Discuss about the Managing Change for Postal and Delivery Industries.
This study has highlighted the reason why government of a country want to set the price of a product by the natural monopolist. In this connection, it can be mentioned that the natural monopolists charged the price at the point where demand curve and the average total cost curve intersect to each other. In addition, this study has tried to highlight the concept of natural monopoly. This study has also provided the example of natural monopolies of Australia. Moreover, this study has described the benefits of natural monopoly. Furthermore, in this study, the cost structure and the natural monopoly market structure would be discussed in this scenario. Therefore, it can be mentioned that the price of the goods and services under the natural monopoly in the Australian market would be comparatively lower than the two or more producers.
As per the statement of Carvalho & Marques (2014), it can be stated that natural monopoly is a state of the monopoly; here infrastructural cost of a product is comparatively higher. In addition, the barriers to entry of the market are related with the market size. Therefore, it can be inferred that the larger suppliers of the market have competitive advantage compared to the other competitors of the economy. In this connection, Carvalho & Marques (2014) added that under the natural monopoly, the capital costs are prevailed and also have the economies of scale in the larger size of market. For example, it can be stated that Australian electricity provider, water supplier are the ideal example of natural monopolists.
According to Crozet, Nash & Preston (2012), it can be stated that marginal costs and the fixed costs are the two types of costs under natural monopoly. In this context, it can be mentioned that marginal cost is benefitted to the consumers. Nevertheless, Haucap & Klein (2012) argued that natural monopoly would be able to reduce the competition in the market among the producers. On the other hand, it can be mentioned that marginal cost can be reduced along with the economies of scale. The average cost of the goods and services would be also decreased. In addition, it can be observed that natural monopolists follow several structure of cost. In the words of Crew (2012), the fixed cost of the goods and services in natural monopoly is higher. In this purpose, it can be added that the rate of fixed cost is not depending upon the overall output. Moreover, it can be opined that the marginal cost of the goods and the services would be equal, which is comparatively lower than the flexed cost of the same product (Haucap & Klein, 2012).
In this study, the reason would be described why the government of Australia would like to impose the price of goods and services based on the decision of the natural monopolists. As per the statement of Makwe (2012), it can be stated that in order to get the protection and increase the welfare of the consumer’s interest, government of Australia requires to formulate natural monopoly. In addition, the government of the country can also reduce the growth of the monopoly power of the producers. If the producers charge higher prices of the products, then the government can control the pricing policy by reducing the excessive prices of the goods and services (Minamihashi, 2012). Therefore, in this connection it can be mentioned that by implementing the natural monopoly, government can prevent the higher prices of the products, which would be set out by the producers. If the government does not formulate natural monopoly in the economy, the consumers would face the problem of allocative inefficiency. Therefore, it can be stated that the welfare level of the purchasers would be declined. In the point of Minamihash (2012), with the rise in the economies of scale of a country, the Australian government can needs to encourage the presence of competition within the existing market structure. In this connection, Carvalh (2014) cited that the new producers would be able to enter into the market and create the expected loss of efficiency. It is required to control the producers with the help of the prevention of excessive use of the monopoly power. In this point, the economies of scale would be able to exploit effectively.
Structure of cost under natural monopoly
In the words of Crozet, Nash & Preston (2012), it can be mentioned that natural monopolies occur if a single producer can control the overall demand of the market in terms of lower cost compared to the two or more organisation. In this connection, it can be stated that the overall cost of natural monopoly is comparatively less than the overall costs of the other organisations, which produce the equivalent amount.
From the above figure it can be noticed that total cost of natural monopoly is lower compared to the summation of total costs of two producers producing the equivalent quantity. In this connection, it can be observed that the marginal cost primarily decreases due to the economies of scale (Minamihashi, 2012). After that the marginal cost increases with the growth of the organisation. Similarly, the average cost of production initially declined and after that this curve increased. In addition, it can be mentioned that the total cost curve decreased with the rise in output level.
On the other hand, Nizovtseva (2014) cited that fixed cost under natural monopoly is higher compared to the other market structure. This implies that the producers with the higher fixed cost need a larger number of consumers in order to get greater rate of return on investment. In addition, it can be observed that there would be higher barriers to entry under natural monopoly (Nizovtseva, 2014).
Long run cost structure under natural monopoly:
From the above figure, it can be observed that the long run average cost curve under natural monopoly has been declining continuously. In this connection, it can be mentioned that the economies of scale are generated in the market; hence, the average cost would constantly decline. In addition, it can be added that in order to increase the profitability of the organisation, the natural monopolist would charge at the level of Q. As a result, the organisation would earn super normal profitability. However, Haucap & Klein (2012) mentioned that if an organisation incurred losses under natural monopoly, the government of Australia requires to provide subsidy to the producers.
Benefits under natural monopoly
The benefits of natural monopolies can be described in the following way:
Average cost pricing
In the words of Crozet, Nash & Preston (2012), it can be stated that the average cost pricing technique would be able to reduce the price flexibility of the company and also ensures that the natural monopolists would not capture above the margins.
In the point of Makwe, Akinwale & Atoyebu (2012), it can be stated that the natural monopolists can be implemented with the help of the higher charging prices. More specifically, price ceiling is the government imposed controlling price.
Regulation on rate of return
This is similar to the average cost pricing. In this context, it can be stated that the percentage of profitability would be included in a company needs to set under the predetermined percentage of government. This would be benefitted to ensure the compliance, which would be helpful for the governmental regulatory approaches (Carvalho, 2014).
Tax or subsidy
As per the opinion of Crozet, Nash & Preston (2012), it can be stated that government of Australia can increase the natural monopoly by increasing the taxes on the large number of producers. In a synopsis, it can be mentioned that the government of Australia would allow financial support with the help of the financial support. With the increase in the new entrant in the market, the market environment would be competitive and it is highly equitable.
According to Haucap & Klein (2012), there are two types of natural monopoly such as strong monopoly as well as weak monopoly. It can be observed that strong monopoly can reduce the average costs whereas the weak natural monopoly can increase the average cost of the market. Under the sub additive natural monopoly market structure, the market would include only one organisation irrespective of multiple firms (Minamihashi, 2012). On the other hand, under strong natural monopoly market structure, if the long run average cost curve of a single organisation would be decreased up to a certain point when long run average cost curve would cut the entire market demand curve. Moreover, it can be opined that in the short run, natural monopolists would not be earned super normal profit. The natural monopolists earn normal profit in the short run (Haucap & Klein, 2012).
This above figure described that one organisation would be provided goods and services to the customers within the industry compared to the two or more firms in terms of lower rate. Suppose, there are four organisations in the Australian market. Each of the organisations has produced at the maximum level (Minamihashi, 2012). In this point, the marginal revenue would be equivalent to the marginal cost. As a result, market price can be estimated by the market demand curve. The price level would be increased up to Px. At the point b, each firm produced at a smaller scale.
As per the statement of Stiglitz & Rosengard (2015), it can be stated that in case of natural monopoly, long run cost curve would be decreased continuously. In this purpose, the Australian government can formulate natural monopoly within the market. As a result, it can be mentioned that the level of satisfaction of the consumers would be increased. On the other hand, under the natural monopoly, one firm would exist in the market. There would be no competition in the market (Nizovtseva, 2014). This would improve the level of welfare of the customers. Hence, the government of the country needs to implement natural monopoly system within the economy.
The natural monopolist firms are assumed to be inelastic. This refers that with the rise in the price of the goods and services, the demand of the consumers would not be changed. Moreover, it can be mentioned that the firms would improve their profitability statement as the competition would absence in the market. However, Carvalho (2014) argued that in case of charging of higher price and due to the inelastic type of demand curve, the government would not be able to implement the practice of natural monopoly. Therefore, it can be inferred that the price of the goods and services would be reduced with the increase of the entering of suppliers in the market (Nizovtseva, 2014).
This study has described the overall market structure of natural monopoly. In this context, it can be noticed that the cost structure would be sub additive type under the natural monopoly type market structure. In addition, this study is able to highlight the structure of average cost, fixed cost and the marginal cost both in the long run and short run. This study has also provided the short run and the long run profitability statement. After the analysis, it can be observed that there are two types of natural monopoly such as strong natural monopoly and the weak natural monopoly. Lastly, in this study, the governmental decision regarding the benefit of natural monopoly has discussed.
Carvalho, P. &. (2014). Computing economies of vertical integration, economies of scope and economies of scale using partial frontier nonparametric methods. European Journal of Operational Research , 292-307.
Crew, M. A. (2012 ). Managing change in the postal and delivery industries (Vol. 25). . Springer Science & Business Media.
Crew, M. A. (2012). Managing change in the postal and delivery industries (Vol. 25). Springer Science & Business Media.
Crozet, Y. N. (2012). Beyond the quiet life of a natural monopoly: Regulatory challenges ahead for Europe’s rail sector. CERRE, Brussels.
Haucap, J., & Klein, G. J. (2012). How regulation affects network and service quality in related markets. Economics Letters , 521-524.
Makwe, J. N. (2012). An economic assessment of the reform of Nigerian electricity market. Energy and Power , 24-32.
Minamihashi, N. ( 2012). Natural monopoly and distorted competition: evidence from unbundling fiber-optic networks.
Nizovtseva, I. (2014). Generalization index of the economic interaction effectiveness between the natural monopoly and regions in case of multiple simultaneous projects. . Applied Mathematical Sciences. , 1223-1230.