This report tries to provide examples of the monopoly and monopolistic market structure that is prevailing in Australia and why the government may try to intervene in the monopoly markets rather than intervening into the monopolistic market structure. To understand this topic a detailed theoretical analysis of the monopoly and monopolistic market structure is provided. The definition of these are provided along with their graphical analysis. Minifie (2017) in his scholarly article has provided few examples relating to the market structure of Australia. The reference to this article is provided at the end of the paper.
From the above report, it is expected that the monopolies in Australia will require a set of revised policy prescriptions that will increase the welfare of the consumers. The application of this would be very useful, as it would help in understanding the market structure of the major industries in the Australian market and their prime drawbacks relating to social welfare of the consumers.
The market structure of Australia is dominated by various duopoly markets. Yet, in few major sectors, there exists monopoly and monopolist market structures. However, the monopolists in the economy have not been performing well in the recent times. In this section of the report, an effort has been made to discuss the various drawbacks of the major monopoly industry of Australia.
According to the conventional definition, market is a place where the buyers and the sellers interact with each other to buy and sell a commodity on a price that is agreed by both of them (Brue et al., 2014). Now, the market consists of different types of competition. Here only the Monopoly and Monopolistic market is discussed in details.
Monopoly Market: In this type of market, there is a single seller and there are numerous buyers. The sellers is a price setter in this type of market. The seller sets a price, which the buyers have to pay, and in general, these prices are high. The main reason for the high prices is due to the non-availability of close substitutes for the commodity and entry barrier to the market (Varian, 2014). Now, because of this high prices the consumer surplus decreases and the deadweight loss increases. The graphical analysis has been provided below.
FIGURE 1: Monopoly Market
(Source: By the Author)
From the above diagram, it can be clearly seen that the equilibrium occurs at the point where the Marginal Cost (MC) curve intersects with the Marginal Revenue (MR) curve. P* and Q* are the equilibrium price and output. The area under the curve ADCP* represents the producer surplus and the area under FDCP* represents monopolist profits. The area under triangle BP*C represents the consumer surplus. The area CEG represents the deadweight loss to the society.
Monopolistic Market: in this type of market structure there exists many sellers and they do not consider their rivals reactions. The products sold by the firms are differentiated at least to some extent (Nikaido, 2015). Further, there is free entry and exit to the market. Therefore, the prices are not that high as compared to a monopolist. The social welfare is high as compared to that of the monopoly market (Sen, 2017). The deadweight loss accruing to the market is low as compared to the monopoly structure. The demand curve faced by the firm is as usual downwards sloping in nature but the demand curve is flatter. The elasticity of demand is high in this type of market structure. The firm to some extent enjoy a monopoly power but the phenomenon of free entry and exit will lure other firms to share the profit that is enjoyed by the monopolist firm in the short run. Therefore, there will be new entry of the firms and thus, the long run analysis is different from the short run (Chopra, 2013). The graphical analysis has been provided below.
FIGURE 2: Monopolistic Market
(Source: By the Author)
From, the above diagram it can be inferred that in the short run the firms enjoy profits which is shown by the shaded region. However, in the long -run due to the entry of the new firms the profit decreases and eventually becomes zero.
In context to the Australian market structure, there are monopoly market structures. The Australian Post is the common example of the monopoly market in Australia. The Australian Post is the largest postal services network of Australia. The mining sector is also an example of the monopolies that is existing in Australia (Eklund, 2015). Further, Energy Aus, which is the energy provider in Australia, rail freight, wired telecom are also a monopoly in its genre. These firms have no competitor and they are the price makers. Similar examples can be drawn of the monopolistic markets in Australia. Gloria Jean’s coffee is the most common example of monopolistic market in Australia. There are many coffee stores in Australia, but Gloria Jean a company established in 1979 by Gloria Jean Kvetko from Chicago is one of a different kind providing coffee to its customers at the lowest price. There are many different competitors like Starbucks, Hudson Coffee but Gloria coffee, which was bought by Retail Food Group in 2014, is different from the competitors in the market (Watson et al., 2016). There are various cell phone companies in Australia, which can be seen a monopolist in Australia. Telstra, Optus, Vodafone can be seen as monopolist in nature. All these firms generate products of the same genre but are differentiated to some extent.
Therefore, one can clearly see the market is highly concentrated in case of the monopoly firms and that for the monopolistic market is quite less. The high degree of monopoly power has various disadvantages. The government may engage into policy intervention through different ways. The government may consider various public policies. In order to increase competition the government may use laws. The main competition law that the Australian government has the Trade Practices Act (Mountain, 2014). In order to prevent anti-competitive behavior the government uses Trade Practices Act law. This law is primarily used to control mergers and to restrict those who exhibit a substantial market power to exert this power in the market as this can harm and restrict other competitors from entering the market. These competition laws helps to increase the social welfare of the consumers. Further, these competition laws will be able to determine the mergers, which are desirable for the increase of the social welfare of the community (Karier, 2016). For some firms there exists natural monopoly. Natural monopoly is the case when firms enjoy economies of scale. This means that the firm can capture the whole market at a relatively lower cost as compared to the other firms in the market (Stiglitz & Rosengard, 2015). The government tried to regulate this phenomenon by limiting the price of the commodities. The firms cannot charge a lower price irrespective of the economies of scale enjoyed by the firm. However, there is a drawback with this policy. Suppose the government sets a price that is equal to the marginal cost. In case of economies of scale, the Average Cost curve is always above the Marginal Cost curve therefore, the firm will incur loses if the price is below the Average Cost. Therefore, this policy might not be suitable one in case of firms that enjoy natural monopoly. In addition, marginal cost pricing gives no incentive for the firms to make a reduction in cost structure. In general the government allows the monopolist firm to keep few benefits of the low costs for may be fixed period. Another important policy that the government took is the public ownership of various private firms. The government thought of running the monopoly by itself in order to increase efficiency and reduce the deadweight loss. The private monopolists’ main aim is to reduce cost to gain higher profits and try to abuse the marker power to the fullest in order to increase profits. The government ownership will try to increase the social welfare to the fullest. However, this has not been the case until date. Consider the case of the electricity department of Australia. The prices of the electricity has increased significantly. The prices are now 2.5 times high than Britain (Shahiduzzaman & Alam, 2013). Moreover, the supply has also decreased. There has been frequent power failures. Therefore, the social welfare of consumers have declined severely. The customers now have to pay high prices and the quality of the product have reduced. Therefore, in this case public ownership has not at all aided a solution. In comparison to that if the energy industry would have been monopolistic in nature then, consumers might have shifted to some other firm that produce energy but at cheaper rates. More over the monopolists that exists in the Australian market cannot not charge whatever price they want. These monopolists will have the fear of substitution (Waterson, 2013). Along with this if the monopolistics gain huge profits then in the long-run new firms will enter and reduce the profits. Therefore, government intervention is not that much necessary in case of monopolists as compared to the case of monopoly firms.
The above section provides a detailed theoretical analysis of the monopoly and monopolistic market has been performed. Examples relating to monopoly and monopolistic market with respect to Australia has been provided. In conclusion, to the above analysis it can be said that the policy prescriptions, which are opted by the government for the reduction of monopoly power and increasing the consumer welfare, are not up to the mark. In case of the Australian energy industry, which enjoys huge natural monopoly, the scenario has worsened. Despite of being a complete public industry, it has failed in increasing the consumer welfare. The government should think of new policies to mitigate this problem. More focus should be given on the research and development aspect of the energy industry. The government can think of levying lump sum taxes. This phenomenon would shift the cost curves and reduce the dead weight loss. Further, the government can think of Average Cost pricing. Unlike the Marginal Cost pricing, in the above said case the firms would not make loses even in case of natural monopoly. The monopolistic firms do not require any government intervention as they face various threats, which may not be that much severe but the monopoly firms faces no threats. Therefore, government intervention is very essential for a monopoly.
Brue, S. L., McConnell, C. R., Flynn, S. M., & Grant, R. R. (2014). Essentials of economics. McGraw-Hill Irwin
Chopra, A. (2013). CMP: INR1, 398 Buy. PAT, 2(3.2), 3-9.
Eklund, E. (2015). Mining in Australia: An historical survey of industry–community relationships. The Extractive Industries and Society, 2(1), 177-188.
Karier, T. (2016). Beyond Competition: Economics of Mergers and Monopoly Power: Economics of Mergers and Monopoly Power. Routledge.
Lewis, T. G. (2014). Booms. In Book of Extremes (pp. 51-67). Copernicus, Cham.
Minifie, J. (2017). Competition in Australia.
Mountain, B. (2014). Independent regulation of government-owned monopolies: An oxymoron? The case of electricity distribution in Australia. Utilities Policy, 31, 188-196.
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6) (Vol. 1391). Princeton University Press
Sen, A. (2017). Collective choice and social welfare: Expanded edition. Penguin UK.
Shahiduzzaman, M., & Alam, K. (2013). Changes in energy efficiency in Australia: a decomposition of aggregate energy intensity using logarithmic mean Divisia approach. Energy Policy, 56, 341-351.
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth international student edition. WW Norton & Company.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.
Waterson, M. (2013). Allocative Inefficiency and Monopoly as a Basis for Regulation. In Industrial Economic Regulation (pp. 51-65). Routledge
Watson, W. L., Piazza, S., Wellard, L., Hughes, C., & Chapman, K. (2016). Energy and nutrient composition of menu items at Australian coffee chains. Nutrition & dietetics, 73(1), 81-87.