Analyze the Market type that usually Prevails in Supply of Gas in Australia.
Economics as a subject deals with market and market dynamics among other concepts. A market is generally known to be a place where buyers and sellers interact in order to maximize individual as well as overall welfare. Markets, however, can be of different types based on the nature of commodity, number of buyers and sellers and other determining factors. A perfectly competitive market is an extreme example of free market with no barriers and uniform distribution of market power among buyers and sellers (Kirzner 2015). However, there are obvious exceptions to this hypothetical market namely, oligopoly, monopolistic competition and monopoly. These are generally examples of imperfectly competitive ones, monopoly being the other extreme form of market. The report tries to analyze the market type that usually prevails in supply of gas in Australia. To study the market type and the consequences of that market on the concerned industry the report takes reference of the article named, “Gas supplier monopoly pricing hits domestic users hard: ACCC”, by Stephen Letts (Abc.net.au, 2017).
Monopoly market implies the presence of single seller or seller group in an economy with innumerable buyers, thereby implying that the seller enjoys almost all of the market power and price making powers. The article takes into account the presence of monopoly pricing powers of the eastern state suppliers of gas and operators of pipelines. It tries to address the issue of misusage of this monopoly power by these gas providers in the country (Gillespie 2014). The assessment conducted by the Australian Competition and Consumer Commission shows the presence of substantial evidences of monopoly pricing by majority of the gas providers in this region. In addition to monopoly pricing, the absence of appropriate and sufficient regulatory measures is also noticed in this market (Abc.net.au, 2017). Gas being one of the most essential household consumption commodity and a primary source of energy for Australian households, this issue raises concern among the government officials and policy makers. The commodity in conern being one of the primary essential ones, the suppliers are enjoying a tremendously high demand for their product, thereby gaining control of huge market power. On the other hand, monopoly power of these suppliers collectively and a presence of cost effectiveness are keeping out any kind of external competition out of the market, thereby making the consumers the direct sufferers of this issue (Ekelund Jr and Hébert 2013). The market though claimed to be highly regulated, in reality lacks proper regulatory measures, with even less than twenty per cent of the east cost suppliers coming under the regulations of the National Gas Law of the country. The industry also suffers from lack of transparency regarding imposition of restrictions and policy implications thereby affecting the clientele adversely (Nelson et al. 2013).
Monopoly market necessarily implies the presence of full market power in the hand of the supplier, as he is the only one supplying the product, which in general is assumed to have considerably high demand. The only interest of a monopolist is necessarily maximization of his own profit. The seller being a price-maker and not a price-maker, in the long run he is expected to earn economic profit as the surplus generated is attributed to him solely (Longley 2013).
From the above figure, it can be seen that, in this market, due to a presence of difference between the cost of production and the price at which it is sold there is presence of economic profit for the supplier in the long ring unlike that of the perfectly competitive market (Rios, McConnell and Brue 2013).
The above discussion implies that, in this scenario due to the presence of monopoly power in the hand of the gas providers and a simultaneous absence of appropriate regulatory policies on these providers, they are trying to maximize their economic profit and to do that they are resorting to stiff monopoly pricing in this market (Abc.net.au, 2017).
The continuous and stiff monopoly pricing by the gas suppliers cartel and consequent sufferings of the direct consumers of the product, which includes the households of the Australian economy, can be controlled with the help of correcting restrictive policy measures on part of the government. The projected price hike in this sector can be curbed to considerable extent with the help of price control mechanisms such as imposition of price ceilings on these producers which will force them to keep their prices below a certain maximum level. Monopoly power of these producers can also be decreased by opening the market to foreign competitors, who will help in taking the overall price levels down to certain extent (Cramton and Ockenfels 2012).
It is evident from the above discussion that currently Australia is facing a monopolistic situation in the market of one of its most essential household commodity. This is posing as a matter of great concern for the Australian government. The absence of proper regulatory mechanism in the market being the main reason for this monopoly pricing, imposition of proper price ceilings and opening the market to potential competitors of these gas providers, can solve this particular problem substantially
Abc.net.au (2017). Gas supplier monopoly pricing hits domestic users hard: ACCC. [online] ABC News. Available at: https://www.abc.net.au/news/2016-04-22/gas-supplier-monopoly-pricing-hits-domestic-users/7350338 [Accessed 24 Aug. 2017].
Cramton, P. and Ockenfels, A., 2012. Economics and design of capacity markets for the power sector. Zeitschrift für Energiewirtschaft, 36(2), pp.113-134.
Ekelund Jr, R.B. and Hébert, R.F., 2013. A history of economic theory and method. Waveland Press.
Gillespie, A., 2014. Foundations of economics. Oxford University Press, USA.
Kirzner, I.M., 2015. Competition and entrepreneurship. University of Chicago press.
Longley, N., 2013. Introduction. In An Absence of Competition (pp. 1-7). Springer New York.
Nelson, T., Nelson, J., Ariyaratnam, J. and Camroux, S., 2013. An analysis of Australia's large scale renewable energy target: Restoring market confidence. Energy Policy, 62, pp.386-400.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hi