Indian Economic Laws: Some Examples

If you want to do business in India, it is important to recognize some essential economic laws in India. These include laws framed as early as 1872 (which are still applicable) as well as those framed just a few years ago. 

Broadly speaking, you need to be familiar with 20 essential economic laws, listed here in chronological order. They form the overall legal framework of the Indian business environment. 

The Indian Contract Act (1872): Established the framework within which contracts can be executed and enforced.

Negotiable Instruments Act (1881): Set rules for promissory notes, bills of exchange, and checks.

Workmen's Compensation Act (1923): Set the compensation to be paid by employers to injured workers.

Sale of Goods Act (1930): A mercantile law that complemented the Contract Act (see above).

Payment of Wages Act (1936): Established a minimum monthly salary for industrial and factory workers.

Industrial Disputes Act (1947): Provided for the investigation and settlement of industrial disputes.

Minimum Wages Act (1948): Fixed minimum pay rates for certain jobs.

Factories Act (1948): Regulated labor in factories.

Employees Provident Fund and Miscellaneous Provisions Act (1952): Established provident funds, family pensions, and other monetary benefits for factory employees.

 Maternity Benefits Act (1961): Regulated post-childbirth time off for female employees.

 Payment of Bonus Act (1965): Regulated bonus payments to be made to certain categories of employees on the basis of production, profit, or productivity.

 Monopolies and Restrictive Trade Practices Act (1969): Established rules to prevent unfair concentrations of economic power.

 Indian Patents Act (1970): Set rules for patent protection in India.

 Payment of Gratuity Act (1972): Provided for payment of gratuities to Indian employees in certain industries.

 Copyright Act (1975): Helped establish copyright protection in India.

 Arbitration and Conciliation Act (1996): Set up to govern arbitration issues.

 Geographical Indications of Goods Act (1999): Provided legal protection for goods originated in a particular area or region within India (examples include Darjeeling tea and Basmati rice).

 Trademarks Act (1999): Helped establish trademark protection in India.

 Designs Act (2000): Helped establish protection of designs.

 Competition Act (2002): Provided for the establishment of a commission that promotes competition, protects consumers, and ensures freedom of trade.

By Ranjini Manian from Doing Business in India For Dummies

Extension of Imperfect Competition: Advertising

The models of monopoly and of imperfectly competitive markets allow us to explain two commonly observed features of many markets: advertising and price discrimination. Firms in markets that are not perfectly competitive try to influence the positions of the demand curves they face, and hence profits, through advertising. Profits may also be enhanced by charging different customers different prices. In this section we will discuss these aspects of the behavior of firms in markets that are not perfectly competitive.

Advertising

Firms in monopoly, monopolistic competition, and oligopoly use advertising when they expect it to increase their profits. We see the results of these expenditures in a daily barrage of advertising on television, radio, newspapers, magazines, billboards, passing buses, park benches, the mail, home telephones, and the ubiquitous pop-up advertisements on our computers—in virtually every medium imaginable. Is all this advertising good for the economy?

We have already seen that a perfectly competitive economy with fully defined and easily transferable property rights will achieve an efficient allocation of resources. There is no role for advertising in such an economy, because everyone knows that firms in each industry produce identical products. Furthermore, buyers already have complete information about the alternatives available to them in the market.

But perfect competition contrasts sharply with imperfect competition. Imperfect competition can lead to a price greater than marginal cost and thus generate an inefficient allocation of resources. Firms in an imperfectly competitive market may advertise heavily. Does advertising cause inefficiency, or is it part of the solution? Does advertising insulate imperfectly competitive firms from competition and allow them to raise their prices even higher, or does it encourage greater competition and push prices down?

There are two ways in which advertising could lead to higher prices for consumers. First, the advertising itself is costly; in 2007, firms in the United States spent about $149 billion on advertising. By pushing up production costs, advertising may push up prices. If the advertising serves no socially useful purpose, these costs represent a waste of resources in the economy. Second, firms may be able to use advertising to manipulate demand and create barriers to entry. If a few firms in a particular market have developed intense brand loyalty, it may be difficult for new firms to enter—the advertising creates a kind of barrier to entry. By maintaining barriers to entry, firms may be able to sustain high prices.

But advertising has its defenders. They argue that advertising provides consumers with useful information and encourages price competition. Without advertising, these defenders argue, it would be impossible for new firms to enter an industry. Advertising, they say, promotes competition, lowers prices, and encourages a greater range of choice for consumers.

Advertising, like all other economic phenomena, has benefits as well as costs. To assess those benefits and costs, let us examine the impact of advertising on the economy.

Advertising and Information

Advertising does inform us about products and their prices. Even critics of advertising generally agree that when advertising advises consumers about the availability of new products, or when it provides price information, it serves a useful function. But much of the information provided by advertising appears to be of limited value. Hearing that “Pepsi is the right one, baby” or “Tide gets your clothes whiter than white” may not be among the most edifying lessons consumers could learn.

Some economists argue, however, that even advertising that seems to tell us nothing may provide useful information. They note that a consumer is unlikely to make a repeat purchase of a product that turns out to be a dud. Advertising an inferior product is likely to have little payoff; people who do try it are not likely to try it again. It is not likely a firm could profit by going to great expense to launch a product that produced only unhappy consumers. Thus, if a product is heavily advertised, its producer is likely to be confident that many consumers will be satisfied with it and make repeat purchases. If this is the case, then the fact that the product is advertised, regardless of the content of that advertising, signals consumers that at least its producer is confident that the product will satisfy them.

Advertising and Competition

If advertising creates consumer loyalty to a particular brand, then that loyalty may serve as a barrier to entry to other firms. Some brands of household products, such as laundry detergents, are so well established they may make it difficult for other firms to enter the market.

In general, there is a positive relationship between the degree of concentration of market power and the fraction of total costs devoted to advertising. This relationship, critics argue, is a causal one; the high expenditures on advertising are the cause of the concentration. To the extent that advertising increases industry concentration, it is likely to result in higher prices to consumers and lower levels of output. The higher prices associated with advertising are not simply the result of passing on the cost of the advertising itself to consumers; higher prices also derive from the monopoly power the advertising creates.

But advertising may encourage competition as well. By providing information to consumers about prices, for example, it may encourage price competition. Suppose a firm in a world of no advertising wants to increase its sales. One way to do that is to lower price. But without advertising, it is extremely difficult to inform potential customers of this new policy. The likely result is that there would be little response, and the price experiment would probably fail. Price competition would thus be discouraged in a world without advertising.

Empirical studies of markets in which advertising is not allowed have confirmed that advertising encourages price competition. One of the most famous studies of the effects of advertising looked at pricing for prescription eyeglasses. In the early 1970s, about half the states in the United States banned advertising by firms making prescription eyeglasses; the other half allowed it. A comparison of prices in the two groups of states by economist Lee Benham showed that the cost of prescription eyeglasses was far lower in states that allowed advertising than in states that banned it. Mr. Benham’s research proved quite influential—virtually all states have since revoked their bans on such advertising. Similarly, a study of the cigarette industry revealed that before the 1970 ban on radio and television advertising market shares of the leading cigarette manufacturers had been declining, while after the ban market shares and profit margins increased. 

Advertising may also allow more entry by new firms. When Kia, a South Korean automobile manufacturer, entered the U.S. low-cost compact car market in 1994, it flooded the airwaves with advertising. Suppose such advertising had not been possible. Could Kia have entered the market in the United States? It seems highly unlikely that any new product could be launched without advertising. The absence of advertising would thus be a barrier to entry that would increase the degree of monopoly power in the economy. A greater degree of monopoly power would, over time, translate into higher prices and reduced output.

Advertising is thus a two-edged sword. On the one hand, the existence of established and heavily advertised rivals may make it difficult for a new firm to enter a market. On the other hand, entry into most industries would be virtually impossible without advertising.

Economists do not agree on whether advertising helps or hurts competition in particular markets, but one general observation can safely be made—a world with advertising is more competitive than a world without advertising would be. The important policy question is more limited—and more difficult to answer: Would a world with less advertising be more competitive than a world with more?

Advertising - The Side Effect of Competition

The models of monopoly and of imperfectly competitive markets allow us to explain two commonly observed features of many markets: advertising and price discrimination. Firms in markets that are not perfectly competitive try to influence the positions of the demand curves they face, and hence profits, through advertising. Profits may also be enhanced by charging different customers different prices. In this section we will discuss these aspects of the behavior of firms in markets that are not perfectly competitive.

Advertising

Firms in monopoly, monopolistic competition, and oligopoly use advertising when they expect it to increase their profits. We see the results of these expenditures in a daily barrage of advertising on television, radio, newspapers, magazines, billboards, passing buses, park benches, the mail, home telephones, and the ubiquitous pop-up advertisements on our computers—in virtually every medium imaginable. Is all this advertising good for the economy?

There are two ways in which advertising could lead to higher prices for consumers. First, the advertising itself is costly; in 2007, firms in the United States spent about $149 billion on advertising. By pushing up production costs, advertising may push up prices. If the advertising serves no socially useful purpose, these costs represent a waste of resources in the economy. Second, firms may be able to use advertising to manipulate demand and create barriers to entry. If a few firms in a particular market have developed intense brand loyalty, it may be difficult for new firms to enter—the advertising creates a kind of barrier to entry. By maintaining barriers to entry, firms may be able to sustain high prices.

But advertising has its defenders. They argue that advertising provides consumers with useful information and encourages price competition. Without advertising, these defenders argue, it would be impossible for new firms to enter an industry. Advertising, they say, promotes competition, lowers prices, and encourages a greater range of choice for consumers.

Advertising, like all other economic phenomena, has benefits as well as costs. To assess those benefits and costs, let us examine the impact of advertising on the economy.

Advertising and Information

Advertising does inform us about products and their prices. Even critics of advertising generally agree that when advertising advises consumers about the availability of new products, or when it provides price information, it serves a useful function. But much of the information provided by advertising appears to be of limited value. Hearing that “Pepsi is the right one, baby” or “Tide gets your clothes whiter than white” may not be among the most edifying lessons consumers could learn.

Some economists argue, however, that even advertising that seems to tell us nothing may provide useful information. They note that a consumer is unlikely to make a repeat purchase of a product that turns out to be a dud. Advertising an inferior product is likely to have little payoff; people who do try it are not likely to try it again. It is not likely a firm could profit by going to great expense to launch a product that produced only unhappy consumers. Thus, if a product is heavily advertised, its producer is likely to be confident that many consumers will be satisfied with it and make repeat purchases. If this is the case, then the fact that the product is advertised, regardless of the content of that advertising, signals consumers that at least its producer is confident that the product will satisfy them.

Advertising and Competition

If advertising creates consumer loyalty to a particular brand, then that loyalty may serve as a barrier to entry to other firms. Some brands of household products, such as laundry detergents, are so well established they may make it difficult for other firms to enter the market.

In general, there is a positive relationship between the degree of concentration of market power and the fraction of total costs devoted to advertising. This relationship, critics argue, is a causal one; the high expenditures on advertising are the cause of the concentration. To the extent that advertising increases industry concentration, it is likely to result in higher prices to consumers and lower levels of output. The higher prices associated with advertising are not simply the result of passing on the cost of the advertising itself to consumers; higher prices also derive from the monopoly power the advertising creates.

But advertising may encourage competition as well. By providing information to consumers about prices, for example, it may encourage price competition. Suppose a firm in a world of no advertising wants to increase its sales. One way to do that is to lower price. But without advertising, it is extremely difficult to inform potential customers of this new policy. The likely result is that there would be little response, and the price experiment would probably fail. Price competition would thus be discouraged in a world without advertising.

Empirical studies of markets in which advertising is not allowed have confirmed that advertising encourages price competition. One of the most famous studies of the effects of advertising looked at pricing for prescription eyeglasses. In the early 1970s, about half the states in the United States banned advertising by firms making prescription eyeglasses; the other half allowed it. A comparison of prices in the two groups of states by economist Lee Benham showed that the cost of prescription eyeglasses was far lower in states that allowed advertising than in states that banned it. 

Mr. Benham’s research proved quite influential—virtually all states have since revoked their bans on such advertising. Similarly, a study of the cigarette industry revealed that before the 1970 ban on radio and television advertising market shares of the leading cigarette manufacturers had been declining, while after the ban market shares and profit margins increased.

Advertising may also allow more entry by new firms. When Kia, a South Korean automobile manufacturer, entered the U.S. low-cost compact car market in 1994, it flooded the airwaves with advertising. Suppose such advertising had not been possible. Could Kia have entered the market in the United States? It seems highly unlikely that any new product could be launched without advertising. The absence of advertising would thus be a barrier to entry that would increase the degree of monopoly power in the economy. A greater degree of monopoly power would, over time, translate into higher prices and reduced output.

Advertising is thus a two-edged sword. On the one hand, the existence of established and heavily advertised rivals may make it difficult for a new firm to enter a market. On the other hand, entry into most industries would be virtually impossible without advertising.

Economists do not agree on whether advertising helps or hurts competition in particular markets, but one general observation can safely be made—a world with advertising is more competitive than a world without advertising would be. The important policy question is more limited—and more difficult to answer: Would a world with less advertising be more competitive than a world with more?

Welfare Loss Under Monopoly

The welfare losses of monopoly (or any form of market power) can be shown quite easily by illustrating the consumer and producer surplus on a graph.

Consider the effect of a firm with linear demand and supply curves (the supply curve would really be the marginal cost). The diagram below considers the case where the firm is competing in a perfectly competitive market with an infinite number of identical firms, or has a monopoly on the market.

In the case of perfect competition, then the firm will simply produce at the competitive price, Pc, where the supply and demand curves interact. All firms are identical so will face identical supply curves – if this firm’s supply curve (marginal cost curve) was higher and it was unable to profitably produce at Pc then it would have gone out of business, and if its supply curve was lower and it was able to make profits then other firms would enter the market until all firms were making zero profits. When the firm produces at Pc it will supply quantity Qc.

When it has a monopoly, it instead produces at the point where MR = MC, ie where the marginal revenue curve cuts the supply curve. This is quantity Qm which will sell for price Pm.

Now first consider the consumer and producer surplus in the case of perfect competition.

The yellow area shows consumer surplus and orange area shows producer surplus. I have split the graph into five areas, area a, b, c, d and e. Ignore the purple MR line cutting through areas a, b and d, the areas are just bounded by the blue supply and demand curves and the red dotted lines linking price and quantity combinations.

In the competitive case:

Consumer surplus = a + b + c

Producer surplus = d + e

Now consider the consumer and producer surplus in the case of monopoly. 

Again yellow is consumer surplus, orange is producer surplus, and I have added a third colour, grey, to show ‘deadweight loss’ – the area that was surplus to consumers or producers in the competitive case but has now been lost.

In the monopoly case:

Consumer surplus = a
Producer surplus = b + d
Deadweight loss = c + e

The effect of going from perfect competition to monopoly is bad for consumers. Consumer surplus has been reduced by (b + c). Area b has gone from consumers to producers, so this is not an overall welfare loss, just a distributional change from consumers to producers.

However the monopoly is good for producers. Producer surplus has increased by (b – e) and as b is a larger area than e this is a net gain.

Areas c and e are deadweight loss. Consumers have lost c and producers have lost e, this is because there is now less output being produced due to the quantity decreasing from Qc to Qm.

So overall society loses out – there is a net welfare loss when the aggregate welfare of consumers and producers is taken into account, although producers are likely to be happy as they have gained at the expense of consumers. From an economic point of view, here there is an efficiency loss caused by going from perfect competition to monopoly.

Fashion for Bottled Water...What are the Risks??

Over the last 15 years, the bottled-water industry has experienced explosive growth, which shows no sign of slowing. In fact, bottled water – including everything from “purified spring water” to flavored water and water enriched with vitamins, minerals, or electrolytes – is the largest growth area in the beverage industry, even in cities where tap water is safe and highly regulated. This has been a disaster for the environment and the world’s poor.
The environmental problems begin early on, with the way the water is sourced. The bulk of bottled water sold worldwide is drawn from the subterranean water reserves of aquifers and springs, many of which feed rivers and lakes. Tapping such reserves can aggravate drought conditions.

But bottling the runoff from glaciers in the Alps, the Andes, the Arctic, the Cascades, the Himalayas, Patagonia, the Rockies, and elsewhere is not much better, as it diverts that water from ecosystem services like recharging wetlands and sustaining biodiversity. This has not stopped big bottlers and other investors from aggressively seeking to buy glacier-water rights. China’s booming mineral-water industry, for example, taps into Himalayan glaciers, damaging Tibet’s ecosystems in the process.

Much of today’s bottled water, however, is not glacier or natural spring water but processed water, which is municipal water or, more often, directly extracted groundwater that has been subjected to reverse osmosis or other purification treatments. Not surprisingly, bottlers have been embroiled in disputes with local authorities and citizens’ groups in many places over their role in water depletion, and even pollution. In drought-seared California, some bottlers have faced protests and probes; one company was even banned from tapping spring water.

Worse, processing, bottling, and shipping the water is highly resource-intensive. It takes 1.6 liters of water, on average, to package one liter of bottled water, making the industry a major water consumer and wastewater generator. And processing and transport add a significant carbon footprint.

The problems do not stop when the water reaches the consumer. The industry depends mainly on single-serve bottles made from polyethylene terephthalate (PET), the raw materials for which are derived from crude oil and natural gas. In the 1990s, it was PET that turned water into a portable, lightweight convenience product.

But PET does not decompose; and, while it can be recycled, it usually is not. As a result, bottled water is now the single biggest source of plastic waste, with tens of billions of bottles ending up as garbage every year. In the United States, where the volume of bottled water sold last year increased by 7% from 2013, 80% of all plastic water bottles become litter, choking landfills.

One just does not understand why bottled water has become such a fashionable thing. What emerged as a necessity (in say railway stations etc) has become a luxury. Most restaurants push the bottled water by saying “do you want tap water or bottled water?” Hearing tap water most choose to opt for bottled water which is sold at much higher rates than MRP. And then some fancier ones may give you choices in bottled water like Evian and so on.

Then you have shopping malls kind of places where simple water stations are not kept/maintained but bottled water machines are present. The whole idea is to push the bottle and let environmental damages be damned.

The government in India which has banned plastic bags should do something on plastic bottles as well. Now, one knows that there are too many bans in this country and we don’t want one more. But then there seems to be no other way. The market way could be to increase price of bottled water sharply. But there are certain places like railways etc where bottled water cannot be avoided. Having multiple prices for a product like water s not going to be easy to manage.
Places like Malls/ Cinemas etc where bottled water can be avoided should be encouraged to do so.

They should be asked to keep and maintain water dispensers. Like people have started carrying their own bags as shops started charging for bags, we need people to start carrying their water bottles wherever they can. The overall circulation of plastic bottles has to come down.

These are the sorts of issues which no one really cares about as they do not impact you immediately. They impact with a long grind but finally when the moment comes there are no solutions really..

From: Mostly Economics Blog

Thw World of Monopoly: How Market Barriers Help Monopoly..

The world of pure competition that was described as the ideal in terms of allocative and production efficiency. Such a market structure leads to the most efficient use of scarce resources. However, pure competition is not common in our country; only the agricultural industry offers a close approximation. In reality, most markets in the United States are characterized by imperfect competition: monopoly, oligopoly or monopolistic competition. Each of these will be explored in this chapter.

MARKET POWER-A DEFINITION

Before we discuss monopoly and other forms of imperfect competition in great detail, it would be useful to consider the concept of market power for a moment. The seller in a purely competitive market has no market power. The price that is set by the market will be the seller's price. Any attempt to charge a higher price will, as we have seen, lead to disaster. The seller's sales will fall to zero. Under imperfect competition, sellers will possess some market power. That means they will be able to raise price and not lose all of their sales. The degree of market power will depend on the number of sellers and the ease of entry into the market (to be discussed below). Where there are few sellers and difficult entry, market power will be great. As the number of sellers increases and entry becomes easier, the market power of the sellers will decline.

MONOPOLY-CHARACTERISTICS

Monopoly is market structure in which there is a single seller of a product with no close substitutes. In addition, there are significant barriers to entry such that new firms will find it very difficult or even impossible to enter the market. True monopoly requires one seller, but the additional characteristics are equally important. The lack of close substitutes is necessary if the single seller is to have much market power.

The existence of barriers to entry is also very important to the existence of monopoly. A single seller in a market where entry is easy would have very little market power. If a monopoly seller charged a high price and, as a result, earned economic profits, new sellers would enter the market if no barriers existed. This would obviously erode the monopolist's position very quickly. Clearly, if barriers to entry were present in a monopoly market, the seller will have a much greater degree of market power.

BARRIERS TO ENTRY

There are several different types of barriers to entry that can exist in markets. One type is product differentiation. In this case, the buyer has come to identify the brand name of the firm with the product. Examples of this would be Kleenex and Jello. Nobody asks you for a paper tissue, they request a Kleenex. Similarly, you would not ask for a bowl of flavored gelatin for dessert, but instead would request a bowl of Jello. In markets where significant product differentiation exists, it is very difficult for new firms to enter. Potential entrants somehow have to overcome the consumers' natural inclination to identify a seller's brand name with the product, and that will not be very easy.

A second type of barriers to entry consists of institutional barriers, which are erected by government. These barriers take on many forms. Firms and individuals are issued patents by government for new products and inventions. Patents last for seventeen years (and are not renewable), during which time the owner of the patent has the sole right to produce and sell that product. This definitely confers a monopoly on the holder of the patent. The reason for granting patents, of course, is to stimulate inventive activity since the resulting new products will benefit all of society. By rewarding inventors with a limited monopoly, there will be an incentive for research and development, which is, of course, the goal of patents.

A third type of institutional barrier includes licensing restrictions by government. Many different occupations (beauticians, barbers, lawyers, doctors, school teachers, nurses, taxicab drivers, etc.) require some type of government license or certificate. Without the license, a person is not allowed to practice a given occupation. What is the purpose of such a requirement? Ostensibly, it is to protect the consumer and guarantee quality. After all, no one wants to go to a physician who has not been to medical school or to be represented by a lawyer with no legal training. For these individuals and others in the health professions, the licensing restrictions seem appropriate.

But what about for barbers and beauticians? Are licenses really necessary for these occupations? The worse that can happen to a buyer is to get a lousy haircut. Why not let the market decide who can be a barber and a beautician? If someone is not very good at cutting hair, the market will soon eliminate that person through lack of customers. In addition, I suspect that you have gone to a barber or beautician and received a lousy haircut, even though the individual was properly licensed. So the license doesn't guarantee that the person with the scissors is competent, only that he or she has been to a beauty school or a barber school. If the license doesn't really guarantee quality for the buyer, there is little reason for it except to restrict the supply.

A fourth type of institutional barrier exists when the government gives exclusive  franchise rights to a firm to sell a product. An obvious example of this would be the U.S. Postal Service, which has the sole right to deliver first-class mail. Other examples would include cable TV companies and utility companies as local phone service, electricity, etc. These latter examples are usually perceived as special cases and require further explanation below.

Another type of institutional barrier erected by government is the use of tariffs and quotas. Tariffs are taxes on imported goods while quotas consist of a maximum amount of a good that can be imported into a country. By placing tariffs and quotas on imported goods, foreign firms will find it difficult or even impossible to enter U.S. markets.

The sixth category of barriers to entry consists of economic barriers. In some markets, production barriers will limit the feasible number of competitors. In the long run, when all resources are variable, firms increase output by expanding their plant size. The firm is said to be experiencing economies of scale when average cost declines in the long run as output expands. Economies of scale are due to such factors as division of labor tasks and specialization, which become possible as the size of the firm's operations increases. For most markets, average costs cease declining at output levels (and then, perhaps, level out over a long range of output) that are relatively small compared to the market size. This means that many firms can operate in such markets and still be efficient by producing where long run average cost is minimized. But in a few markets, average cost in the long run continues to decline over the entire range of market demand.

Therefore, in case of natural monopoly, one firm is preferred. Usually, the government will grant a public-utility franchise to an individual firm, giving it the sole right to provide some product to a market. This is the case with local phone service, electricity, etc. In some markets, the economies of scale are large relative to the size of the market such that only a few sellers are possible. This appears to be the case for automobile production, cement, and aluminum production. These will be discussed later under oligopoly.