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Identify, from Australian industry, examples of monopoly and monopolistic competition and explain how and why governments may engage in policy intervention with respect to monopolies but not do so with respect to firms operating in a monopolistically competitive industrial structure.

Theoretical Analysis of Monopoly and Monopolistic Competition

The essay tries to give examples relating to the monopoly and monopolistic competition that are prevailing in the Australian industry and why government intervention is necessary in the monopoly markets and not in case of the monopolistic market. In order to have a complete understanding of the topic a detailed theoretical analysis of the monopoly and monopolistic competition is provided in the analysis section. Further, various benefits and drawbacks relating to these market structures are discussed thoroughly. Definitions along with the graphical analysis for the social welfare of the economy is provided for a better understanding of the topic. The evidence and examples of such market structure is gathered from the scholarly article of (Minifie, 2017). The reference to this article is provided.

The essay aims to figure out the drawbacks that might be prevailing in the major monopoly markets of Australia. The set of policies that are implemented by the government might be inefficient to increase the social benefits accruing to the consumers. Further, if these policies are found to be inefficient then a few policy implications will be suggested for the stakeholders.

The existence of competitive pressure in the economy is very important for the maximisation of social welfare in an economy. A competitive market ensures that the prices that is charged by the seller is equal to the costs that is incurred by the same (Corchón, 2013). However, the scenario of Australia is quite different. There are no such competitive markets in the industry. Most of the Australian market is dominated by oligopolies (Minifie, 2017). However, in few of the important industries there exists monopoly and monopolistic competition. The essay tries to analyse such markets in the Australian industry and bring in light the various problems associated with such industries.

The definition of market states that market is a place where buyers and sellers interact with each other for the purchase and sale of a commodity. The price and the quantity is set as per the bargaining of the customers (Brue et al., 2014). There can be different types of market structure. Perfectly competitive market, monopoly markets, monopolistic markets and so on. As per the topic of the essay, theoretical analysis is performed on the monopoly and monopolistic market structures of an industry.

Monopoly Market: The main feature of this type of market structure is that there is a single seller but large number of buyers. The consumers or the buyers do not have the bargaining power and the seller is a price setter in this type of market. In this type of market, structure there exists high degree of entry barriers and the goods produces by the sellers have no close substitutes (Varian, 2014). Because of these factors, the price level is comparatively high. Buyers have to pay prices that are more than the cost incurred by the sellers. The main aim a monopolist is to maximize the profits. As a result, the social welfare of the customers decreases (Sen, 2017). The consumer surplus decreases and the deadweight loss to the society increases. The deadweight loss that happens in a monopoly market is explained diagrammatically below.

Benefits and Drawbacks of Market Structures

The equilibrium in a monopoly market occurs at the point where Marginal Cost (MC) curve intersects the Marginal Revenue curve. Diagrammatically P and Q are the points of equilibrium.  The area of the triangle SPA represents the consumer surplus. Area under the curve BCE represents the producer surplus. While the area under the curve BEAP represents the profits from the monopoly power. The area AED represents the total deadweight loss to the consumers. There are several ways to reduce this deadweight loss arising due to this monopoly power (Zeuthen, 2018). Somehow, if the cost curve could have been shifted upwards this deadweight loss to the society would have been reduced. The major concern of this essay is to reduce the deadweight loss and to increase the social welfare of the community.

Monopolistic Market: In this type of market, there is many sellers each selling a different version of the commodity. Consider the example of the soft drinks industry. There are many sellers and each of them produces a different version of the product. In this type of market structure, there are close substitutes to the commodities. The barriers to entry are very low. There exists free entry and exit to the market. Sometimes the goods are differentiated through the process of advertisement made by the company. The sellers to some extent enjoy monopoly power but that does not retain in the long- run. In the short-run, the company may experience high profits but the free entry and exit mechanism helps to eradicate this profit in the long- run (Chopra, 2013). Therefore, the sellers cannot charge whatever price they desire. Consider for example if the price of diet coke id too high then a person will shift to Pepsi. Hence, availability of close substitutes have led to decrease in the prices as compared to that of a monopoly market. Thus, the equilibrium prices are low and quantity is more as compared to a monopoly market. The deadweight loss accruing to society is low than that of monopoly market. Therefore, the social welfare is high but lower than that of the competitive market. Due to the availability of close substitutes, the demand curve in a monopolistic market is more elastic than that of the monopoly market (Nikaido, 2015). The graphical analysis is provided below.

From the above diagram, it can be clearly seen that the demand curve for the monopolist is elastic than that of the monopoly firm. The shaded region is the profits enjoyed in the short –run. In the long- run the profits are eliminated due to the entry of the new firms. The blue line denotes the demand and marginal curve of the monopoly and that for the monopolist it is denoted by the black line. The equilibrium for the monopolistic case occurs at P* and Q*. Comparing that to a monopolist the equilibrium occurs at P and Q. Clearly, the deadweight loss accruing to the monopolistic competition is quite less than that of the monopoly. Therefore, it can be reviewed that monopolistic market is more efficient than the monopoly market (Zeuthen, 2018).

Prevalence of Monopoly and Monopolistic Competition in the Australian Industry

From the definitions provided in the above section, the Australian market structure can now be analysed thoroughly. The monopoly market structures that exists in the Australian economy are Australian Post, Energy Aus, mining industry of Australia, rail freight, wired telecom. The Australian Post is a big monopoly and the largest postal network of Australia. The mining sector is also a monopoly that is operated by the government of Australia (Eklund, 2015). Another important monopoly that is prevailing in the Australian economy is that of the energy industry. The energy market of Australia is by far the largest monopoly owned by the government. The above said industry have no competition though one can argue that people nowadays prefer cell phones over wired connections or may use airways instead of railways. However, this is not true, as in most of the workplaces require high-speed internet facilities which can only be delivered by the wired telecom network. For the movement of heavy  freights railways are always a better option, thus these industries enjoy monopoly. The above said firms are price makers and there are huge barriers to entry in these markets. The examples of monopolistic firms that are existing in the Australian market are Gloria Jean’s coffee. The coffee industry has many alternate competitors like Hudson or Starbucks. These companies sell the same product that is coffee but each of their products are differentiated to some extent. Gloria Jean is a company, which was established in Chicago on 1979 by Gloria Jean Kvetko (Watson et al., 2016). The company’s main aim is to provide coffee to the customers at a price much lower than Starbucks or Hudson. Other monopolistic markets that can be observed in the Australian market are the Australian cell phone industry with variety of companies like Telstra, Vodafone and Optus. They also belong to the same industry but produce products, which are differentiated to some extent.

There are various problems associated with the working of a monopoly. There is serious need for the policy intervention in case of monopoly. Various governmental laws can increase the competition in the market. The Trade Practices Act (Mountain, 2014) is the main competitive law that the Australian government follows. The main aim of this act is to prevent anti-competitive behavior among the industries. The law aims to prevent the creation of mergers and to restrict the companies to exhibit market power that can harm the competitors in the market (Karier, 2016). These laws help in reducing the deadweight loss and eventually leading to the increase in the social welfare of the society. Number of firms enjoy natural monopoly. Natural monopoly means that the firm enjoys economies of scale. By economies of scale, we mean that the firm can capture the whole market at a relatively lower price as compared to the competitors in the industry (Stiglitz & Rosengard, 2015). The Australia rail freight enjoys such monopoly power. To compete with natural monopoly, the government tries to limit price of the commodities. However, this is always not possible. In case of natural monopoly the Marginal Cost curve is always below the Average Cost curve and setting the price equal to Marginal Cost would bring losses to the firms. No firm would want to run in losses thus, this policy is not appropriate. Further, marginal cost pricing gives no incentives to the producers to develop a reduced cost structure. The government of Australia tried to run the monopoly by itself in order to reduce inefficiencies and increase social welfare. This phenomenon is called public ownership of the private firms. The government ownership will try to increase the social welfare to the fullest. However, this has not been the case until yet. The energy industry of Australia is operating very inefficiently. The prices of electricity have increased significantly. In the present day the prices are as high as 2.5 percent that of Britain. The prices have increased significantly (Shahiduzzaman & Alam, 2013). Moreover, there are frequent power failures. Thus, the supply of electricity has also decreased indicating a decline in the service. Therefore, the customers have to pay high prices and the quality of product has decreased. Hence, public ownership has not aided a solution to the problem. However, if the energy industry had been monopolistic, then people would have found close substitutes to it. The monopolistic firms would have the fear of substitution and therefore would improve the quality of the product. In some cases, the monopolist might earn profits in the short-run but in the long- run entry of the new firms would have eradicated these profits. Therefore, policy implications are necessary for the monopolists but are not compulsory for the monopolistic firms.

Conclusion

In the above sections, a detailed analysis of the topic has been conducted. Focus has been made on the various governmental policies followed by the Australian government has been analysed. However, these policies are not up to the mark. Government has failed to make significant progress in the energy industry, as it has not been able to improve the social welfare with respect to this industry. Despite of being a public industry the Australian energy industry has failed to leaps and bound. The government must implement new policies. Few policy prescriptions can be made with respect to this matter. The government should shift the focus on the research and development aspect. Research and developed should be conducted on the energy industry. Another important step that can government can take is Average Cost pricing. In Marginal Cost pricing the firms, make losses. Whereas, in average in Average Cost pricing there are no such losses. The monopolistic firms do not require any policy intervention as there are close substitutes available for the products and there are no such barriers to entry unlike that of a monopoly market. Regulations is very important in case of a monopoly firm.

References

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.

Corchón, L. C. (2013). Theories of imperfectly competitive markets. Springer Science & Business Media.

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.

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.

Zeuthen, F. (2018). Problems of monopoly and economic warfare. Routledge.

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