONOMICS15
CWU. 2013. CWU’s response to Ofcom's Call for inputs, Review of Mail Integrity andPostal
Common Operational Procedures. Retrieved from
http://stakeholders.ofcom.org.uk/binaries/consultations/mailintegrity/responses/CWU.pdf
Davy Research. 2015. Transport Logistics – UK parcels market: return to sender.
Retrievedfromhttps://www.davy.ie/research/public/article.htm?
id=parcels20150415_16042015.htm
Deloitte for Ofcom. 2016. Econometric benchmarking in the UK postal sector:
Finalreport.Retrievedfromhttp://stakeholders.ofcom.org.uk/binaries/consultations/royal-
mailreview/annexes/benchmarking-report.pdf
Diaz, R. 2012. "Theories of markets:Insights from marketing and the sociology of markets". The
Marketing Review. 12 (1): 61–77. doi:10.1362/146934712X13286274424316
DX Group PLC. 2013. DX Group PLC’s response to Ofcom's Call for inputs, ‘Review of Mail
Integrity and Postal Common Operational Procedures. Retrieved
from,http://stakeholders.ofcom.org.uk/binaries/consultations/rm-accesspricing/responses/
DX_Group_plc.pdf
Free, R .2010. 21st Century Economics: A Reference Handbook. Volume 1. SAGE Publications. p.
8. ISBN 978-1-4129-6142-4.
Hope, C. 2012. "Fear of mass post office closures averted as Royal Mail agrees 10 year lifeline".
The Telegraph.

ECONOMICS16
Mackie, L., Glasman, M. 2012. "This cynical Royal Mail and Post Office divorce will bring only
misery". The Guardian. London: GMG. ISSN 0261-3077. OCLC 60623878. Post Office Ltd
Mankiw, N. 2014. Principles of Microeconomics. Cengage Learning. p. 32
NERA Economic Consulting for Ofcom. 2013. Approaches to Measuring the Efficiencyof Postal
Operators: Final Report for Ofcom. Retrieved from
http://stakeholders.ofcom.org.uk/binaries/post/postal-efficiency/nera.pdf
Ofcom. 2012. Securing the Universal Postal Service, Decision on the new regulatoryFramework.
Retrieved from http://stakeholders.ofcom.org.uk/binaries/consultations/review-ofregulatory-
conditions/statement/statement.pdf
Post & Parcel. 2015. DPD launches innovation accelerator programme in UK. Retrieved from
http://postandparcel.info/63741/news/it/dpd-launches-innovationaccelerator-programme-in-
uk/
Postcomm. 2010. Laying the foundations for a sustainable postal service – Annex 1Analysis of
Markets – Decision document. Retrieved from
http://webarchive.nationalarchives.gov.uk/20111027102050/http:/www.psc.gov.uk/
documents/1158.pdf
Roth, S. 2012. "Leaving commonplaces on the common place: Cornerstones of a polyphonic
market theory".Journal for Critical Organization Inquiry.10 (3): 43–52. SSRN 2192754
Sparrow, A. 2009. "Brown will back down over Royal Mail privatisation, predicts Labour rebel".
The Guardian.

ECONOMICS17
UK Mail. 2013. UK Mail’s response to Ofcom's Call for inputs, ‘Review of Mail Integrity
and Postal Common Operational Procedures’, retrived from
http://stakeholders.ofcom.org.uk/binaries/consultations/mailintegrity/responses/UK_Mail.pdf
WIK. 2013. Consult for Ofcom, Review of Postal Operator Efficiency. Retrieved
fromhttp://stakeholders.ofcom.org.uk/binaries/post/postal-efficiency/wik.pdf