Within an economy, four types of markets, viz., perfect competition, monopoly, monopolistic competition and oligopoly can be seen. These markets have different characteristics depending on the number of sellers and buyers, types of products, restriction regarding entry or exit and other related factors (Weller, Kleer and Piller 2015). It is essential to mention that each market structure exists in real field and consequently classifies market of each country accordingly. To understand the situation more accurately, the report selects Australian industry to discuss further. In the present economy of Australia, various forms of market structure, such as monopoly, monopolistic competition and oligopoly can be observed (Lorenczik, Malischek and Trüby 2017). However, oligopoly structure chiefly dominates the entire Australian market, for instance, operating structure of banking sector or retail market. As a result, the number of monopolist and monopolistic competitive industries in this market are comparatively low. In this context, it is essential to mention that each market has dynamic characteristics as they change over time along with their nature of competition. This report focuses on monopoly and monopolistic competitive industries of Australia and explains activities of some specified sectors under these market structures.
Hence, it is essential to describe about the basic microeconomic concept of monopoly and monopolistic competition, based on which the paper will further explain the Australian market through selecting some specific industries, for instance, postal service or restaurant industries. In addition to this, the report will also describe about the requirement of government intervention in these markets.
In a pure monopoly structure, a single seller or firm operates the entire market freely without experiencing any competition. The chief characteristic of this market is that the seller can earn excess profit unlike any perfectly competitive market in both short-run and long run, as other firms cannot enter into the market. This implies that the product does not have any substitute and consequently the firm performs as a price maker (Fang and Wu 2018). Hence, the monopolist can enjoy the power to set price freely without fearing of any loss. This following figure can describe this market structure accurately. As the number of firm within this is market is one, this firm represents the industry and for this, firm and industry are used synonymously. Moreover, the firm does not consider market demand and market supply, as it operates as sole producer.
Figure 1: Monopoly Market
Source: (created by author)
Figure 1 represents monopoly market with the help of average revenue (AR), marginal revenue (MR) and marginal cost (MC) curves. The firm maximises its profit when marginal cost equates with marginal cost curve. According to above figure, the monopolist sets price P for quantity Q while cost of production is C. Hence, the shaded area represents super-normal profit of the firm through representing a difference between price of the product and cost to produce it.
Market power implies the ability of a firm to increase and maintain its price above the equilibrium level to earn higher amount of profit. This type of service cannot be obtained in any competitive market, as in this form of market free entry and exit of firm is allowed (Phelan et al. 2017). Hence, if a firm observed that other firm is making excess profit through enjoying market power, then the new firm can enter into the market. However, this is not possible in a monopolistic market.
Australian monopoly industry:
Australia has some public listed companies (ASX) that operate as monopolist in their respective sectors. The Sydney airport represents a monopoly market due to its strategic placement. This international airport solely provides services to the people of Australia and foreign tourists across the world. The Sydney Airport Holdings Ltd. enjoys the power to operate the entire service of aviation and consequently does not allow other entity to enter and operate within this sector (Forsyth 2017). Thus, the airport charges higher prices to passengers for parking and hiring vehicles. According to a report of the Australian Competition and Consumer Commission, the Sydney airport has provided below standard services to their passengers, the airport charges $ 15.53 per passenger from each airline and in turn earns huge marginal revenue (Bowyer and Chapman 2014). In addition to this, the postal service of this country also operates as a monopolist. This government-owned business has only one shareholder, which is, the Australian government. This specified service operates under the Australian Postal Corporation Act 1989 while the Australian post board as well as management takes responsibilities to run the organisation every day.
According to the Australian Competition and Consumer Commission (ACCC), the postal service o Australia has possesses a legal monopoly for delivering letters having less than 250 g weights that cost maximum $ 2.40 to deliver (Decker 2016). The sector operates its business within three markets, viz., letters and related services, retail merchandise and agency services as well as parcels and logistics. Retail merchandise delivers parcels and logistics in both international and national markets. Under letters and related services, the Australian Post gathers, processes and distributes letters across the country and all over the world as well. This service helps Australian business organisations to develop their business through achieving targets, as the service gives opportunity to these business organisations for conducting research with the help of some other associated postal services (Wang, Jie and Abareshi 2015). Through retail merchandise and agency services, Australian Post provides services to third party agencies through connecting businesses, consumers and government organisation in the form of bill payment or banking service. This service also supplies parcels and logistics across the country. However, recently the postal service has increased its cost of stamps due obtain profit. This can negatively influence common citizens as well as business organization. This is because increasing cost for delivering parcels and letters can lead the cost of supply of these organisations.
Importance of government policies:
In this context, it can be mentioned that government intervention and government policy is required in monopoly market for protecting interests of customers. The monopolist enjoys the market power to increase price by higher amount compare to its equilibrium price. However, this practice reduces the amount of consumer surplus. Moreover, absent of competition can lead this firm to produce product insufficiently. He firm may not utilise all resources fully to produce its output. In addition to this, lack of competition can lead this firm to produce product with comparatively lower quality. Hence, the market may not obtain its optimization level. Thus, to protect self-interest of consumers and control the monopolist to fully utilise natural resources, the government can implement effective policies. Hence, some tools that the government can utilise in this monopoly market are price capping, merger policy and regulations regarding rate of return (Hao and Lu 2018). Through these policies, the government can monitor and control all economic activities of the firm. This is also applicable for above mentioned situation, where airport service of postal service are enjoying market power and do not experience any strong competition. Proper government policy can force the Sydney Airport to develop its customer service. Moreover, government can set maximum prices that airport charges from their passengers. The government can also set a maximum percentage that the airport charges from its airlines. This in turn can reduce cost of these airlines. In addition to this, the government can impose policies to control postal service o Australia, as other private organisations do not get permission to deliver letters and parcels across the country (Carranza, Clark and Houde 2015). The government can implement policies to restrict maximum price for each letter to protect interests of common people as well as business organisations. This implication is applicable for other monopoly market of Australia. It is very difficult to find proper monopoly in this country like postal service. Most of the monopoly sector operates under government control. However, sometimes, these firms start to utilize their monetary power through charging higher prices from their customers. For reducing this, Australian government can charge its price capping policy.
Merger policy is other important tool that the government can apply to take strict regulations against the firms that take merger policies for enhancing their business operation. For instance, companies can increase its market capitalisation higher than 25% through merging with new entities (O'Toole 2018). This situation is controlled by the Competition Commission. The commission takes decision about merging new entities for maintaining market structure. Regulation regarding rate of return also helps the government to decide the maximum level, where a firm can maximise its profit. If the firm enjoys higher amount of profit and forcing other small companies to experience loss then the government can impose tax to reduce this excessive profit. In other situations, the government takes decision to break the monopoly market structure for controlling a firm from earning higher amount of profit and reducing its monopoly power. To implement a fair competition for fully utilising natural resources by firms, the government impose different parameters.
Monopolistic competitive market:
Monopolistic competitive market is other form of market, where characteristics of both monopoly and perfect competition can be observed. Like a perfectly competitive market, the number of buyers as well as sellers in a monopolistic competitive market is large (Haaland and Venables 2016). Moreover, both markets do not have any restrictions regarding entry or exit of new or old firm. However, the chief difference between these two market is perfectly competitive market sells similar products that are perfect substitute while a monopolistic competitive firm sale similar products, which are close substitute (Parenti, Ushchev and Thisse 2017). Hence, in a perfectly competitive market, buyers cannot differentiate the product while in monopolistic competitive market, buyers can do this. Thus, each firm within this monopolistically competitive market acts like a monopolist and consequently experiences a downward slopping demand curve (Bertoletti and Etro 2017). In addition to this, like a monopoly market, this monopolistic competitive market can enjoy excess profit through charging higher prices compare to the equilibrium price.
Monopolist market in the context of Australia:
Monopolistic competitive market can also be observed in Australia as well. Most of the restaurant services in this country operate under this market structure. For instance, some large pizza chains like Domino’s Pizza, Borruso’s Pizza, Australia’s Pizza House and other pizza producing companies produce similar products but their size, tastes, quality and price differ with each other (Rasekhi and Ramezani 2017). Other example of Australia’s monopolistic competitive market can be observed in coffee industry. Gloria Jean’s Coffee is considered as the leading coffee industry of Australia. Since 1979, the company has been producing coffee and has expanded its business across the world with more than 1000 coffee shops. In 2014, the Hudson Coffee purchased this company (Khamis 2015). At present, some other strong competitors, such as Starbucks, Hudson Coffee and Coffee Club in this coffee industry are competing with Gloria Jean’s Coffee. However, the specified company is well-known across the country for providing coffee with comparatively lower costs. In addition to this, other examples of monopolistically competitive market are Kellogg’s, tyre producers like Bridgestone and Dunlop.
Importance of government intervention:
The monopolistically competitive market does not need any government intervention, as the market decides prices mutually and consequently consumer surplus does not affect adversely. In this context, if the government intends to imply tax or price ceiling then this activity would adversely affect the condition (Bös 2015). Moreover, the market has more than one firm and for this, competition can be observed among them. Each firm tries to utilise the market resource fully to provide best product with comparatively lower prices. Hence, this market structure does not require any government policies.
Hence, in conclusion, it can be stated that both monopoly and monopolistic competitive market can be observed in real field and this is also applicable for Australian market as well. The Australian market mainly follows oligopoly market structure. However, in some situations, the market follows both monopoly and monopolistic competitive form of market as well. Monopoly market can be observed in the Sydney International Airport and the Postal service of this country. The Sydney airport does not have other competitor and consequently it charges higher prices from passengers to park their vehicles provide lower quality services and demand higher price shares from airlines to increase its profit margin. In addition to this, the Australian post also performs as a monopolist as any other private companies cannot deliver letters or parcels to any postal offices across Australia and in other countries. The government of Australia is the only owner of this service. At present, this government owned company has increased the price for each letter and this further adversely affects Australian citizens and other business organizations. Thus, to reduce the power of market and to protect consumer surplus, the government can implement various policies like price capping or merger policy other some others. On the contrary, competitive market can be observed in food and restaurant sectors, where many companies offer similar type of products but they have distinct sizes, tastes or price. This type of market can also be observed in coffee industry where many coffee producing companies compete with each other for attracting customers through providing various services. This type of market does not require any government intervention, as strong competition among firms can be observed. Each firm tries to maximise its profit by utilising its resources completely.
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