Analysis of Natural Monopoly and Government Price Regulation in China

This essay provides a comprehensive analysis of natural monopolies in China, focusing on the government's role in regulating price setting. It examines how and why the Chinese government maintains control over key sectors like energy and telecommunications through state-owned enterprises, government pricing, hybrid pricing, and directive pricing. The essay delves into the mechanisms used to control prices, the industries affected, and the implications of these policies. It explores the challenges to competition posed by natural monopolies and the government's strategic use of these monopolies to control economic affairs. The discussion includes an examination of the legal and regulatory frameworks that govern these monopolies, providing insights into the economic dynamics of China's market. It highlights the restrictions imposed on foreign companies, the influence of the government in price determination, and the overall impact on stakeholders within the Chinese economy.

Running head: Natural Monopoly
Explain how and why governments may want to regulate the price setting of a natural monopoly
Country: China
Student’s Name
Course Code

1Natural Monopoly
Economy of a country is like the oxygen which enables the country to live breathe and
prosper. In the world of global economic development China is a country where the monopoly of
its economy is kept intact and with great pride (Baldwin, Cave & Lodge, 2012). Monopolizing
its economy has paid great dividends to the economy of China as it has pulled a large part of its
population out of poverty. Workers of China have moved from a low-productivity job to high-
productivity jobs which are yielding them higher incomes. Monopoly of economy has its own
features such as rapid urbanization, concentration of wealth, disparity among citizens, diversified
social status of people and many more. China is endowed with almost all the resources to make it
an economic superpower (CHEN & ZHU, 2012). But having resources and using them wisely
are two different issues altogether. To go in depth of the nature of monopoly discussion on the
nature and the way of business done by companies of China should be done. In the various
research papers about the Chinese economy it is written that it has a comprehensive strategy to
keep the monopoly intact and to improve it further. There are many things to be found out in this
discussion and the most important thing will be the how and why of the regulation the Chinese
government imposes on the price setting of a natural monopoly.
In the following discussion, it is imperative that the aspects and characteristics of the
Chinese monopoly over its economy will be thoroughly discussed in detail and with proper
analysis. It can be easily speculated that when it comes to monopoly of economy everything
which Chinese government produces and controls comes in the ambit along with the political and
administrative aspect of China as well (Crozet, Nash & Preston, 2012). But the emphasis will be
on the economic part as the discussion is about natural monopoly on pricing.

2Natural Monopoly
Price
Quantity
Marginal
cost
Average Cost
Demand
Marginal Revenue
Natural Monopoly Graph
Source: (Created by Author)
The first thing which comes into mind when the topic is raised about monopoly of pricing
is the natural resources produced in China. Industries which are based in China are dominated
mainly by the State Owned Enterprises which gives its government exclusive authority
andcomplete autonomy over the natural resources produced. When the survey was done in the
Guangdong province of China it was found that the State owned enterprises have access to
almost eighty industries whereas foreign companies have access to only sixty out of which
private owned companies are allowed to enter only 40 industries (Foster & McChesney, 2012).
This shows the grip of Chinese government over manufacturing through its own enterprises.
When it comes to the Energy Resources Chinese use their franchise to maintain their monopoly
as it is also binding by the Mineral Resources Law. This ensures the leash over one part of the
energy sector of China. Another vital part of energy sector is the oil industry in which the roots

3Natural Monopoly
Price
Quantity
Average Cost
Demand
Economies of Scale
on monopoly are very deep. China National Petroleum Corp., China National Offshore Oil
Corp., China Petrochemical Corp are some of the franchise who have exclusive rights of oil
exploration both inside and outside China and without their permission entry of any other
company is prohibited (Haucap & Klein, 2012). Along with this the corporations owned by
foreign partners working with the Chinese franchise are also kept on a tight leash. Another
prominent restriction which is applied for doing business is that the procedure of examination for
foreign companies. Any foreign entity that wishes to enter into the oil industry has to comply
with the contractual terms of the Chinese government which are very rigid. The government
authorized state companies negotiate, conclude and execute all the contracts. Apart from this, the
investment which is being done by foreign entities is also scrutinized by the investment
department.
Economies of Scale during Natural monopoly
Source: (Created by Author)

4Natural Monopoly
Due to rapid digitization of the world one industry which has become like a lifeline is the
telecommunication industry (Jun-hao, 2013). It is also a prominent part of the economy of China.
The country is the most populated one in the world and has been like this for recent decades. The
number of telecommunication users derived from its population gives it huge importance and
economic value. China exercises the same kind of monopoly on telecommunication industry as it
does on the previously discussed industries. All the more, telecom industry provides a much
refined example of the monopoly on private and foreign sector infringements in China (Joskow
& Wolfram, 2012). There is a permit system which restricts foreign and private entities to enter
into this industry as the terms and conditions are very firm with very less leverage. The
paraphernalia set by the Chinese government is very tough as it includes a registered license,
qualification of a legal person, having deep financial resources and manpower, decent track
record of the company in the field of telecommunication. Other than these, the company should
provide a feasibility study reportwhich contains business strategies, analysis of potential market,
investment benefit analysis and speculated quality of services (Liangchun & Wei, 2012). There
are other many clauses in the contract which are very hard to comply with which makes the
entire telecom industry highly monopolized.
Now coming on to the main part of monopoly of an economy which is monopoly pricing
it can be stated that the State controls all the prices which are allowed to be set higher or lower to
as per the convenience of the State to maximize the benefits of the stakeholders (Lin & Lin,
2015). Price being a dynamic entity is controlled by many implements owned by the State or
within a specific domain of the business which can control the volume of production and can set
prices according to the volume of products that are produced. There are several methods by
which the price control is conserved throughout China. Government pricing, hybrid pricing and

5Natural Monopoly
directive pricing are those methods (Minamihashi, 2012). At first we will discuss government
pricing. The areas where government pricing are deployed are railways sectors, electricity and
tobacco. There is an administrative department for Tobacco Monopoly under the council of State
which allows only specific brands and the administration department of Price. There are non-
representative brands of cigarettes which are also marketed. The prices of these cigarettes are
determined by the administrative department of Tobacco monopoly at the level of the provinces.
Then the prices are reported to the pricing authority set up for the provincial level. But since
2003, the Bureau for State Monopoly has taken up the system of unified approval of prices.
Almost all the pricing monopoly is tackled by the departments of administrations which
formulates the feed-in tariff and sale prices and are approved thereafter. There is a Railway Act
which provides the mechanism to set up the prices for railway transportation (Paltsev & Zhang,
2015).
Another technique used for Pricing Monopoly is Government Directive Pricing. It is said
to happen when the government bodies or the quasi-government bodies fix the prices of the
commodities according to the trends of the market. But the control on the commodities remains
with the government and the quasi-government bodies. It was seen before 1982, oil prices were
fixed and controlled by the government. But between 1982 and 1994, implementation of dual
pricing system was done (Shaikh & Ji, 2016). As a result, the monopoly price of oil was limited
to 100 million tons and the surplus production was sold to foreign entities at international prices.
But as the market status of oil changed in both domestic and foreign markets between 1994 and
1998 merger of prices of both the markets was done. This unified the prices of the oil in both
markets which resulted in acute monopoly of the oil prices. After the implementation of these
monopolies, in 1998 announcement was made by the National Development and Reform

6Natural Monopoly
Commission (NDRC) establishing a mechanism for price regulation of crude oil and other
products made by oil (TANG & GUO, 2012). The policy was to cater the rapidly changing rates
of oil prices in the international market. But since China had its own price monopoly under its
government it was made clear that from now on the price of crude oil will be determined by the
international market. Now, there was a change in the pricing system as the benchmark rate was
to be determined by the NDRC according to the international rates of the oil. The prices of
domestic oil were to be synchronized with the price of oil in international market on the first day
of June every year. The prices of other products of oil were to be geared with the same on fifth
day of June every year. The latest amendment in the oil pricing was done on nineteenth day of
December 2008 which stated that oil prices of domestic land will be linked to the prices of
international market (TANG & GUO, 2012). But the determination of the oil prices will rest with
the government and its authorized enterprises.
The last method of pricing monopoly which is executed by the Chinese government is of
Hybrid Pricing. It is the type of pricing where there is a coexistence of market prices, directive
pricing and government pricing. The most known field where such a coexistence exists is the
telecommunication field. The value added prices for telecommunication and the market prices
are determined by the government. Since there is much competition in the market the tariffs of
the telecommunication industry are regulated. There is another department of Information
Industry which manages all the hybrid pricing and tariffs for the services of telecommunication.
The department is owned by the State Council which consults with the pricing department of the
State’s Council. Once the approval is given by the State’s Council, implementation and
promulgation of the prices are done. It has been observed that the hybrid pricing is a result of a
pricing structure followed before 1978 (WANG & WANG, 2012). It was before this period that

7Natural Monopoly
government controlled all the prices of telecom industry. But later on in the beginning of
1996,China approved various vertical modifications to the tariffs of telecom industry. After that
the changes were made in the years 1997, 1998 and 2001 (Minamihashi, 2012). This allowed the
competition to flourish with the services to be rationally allocated. But still the government
controls major part of the pricing and tariffs of telecom sector.
When we talk about the relevance and desirability of a natural monopoly there exists a
staunch challenge to the policy of competition. There exists a natural monopoly when the fixed
costs far exceed the average costs. But in the case of governments natural monopoly is used as a
weapon to exercise complete control on all types of economic affairs. It creates a firewall for the
foreign entities who are subjected to severe rules and regulations if they want to do business in
China (Zhang & Paltsev, 2016). This gives the government enterprises the superiority to talk
terms and to bend the terms as per their interests. Most of the enterprises which are deemed to
exercise natural monopoly are the ones who provide resources of the services which are very
basic to the need of the citizens of China and have a huge market base of consumers. From the
beginning till the end everything related to pricing monopoly is in the hands of the government
and their enterprises who see to it that their grip on pricing stays strong no matter what the
situation comes. Indeed there are regulations and amendments but are very few in number and
are done with a huge time gap. It is quite interesting that one government enterprise is able to
manage and maintain the entire industry for which it executes the monopoly. As for example
energy resources, oil industry and telecommunication industry are such big fields of work where
outsourcing or incorporating other foreign entities are required (Zhang, Yang & Shackman,
2017). But to maintain the hold on every minute aspect of economy the Chinese government tend
to monopolize it.

8Natural Monopoly
As we can read in the above discussion that there are upsides and downsides of the price
regulation of a natural monopoly it is a choice which is made by the Chinese government. It
could have allowed investors and foreign companies to take part in the growth of their economy
by partnering in their government enterprise or by investing in their ventures. But instead they
choose to keep the foreign parties away from their business and do it on their own by exercising
price monopoly on almost every segment of business. Since they have been doing this for quite
some time, China has mastered the art of monopoly in its true sense. It cannot be negated that
they have done anything wrong as the growth of economy has been humungous and majority of
the people living in the country have benefitted from it one way or the other.We have discussed
earlier that how and why China executes monopoly, the types of methods used for exercising
them and the efficiency with which they have done it. Pricing monopoly shows the dominance of
the government on its subjects and also at the international level. This shows that they are self-
sustainable and can manage the economy by their own. But the downside is also very prominent.
Natural monopoly tends to breed corruption in the subjects of government enterprises. There is
no sense of competition in the market. The departments know very well that they have to
regulate the prices of commodities and thereby can control the economy of the country. It can be
concluded that Chinese government should relax their rigid monopolistic rules and let some
competition come in the government franchise. This will be more beneficial for the growth of the
economy but will be a serious blow to the natural monopoly.

9Natural Monopoly
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10Natural Monopoly
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