Cost of Capital in Pricing Monopoly in Communist Country 14 June 2006
People are sometimes confused with the term of monopoly. Wherever it is
conducted, monopoly is defined as a market set by only one provider of the
product or service. For example, in most communist countries there is only one
provider of telecommunication, transportation or electricity, which is normally
in the form of state-owned enterprise (SOE), as this type known as a natural
monopoly. Yet this monopoly market can also be applied in a liberal country
like the United States, or other Western countries. The term used is softer, a
quasi monopoly, and the example unsurprisingly are like Intel and Microsoft.
Monopoly is monopoly and the pricing decision of the product or service has to
be influenced by public regulation in one country in order to get a fair price.
In pricing a product, a company usually calculates the capital budget in a
feasibility study of a project to finally find the suitable profit margin. In
capital budgeting, the cost of capital is used as a comparative parameter with
the rate of return. The rule is that the return rate must exceed the cost of
capital. Once exceeded, an additional parameter like profit margin can then be
considered with, of course, the role of public regulation set by the authority.
In finance, the cost of capital can be calculated using the popular capital
asset pricing model (CAPM) as the cost of capital (k) equals to risk-free rate
(Rf) plus Beta times the market risk premium (MRP), which is the difference
between the risk-free rate and the market return (Rm).
k = Rf + Beta x MRP, where MRP = Rm - RfTo illustrate this calculation, I can
use the example of People Republic of China market, picking up the China
Telecom Corporation, which is 70% owned by the goverment and listed in Hong
Kong and New York stock exhanges. China is a communist country who has a
monopoly in telecomunication, however has 3 (three) considerable stock
exchanges: Shanghai, Shenzhen and Hong Kong exchanges that can be referred to
the market risk premium.
To define Rf, we use the Chinese Government Bond rate. From the three
exchanges, we choose Hong Kong Stock Exchange (HSE) index for calculating the
market return (Rm). For finding Beta, we use the historical prices of China
Telecom stock and HSE index. Then, calculate k, the cost of capital.
Whatever the result is, I have to say that even in a communist country, a cost
of capital matters. Particularly, in pricing a monopoly product or service.
How about Intel and Microsoft, they are originated in a very sophisticated
liberal country? The cost of capital, of course, matters. And also needs to be
regulated, as can be seen from the 2004 news on Intel being investigated by the
European Commission for quasi-monopoly.
THE European Commission said yesterday that it had re-opened a three-year-old
investigation into Intel, the worlds biggest computer chip maker, just weeks
after the companys Japanese offices were raided by regulators on suspicion of
anti-competitive practices.
0
[EMAIL PROTECTED]
[Non-text portions of this message have been removed]
------------------------ Yahoo! Groups Sponsor --------------------~-->
Check out the new improvements in Yahoo! Groups email.
http://us.click.yahoo.com/DEOZVC/fOaOAA/cosFAA/GEEolB/TM
--------------------------------------------------------------------~->
Ingin bergabung ke milis ekonomi-nasional?
Kirim email ke [EMAIL PROTECTED]
Yahoo! Groups Links
<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/ekonomi-nasional/
<*> To unsubscribe from this group, send an email to:
[EMAIL PROTECTED]
<*> Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
