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.
Monopoly Market Structures in Australia
A Monopoly market structure is categorised by a solitary trader, who is trading in a distinctive product in the market. In such a market, the trader encounters no competition, because he is the only trader of that particular good which has no close substitutes. On the other hand, when the other firms engage in trading of that particular goods and services, the industry eventually transform into oligopoly where few firms dominate and have the authority of the market (Wei-hua, 2014).
The Australian postal services are an example of monopoly market structure. They offer very perfect services which deter other potential firms from entering the market. The postal service organization in Australia commands the whole postal service industry and therefore, acts as a price maker in the industry (Lovelock, 2015). Sole proprietors and individuals cannot establish a monopoly business and make it for very long time in the market industry, this is because other few organizations would facsimile the idea and start immediately the business and this would now mean that the market would shift from monopoly to oligopoly market structure (Çak?r, 2015). The monopoly business is very successful when being implemented by the government, this is so because the government will create barriers to entry and remain in the business alone like the case of Postal services of Australia being dominated by the government. The postal corporation has been given the mandate to distribute letter post in Australia. This approval came after the amendment and ratification of an act in the year 1989 (Alexander, 2017). The government enjoys the monopoly in the postal industry due to the fact that it has the power to pass the approval act and it also has a remarkable fast and reliable services. The government also acts as a price maker because they have the solitary ability to effect the prices in the market. This is although very dangerous because not all the citizens can afford when prices slog, which is a common trend with the Australian postal services (Whincop, 2017).
The Australian Banking sector follows an oligopoly market structure. In oligopoly market structure, the market is dictated by very few firm and it is usually said to be concentrated. Many other small firms also operate in the market despite the dominance attributed to the few firms who have solitary authority in the market. In Australia, few banks operate in the banking sector, they are prospective in nature and strive very hard to maximize profits they include ANZ Bank, NAB Bank, Westpac bank and the Commonwealth Bank of Australia (Seltzer, 2017). The firms are known in making abnormal profits. The four banks operate in the market and share profits amongst themselves. Withstanding the hard economic times in the banking industry discourages many other prospective entrants to the market. The small banks that intends to enter the banking industry find it very hard due to the enormous capital venture required for a start-up. The big four banks of Australia operate in a joint manner and stakeholders venture in fruitful ventures after thorough analysis of different investments (Zhang, 2017). The Banking industry is dominated by few firms that causes unfair competition in the sector resulting to a deadweight loss in the economy and other negative aspect in the Australian economy. The oligopoly banks acts as the price makers and rules the industry and therefore, discourages the new entrants in the industry (Abbott, 2018).
Major Inefficiencies Associated with Monopolies
This happens when there is an ideal sharing of products, considering the fact that purchaser’s favourites. Allocative efficiency can also be referred to as the production level where the cost is equivalent to the Marginal Cost of production (P=MC). It is assumed that the cost the purchasers are confident spending in a particular goods and services is corresponding to the marginal utility they are expecting to get from the consumption of the product or the utility they are going to derive from the service usage (Fernández-Blanco, 2018). For that reason, the ideal sharing of products is attained when the marginal utility of the products and services is equivalent to the marginal cost (Svensson, 2017). This can be explained using a graph below.
Figure 1: Allocatively inefficient MU>MC.
At a production output of 40 units, the marginal expenditure of the good and services is $6, with the same production output purchasers would be ready to part with a price amounting to $15 at this point the sector is allocatively inefficient because the Marginal benefit is greater than the Marginal Cost. The cost reveals that the products marginal utility is greater than marginal expenditure which clearly indicate that there is minimal consumption of goods and services in the market. When the production of output is increased from 40 units to 70 units the price of the goods and services also decreases from $15 to $11. The society benefits from the increased production of output as it results to price reduction and hence more will likely afford to purchase. The reason is that the market is Allocatively efficient, the Marginal utility is equal to the marginal cost.
Figure 2: Allocatively inefficient MC>MU
At a production output of 110 units, the marginal expenditure is $17, but the cost at which consumers are comfortable incurring is only $7 the market is said to be allocatively inefficient and the Marginal cost is greater than the marginal utility. At this production level, the marginal cost $17 exceed the marginal benefits which is $7 there is excess consumption of the product. It therefore, implies that the society at large producing more of the product. The Allocative efficiency in this case happens at the price of $11 where the marginal cost is equivalent to marginal utility MU=MC.
Monopoly firms increases the price above the marginal expenditure of production and are therefore, said to be allocative inefficient. Monopoly market structure have authority to reduce consumer surplus and are price makers (Biener, 2017).
Figure 3: Monopolies Market Structure.
Monopoly firms will sets a price of . At this point, the market is said to be allocative inefficient because at this production level output , the cost is higher than Marginal Cost (P>MC). Allocative efficiency happens at the point where the Marginal Cost intersect the demand curve, for instance the Price is corresponding to Marginal Cost. The shaded area on the graph representing deadweight loss indicate the allocative inefficiency in the economy.
Productive Efficiency is determined at making goods at the lowest possible expenditure. This happens on the production possibility frontier. Is worth noting that producing goods and services on the production possibility frontiers is not automatically allocatively efficient, the production possibility frontier only indicates the possible output (Decker, 2017).
Price discrimination can be defined as charging dissimilar prices for the similar goods or similar price for the segregated goods and services, some purchasers are willing to pay more prices as compared to when there was a single price. In general, higher production output happens with a price discrimination. Additionally, some business venture could not be in operation without the price discrimination. For instance, a private doctor operating a clinic in a village set-up cannot have a booming business without practicing the price discrimination (Ding, 2017). When price discrimination rises the production output level and profits from selling, it in turn decreases the allocative inefficiency. Industries that effectively practise price discrimination will benefit by receiving higher returns.
The below conditions are responsible for price discrimination.
i. Presence of a market dominated by single seller with distinct product.
It suggests a trader can differentiate costs in the case where there is only a single trader with a distinct product. The level of charging dissimilar prices for similar goods is determined by the number of single traders with distinct product in the market.
ii. Distinct Marketplace
This suggests a presence of dualistic or extra marketplace that can be certainly divided for selective prices. The consumer of a selected marketplace remains there without changing to a separate marketplace and the products traded in that selected marketplace is not allowed to trade in some other marketplace.
iii. Absence of legally binding agreement among the consumers.
This is the most essential condition for charging dissimilar prices for similar goods. Sellers can differentiate prices in the absence of legally binding agreement among purchasers of separate marketplace. Consumers in a separate marketplace realises that prices for goods in a separate marketplace are slightly cheaper, they will have a preference to purchase the goods in a separate marketplace and vend it in their marketplace. The monopolists should be capable of separating marketplace and evade trading the goods in these marketplace.
iv. Different Elasticity of Demand:
This suggests that the elasticity of demand in the marketplace should vary from each other. In marketplace with higher elasticity of demand, lower price should be charged for goods, but in marketplace with lower elasticity of demand, higher costs should be charged. Charging dissimilar prices for similar goods is not possible where marketplace have the same elasticity of demand.
How the government intervenes to reduce the monopolies distortion?
- Regulation of quality of service
Government regulators inspect the quality of goods and service delivered by the monopoly firms on regular basis. A case where the railway regulator inspects the welfare performance of railway companies to confirm that they use the required materials during construction of railway lines.
In the other energy sectors like gas and electricity sectors, the regulators will ensure that the people of a country are treated with concern and they get the value of their expenditure. for instance, not agree to a monopoly firm to take off gas supplies during winter season (O'Toole, 2018).
- Merger policy
The state has a rule mandate to probe unions that intend to dominate and make monopoly power. If a new union makes a company with more than 30% of market share, it is by design reported to the commission responsible for competition. The commission therefore, has the authority to make decision whether to let them operate in the market or disapprove the merger (Mini, 2018).
- Breaking up a monopoly
In some cases, the government might resolve to break up a monopoly firm when they deem that the firm has become too powerful in the market and it is causing more harm than good to the consumers of their goods and services. This type of resolution occurs in rare cases. For instance, the United States probed Microsoft and look into possibilities of breaking up the monopoly, but later they decided to do away with the decision (Hawley, 2015). This action is very harsh because the government too enjoys the taxes and the Microsoft users too, get exclusive services from Microsoft providers. Again the United States government were not sure whether the new firms would not collude in the market.
- Rate-of- Return Regulation
Rate-of-return regulation is a structure to set the prices charged by state controlled markets for single trader with distinct products like water and electricity. If the companies continue to uncontrolled, they could simply charge much higher amounts since buyers would be willing to pay any price for products and services such as electricity or water. A drawback of rate of return regulation is that it may result to cost padding, a situation where firms let prices to rise so that return margins are not considered extreme. Rate of return regulation provides a slight encouragement to be efficient and increase returns. Rate of return regulation may fail to assess how much returns is sensible. When they fix too high, then companies can exploit their monopoly power (O'Toole, 2018).
- Probing the abuse of monopoly power
United Kingdom has the office of fair trading and has the mandate to probe the abuse of monopoly power by firms operating under monopoly (Tigar, 2018). This abuses comprise of discriminating trading practices like collusion where firms operating in a market agrees with one another to set higher prices, Collusive tendering where companies enters into contract to fix the bid at which they will tender for a certain project then the companies will take in turns to get the contract at much more prices, Predatory pricing which entails fixing the price very low this discourages and ejects out the other competitor companies out of the business and lastly the selective distribution where the companies enter into selective and special distribution to some few selected to keep the prices high in the market for instance the United Kingdom cars are speculated to be expensive than other European countries (Tigar, 2018).
In conclusion, the Australian postal services are an example of monopoly market structure. They offer very perfect services which deter other potential firms from entering the market. The postal service organization in Australia commands the whole postal service industry and therefore, acts as a price maker in the industry. The government use various methods to reduce monopoly power which include merger policy, rate of return regulation, breaking up monopoly and regulation of quality services.
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