Essay: Qantas' Monopoly Power In Australian Airline Industry.

Identify, from media reports on Australian industry, an example of a firm that has significant monopoly power. Identify the inefficiencies in outcomes that arise, or would arise, if the firm was free to exercise that power. Finally, explain how government intervention is used, or may be used, to curb that power and provide a more efficient outcome for the economy.

The present essay provides an overview on the firm that has considerable monopoly power in Australia. The chosen firm for this study is Qantas Pure monopoly refers to the market situation in which single entity is a sole manufacturer and seller of commodity or service in the entire market. The monopolist possess monopoly power being the only seller in the market. Monopoly Power usually occurs in the firm where it has market dominance in the sector. Monopolies usually derive their market or monopoly power from the entry barriers to the market (Adler et al., 2015). These barriers can be classified into four types based on few sources such as- specific resources, natural monopoly, government regulation and deliberate actions. Abuse of the monopoly power might involve setting of higher prices or limiting total output. Moreover, abuse of this monopoly power might lead to problems for suppliers, deadweight welfare loss and less choice. The inefficiencies in outcome that might occur if the firm was free to exercise such monopoly power is analyzed in this study. The government intervention used or can be used for curbing monopoly power and provide efficient outcome of the economy is also explained in this essay.

Monopoly relates to the market structure that is characterized by single seller that sells unique commodity. In the monopoly market, sellers usually face no competition since he is the only seller of products with no substitute. In this market, factors such as- ownership of resources, government license, high startup cost restrict other seller’s entry in this market.

                                                              Figure 1: Monopoly graph

                                                           Source: (As created by author)

The monopolist might seek to attain profit by setting total output at which MR=MC. At this point, price of the product is Pm and output is Qm. As compared to perfectly competitive market, monopolist enhances price and decreases output. The deadweight welfare loss occurs in comparison to the competitive market.

Over the last few years, there have been huge changes in the aviation industry of Australia. The total number of travelers as well as freight volume that mainly passes through the Australian airports have been doubled over the years. Karier (2016) has found out that all Australian airport sector explicitly as well as implicitly possess market power to different degrees. The Australian passengers, manufacturers, communities and economy have been mainly paying price of monopoly power through high airport charges as well as freight costs, low connectivity and less opportunity for national employment creation. The monopoly power of Australian airports is mainly amplified by inelastic demand for the airport services and lack of airlines power in negotiating conditions and terms that are reasonable. The Qantas group has been the first wave of the airport privatization and also sparked enhance in efficiencies as well as productivity. At present Qantas group has huge market dominance in the Australian airline sector. This airline entity presents threat to the economic well- being of Australia and strains on its productivity. The Qantas Group has entrenched its monopoly power as it becomes impossible for other airlines to access arbitration under National Access Regime. The network of Qantas Group has important strategic imperative involving connecting foreign routes with trunk routes that permit larger frequencies as well as more destinations. This airline firm believes the present regulatory model applying to the airports has been effective in constraining monopoly power of the airport operators (Taussig, 2013). Qantas also believes that the airport operators give set of infrastructure-based services at airport. As several airport users need huge range of services, the market power of airport is mainly observed in group of services provided. This airline entity have considerable monopoly power in regards to sites for the parking services. According to ACCC review of the aeronautical charges, Qantas has been abnormally earning high profits specially from the car park services. In fact, the prices that Qantas charges for this services are usually unrelated to costs. In fact, this airline entity has large maintenance facilities at total number of airport locations. These facilities are mainly substantial and signify sunk investment. This entity acknowledges that with respect to future investment in the heavy maintenance facilities, it has been able to exercise level of choice relating to location of future investment. However, with respect to these investments, Qantas has been captive to monopoly power of the airport operators. The market power of Qantas has enabled to generate excessive returns from its aeronautical assets (Laibson & List, 2015).

Qantas attains some possible benefits from monopoly power in the market. The profits that the company attains is further used for funding innovation with spillover benefits. This in turn leads to achievement of dynamic efficiency. The manufacturers of Qantas might attain economies of scale, thereby leading to lower average cost. Furthermore, they might be subject to regulation of price that limits its profitability. The figure below reflects economies of scale achieved by Qantas producers-

                                         Figure 2 : Economies of scale achieved by Qantas producers

                                                           Source: (As created by Author)

The above diagram shows that Qantas producer gains total profit at point P2 when the economies of scale have been attained. Moreover, attainment of economies of scale leads to lower average cost from C1 to C2 but increase in total output from Q1 to Q2.

It has been evident from certain facts that inefficiencies have been arising from capital project delivery and in negotiations with the airlines. The Qantas airline firm believes that present regulatory regime does not constrain effectively on the Tier 1 airports monopoly power since it relates to parking of cars and permits airports to set high prices. However, these prices impact both the consumers as well as airlines since operational laborers required accessibility to the on-site parking. The Qantas firm has experienced monopoly power of airports relating to pricing of car parking. This airline company makes suitable approach for reducing risk of airports monopoly behavior and providing viable alternatives of transport. Moreover, this airline company is urging government to reign in airport, thereby abusing its monopoly power in order to extract perverse charges (Burghouwt, 2015). For example, in some situation Qantas increases the price above marginal cost of production and hence are allocative inefficient. The reason behind this is that monopolies have market power and thus can enhance price to decline consumer surplus.

                                               Figure 3: Inefficiencies of Qantas monopoly market

                                                              Source: (Burghouwt, 2015)

The above figure reflects that monopoly sets at price Pm is inefficient at this output Qm as price is higher than MC. The deadweight loss reflects the level of allocative inefficiency in the monopoly market.

Abuse of monopoly power might lead to market failure as it results from ability in charging higher price (Bober, 2016). As the Qantas group seeks in extracting higher price from the consumers above resource costs that are used for making any products or service, the requirement and wants of its customers are not always met. Moreover, the total quantity on market becomes restricted below the socially optimum by monopolists. This in turn results in loss of consumer surplus or welfare, which in turn disproportionately impact the low income families. Overall, it also leads to deadweight welfare loss and problems for the suppliers. Thus, this will be the inefficiencies in outcome if Qantas experiences free monopoly power. For example, one of the Melbourne airline company has considerable market power in Melbourne for the ground based services for the aircraft operating passenger services. This airline company have market power in the geographic market for operating in foreign passenger services.  The services offered by this airline company makes up small bundle of services sold by airport and is only small section of airline cost. In this situation, considerable increase in price of service can have small impact on airline cost and not lead to substitution by airline.

The figure below reflects that equilibrium price occurs at the point E where the initial demand curve (DD) intersects the initial supply curve (SS). Corresponding to the equilibrium point E, the equilibrium price is P and equilibrium quantity is Q. The monopoly power of Qantas increases price of products or service than competitive market with the restricted output. As a result, price rises from P1 to P2 and quantity declines from Q1 to Q2.

                                    Figure 4: Abuse of monopoly power leading to market failure

                                                             Source: (As created by Author)

As monopoly power creates several problems in the business, the government must intervene in order to reduce monopoly power in the market. The Australian government adopts some policies for the airline industry in order to overcome market failure that occurs from use of monopoly power and act in the interest of consumers (Brue et al., 2015). The actions taken by the Australian government reveals concern about productive as well as allocative efficiency in longer term.

Price capping regulation- Phang (2016) opines that price cap regulation is the most common method of setting prices in huge range of monopoly situation. Price cap regulation has been mainly proposed for the economic regulation of monopoly utilities in the way of motivating improvements in the performance. The Australian government has imposed CPI-X in the regulation of Qantas since its privatization. The policymakers of this country have also opted for revenue- weighted average price approach. But shortcomings of the price cap regulation that occurs is that it might be profitable for operators for reducing quality below socially optimal level. For example, price capping regulation adopted by the Australian government leads to increase in travel costs of Qantas Airline companies. Price capping is explained in the diagram below-

                                         Figure 5: Price capping reducing monopoly profits

                                                          Source: (As created by author)

From the above diagram, it can be seen that initial equilibrium price is P1 and equilibrium output is Q1 where MR=MC. After imposition of price capping, the monopoly profits reduces which leads to decline in capital investment by businesses. Ultimately, the customers of Qantas suffers due to increase in price of air ticket.

Liberalization of markets- The policymakers of Australia deregulating airline market enables new entities to enter as well as compete with existing monopoly. This in turn helped to promote huge competition in the airline industry of this nation. The policymakers even sought in maximizing sale price within this framework of the policy for ensuring varied ownership across airports. One problem that occurs for Qantas is that the operators of this firm leverage monopoly power from regulated services into competitive markets through strategies of price bundling. Moreover, the Qantas operator also unbundle few services, thereby shifting few parts outside price cap.

Merger Policy- The Australian government also integrates merger policy for preventing enhance in monopoly power when the two organizations collaborate with each other. In addition to this, it becomes useful for preventing monopolies but not with existing monopolies.

Conclusion

From the above discussion, it can be concluded that the Qantas enjoys considerable level of monopoly power. The company has attained several benefits as well as challenges from monopoly power. It helps the organization to innovate and enhance efficiency in its business operations. Furthermore, market failure might occur for Qantas due to exercise of free monopoly power. In addition, the government also imposes price capping policies and also liberalizes the airline market for curbing monopoly power of Qantas.

References

Adler, N., Forsyth, P., Mueller, J., & Niemeier, H. M. (2015). An economic assessment of airport incentive regulation. Transport Policy, 41, 5-15.

Bober, S. (2016). Alternative principles of economics. Routledge.

Brue, S. L., McConnell, C. R., Flynn, S. M., & Grant, R. R. (2014). Essentials of economics. McGraw-Hill Irwin.

Burghouwt, G. (2016). Airline network development in Europe and its implications for airport planning. Routledge.

Karier, T. (2016). Beyond Competition: Economics of Mergers and Monopoly Power: Economics of Mergers and Monopoly Power. Routledge.

Laibson, D., & List, J. A. (2015). Principles of (behavioral) economics. American Economic Review, 105(5), 385-90.

Phang, S. Y. (2016). A general framework for price regulation of airports. Journal of Air Transport Management, 51, 39-45.

Taussig, F. W. (2013). Principles of economics (Vol. 2). Cosimo, Inc..