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Economics Commentary Essay

The collusive1 market structure that the Japanese traditional industry has traced over previous years has increasingly become to fail. The tendency of companies abandoning cross-shareholdings2 has generated a in deep economic loss resulting from a reduce in the total revenue of corporations in the country. The attempt of industries such as steel, paper and energy as well as car making companies and electronic firms3 to consolidate economic partnership through means of oligopoly, has decreased deliberately from 50% of the market values to 20% over the last 17 years.

The benefits of share holding companies were determined in preceding times to maximize profits by jointly agreeing in a fixed price which will avoid “price wars” and therefore substantial revenues4. Also assuming the interdependent behaviors, cross-shareholding companies act together to establish high barriers of entry to the industry in order to preserve ascendancy and evade competitiveness to have a high indices of demand. As the extract mentions, there is a bought share between companies to prevent the overhaul of others and to regulate the number of firms within the market as it happened with Mitsubishi when 11 other companies had an acquisition of shares to “block the outsider”.

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As these companies were subdued to price controls of the industry, the demand curve will therefore be highly inelastic responding to the few amount of substitutes5 that the industry seeks to have in flow.

However the concerns about the crumbling of the traditional tendency of cross-shareholding are given with the results in the change of behavior of the industry. Along with the abandonment of share holding companies, the industry becomes vulnerable to external entry and in the case of Japan foreign investments which increases competition. As there is increase in supply of same products, demand for products of individual firms will fall and the demand curve will shift to the left.

Demand shifts to the left from D1 to D2 due to the increase in supply with the entry of new firms and the removal of a unique price of product in the whole industry.

As the result in the shifting of the demand curve of any Japanese product prices of evidently reduce as shown in the previous figure. From P1, being the demand of a cross-holding alliance of the market, and P2 the consequent reduction of this model. Quantity produced also lessens from Q1 to Q2 as costs of production are directly proportional to the loss of profit6 with the diminishing prices.

Due to price decline, total revenue also decreases as both quantity and price of products decrease considerately. The impacts of this phenomenon on Japanese economy is illustrated with losses of the questioned firms. Between March and September more than 160 shareholding companies lost a total of �300 billion in value. 610

Banks and monetary institutions have also been affected as these companies are part of the essential capital they lend against.

Despite the increase in cross-shareholding companies since 2004, the evident economic impact of the “criss-crossed capitalism” are starting to arise. The Japanese government in response has been working on regulatory measures to prevent this phenomenon future repercussions.

Works Cited –

* Economic Basis: Demand and Supply. In the internet: http://www.investopedia.com/university/economics/economics3.asp, s.t.

* Economic Basis: Monopolies, Oligopolies and Perfect Competition, s.t. In the internet: http://www.investopedia.com/university/economics/economics6.asp, s.t.

* Introduction to economics

* WHITTEN, Darrel. Japan: Japan’s System Of Interlocking Shareholdings. In the internet: http://www.mondaq.com/article.asp?articleid=24335, 2004.

1 A commonly accepted price determination of oligopolists to prevent competition of prices over similar products.

2 When to or more firms3 hold each other shares.

3 Institutions that employ production factors to produce and hence sell goods and services.

4 The resultant economic gains of multiplying the price of a good times the quantity of that good sold (TR=pxq).

5 Similar products with certain differentiations that determine price elasticity of demand.

6 Net income in gains of a businesses activity.

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