L102 : Economics Assignment : Assessment Answers

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.

Australia is one of the countries with competitive pressures and market power. The different market structures that exist in the country have strong market hold but largely do not share to the output and employment (Minifie, 2017). On the other hand, the market structures in Australia have risen but the profitability has not mounted up since 2000’s. The market structures that control half of Australia is monopoly, followed by a narrowed version of monopoly as oligopoly and monopolistic competition.

Monopoly and monopolistic competition are two different market structures. The former market structure needs intensified competitive pressures by the policymakers whereas the latter needs to compete with different products through the advertisements due to product differentiation (Waldman & Jensen, 2016). Nevertheless, the Australian industries like Australia post (mail), wired telecoms, transmission and electricity distribution are natural monopolies, followed by high profits from supermarkets and highly regulated sectors like gambling that are considered to be uniformly strong holders in monopoly.

On the contrary, monopolistic market structure in Australia does not need intervention from the government because pf product differentiations which keeps the price low and with less barriers on entry and exist of firms (Black, 2017). Some examples of monopolistic competition would be cafes and coffees like Gloria Jean’s Coffees from the coffee industry, or in construction industry in heating, ventilation and air conditioning (HVAC) sector from the mechanical services industry or the fast food industry covering Domino’s, Pizza Hut, KFC, Red Rooster, and so on.

Monopolies and government intervention can go hand in hand because the government itself grants monopolies with the “exclusive franchises” considered as “public utilities”. The natural monopolies like electricity have regulated market and does not possess competition because of economies of scale which in turn has reduced average total cost so that desirable rates can be paid by the customers and the electricity can be allowed at low (Nelson, et al., 2017). Nonetheless, this cannot be possible by a monopolistic competition market where there are many sellers with high average total costs leading to higher prices from the consumers. The only reason, that monopoly market needs to be regulated so that a price higher than social optimal cannot be marked with less production (Mahoney & Weyl, 2017). Diagrammatically, a monopoly acting as a dominant firm can be compared with a regulated monopoly.

Source: (Waldman & Jenson, 2016)

The figure 1 shows the dominant positioning of a monopoly when it a price higher is set in response to small firm is set such “Pm” would be considered as a “Monopoly Price”. In other figure 2, a cost function is faced as “C = F + c(q)q” where F = Fixed capital costs and c(q) = marginal cost of operation (constant), and “Pm” would be the monopolist price with profits as π as a net profit of (π – F) with “E” as allocative inefficiency. Now, if there is regulation in the market, then then MC intersects such that the price below monopolist price could be competitive price “Pc” and E would be 0 but the AC is too high and as a result, the firm might have to exist the market as it cannot recover its cost. Hence, this would entail a government’s regulation of taxes or subsidy in the market (Waldman & Jenson, 2016).

The argument stresses on making a single provider and making the monopolies break free from competition and later regulating the monopoly pricing and providing its welfare to the customer through by passing the savings to increase the efficiency. One such example from history of monopoly raises the question that when three gas companies tried to merge in 1888, Thomas Alva Edison discovered “electric light” which not only made all the gas companies vulnerable but also, there was no materialization on natural monopoly or economies of scale with no free market (Mainer, 2010). Further, the regulation in market can be duly a “high power regulation” if the monopoly is savoured with incentives for the series of cost reduction with quality provision (Chamberlin, 2015). In other words, it suggests that the regulated firm would possess higher degree of risk which would entitle the regulator to give a strong commitment for maintaining monopoly in the market.

Irvine (2011) opined that Australia is a land of breeding oligopolies or monopolies and has ripped of the individual through its competitive nature. As distinguished by the companies, Australian revenue is generated by wired telecoms, transmission and telecommunications. However, mobile telecoms in Australia are assumed to be more expensive than US for the companies like Telstra, Vodaphone or Optus. Although, this is a new sector and technology is growing rapidly which is oblivious of its path to evolve (Minifie, 2017). In this regard, there is need to tighten the government regulation for natural monopolies because they not only face less direct competition but they constrain prices. The price constraining is common and is done with the hold of innovation and investment with robust commercial incentives. As suggested by Sims (2016b), price monitoring cannot be the only solution to regulation in the absence of competition in the country.

Nevertheless, the government has tried to impose regulation in electricity department and transmission by cutting the prices. Similarly, in fixed line communication, dismissing of National Broadway Network to ensure efficient use of price permits. Also, ACCC no longer bears the costs of a new network as per 2015 ACCC norm (Minifie, 2017). Moreover, mobile telecoms are investing and the prices are increasing because there was adequate competition in the market and the intensity would be the same until and unless there is a fourth network in the market. However, as a basis of price regulation, the government is not encouraging a 5G network and even ACCC has rejected it (Sims, 2017).

Australia post one of the natural monopolies is the largest retail network in Austral which is a government enterprise. Being a self-funding business, it holds 5% of the total Australian industry value. Although, it follows second degree of price discrimination because it has different price slabs for its different customers based on the customer usage. The competitiveness is not there in mail and postal services because it subsidises its letters from the business in parcels which has not been the case with other postal services of different countries (Communications.gov.au, 2014). However, as per the growing profits, reform planning needs to be automated so that in additional savings, labour transformations could be involved. Nevertheless, falsification or failure to implementation can lead to the impacts borne by the government and the taxpayers.

However, in the Australian industry of gambling and betting there is need to reduce the issuing of licenses even though the impact would be on supernormal profits. However, government intervention should be given by reviewing the options of auction so that better public value could be achieved. This will help in cutting off the overall regulatory burden and toughening the pro-competition regulation. Also, as per TAI, the industry has outrage and veto policies that can affect the autonomy as a whole by risking and losing the governing majority (Fletcher, 2013).

In contrast to monopoly, monopolistic competition does not possess market power but has multiple firm that produce diverse quality of products with differentiated prices. Chamberlin is of the view that the individual firms not only able to cover their fixed and variable costs but also has the demand curve as downward sloping till the time all firms change the output simultaneously (Nikaido, 2015). In response to monopoly, monopolistic competition can be changed incorporated with taxes and subsidies with no use of regulation. This is because when monopolistically competitive market structure is allocated on the set of equilibrium, here, each firm operates on a non-negative profit and there is no high amount of transfers taken place. On the contrary, every firm has economies of scale with  which violates the efficiency when price is greater than marginal cost. If it is kept equivalent then, there would be normal sum payment (Pigou, 2017).

The regulation of monopolistically competitive markets is not required because the market is itself efficient in spite of economies of scale (Belleflamme & Peitz, 2015). The regulation is not possible without the lump sum transfers, they cannot be turned as practical with scale of economies. The monopolistic competition works on the agenda of cost minimization where production costs can even go down if the firms choose unlike investments (Black, 2017). In addition to this, if even aggregate costs are reduced, firms can induce with different volumes which further highlights that the market will remain symmetric in this case and cost savings will not be realized. As a result, when lump sum is not taken into consideration then price is equivalent to marginal cost stating neither the market nor the regulator is able to take advantage of the aggregate production costs (Mishan, 2015).

To support with examples, industries of Australia are taken which operate efficiently without regulation in the market. Cafes and coffee market in the coffee industry of Australia can be dominated by other small yet specialized operators but franchised operations will continue to attract crowd because of quality and experience. The Café and Coffee shops industry have been favourable for the traditional coffee shop market while boosting high revenue from Michel’s Patisserie and Gloria Jean’s Coffee because of their independent production decisions irrespective of new companies entering the market Gargano (2015). As per IBIS World Report (2018) coffee culture has grown and resulted in low industry concentration and barriers to entry with high industry competitions amongst firms.

Alternatively, for construction industry, there are significant but few barriers to entry but the industry maintains its current practices through the help of specialized and small sub-contractors. The only area where is creates a barrier to entry is the efficiency level and the capability to manage big projects (Myers, 2016). As a result, this leads to few contractors who can develop links to prospective clients. The industry is monopolistic in terms of HVAC (heating, ventilation and air conditioning) sector. This part of the industry with small and medium sized contractors perform the activities of bricklaying, concreting, steel fixing and so on (Yang & Xu, 2015). There is no regulation required in this part of the industry due to the efficiency it performs on.

Fast food industry, a form of monopolistic competition deals with the changes with other small forms, for example Burger Store in Sydney applied the same campaign as applied by McDonalds in terms of meal and beverage, the fast food outlets have close substitutes and can be substituted for each other even if its  a deal given to the customers (Farnham, 2014). Just like the previous example, a burger joint can formulate a similar discount as McDonalds to attract more customers even if it is lowering the prices to a level  to earn supernormal profits in the short run.

To conclude, it can be said that both monopoly and monopolistic competition are different market structures which regulate markets. However, government regulation is needed in former but the same is not true for the latter market structure. Also, monopoly have market power that makes them superior in the market with no other firm in the industry to compete with but a monopolistic structure operates with different firms in the same industry. The monopoly industries like Australia Post, mobile telecoms, electricity division are the only companies in the firms that operate on natural and highly regulated monopolies. Whereas café and coffee shops industry and fast food industry compete with other firms to maintain their standing with easier entry and exit with not full information of the decision taken by other. Also, the regulation being not possible in monopolistic competition with the given scale of economies.

References:

Australian and International Postal Services Overview. (2014). Retrieved from https://www.communications.gov.au/sites/g/files/net301/f/BCG_Postal_Services_Background_Report.pdf

Belleflamme, P., & Peitz, M. (2015). Industrial organization: markets and strategies. Cambridge University Press.

Black, J. (2017). Critical reflections on regulation. In Crime and Regulation (pp. 15-49). Routledge.

Cafes and Coffee Shops – Australia Industry Report | IBISWorld. (2018). Retrieved from https://www.ibisworld.com.au/industry-trends/market-research-reports/accommodation-food-services/cafes-coffee-shops.html

Chamberlin, E. H. (Ed.). (2015). International Economic Association Monopoly and Competition Regulation. Springer.

Farnham, P. G. (2014). Economics for managers. Pearson.

Fletcher, J. (2013). The four corporate industries that rule Australia. Retrieved from https://www.greenleft.org.au/content/four-corporate-industries-rule-australia

Gargano, S. (2015). Cafes and Coffee Shops in Australia. Retrieved from https://www.konacoffeefarmers.org/wp-content/uploads/2015/05/Cafes-and-Coffee-Shops-in-Australia-Industry-Report-Apr-2015.pdf

Irvine, J. (2011). “Top bosses’ riches are undeserved”. Sydney Morning Herald. https://www.smh.com.au/federal-politics/political-opinion/topbosses-riches-are-undeserved-20111101-1mttj.html.

Mahoney, N., & Weyl, E. G. (2017). Imperfect competition in selection markets. Review of Economics and Statistics, 99(4), 637-651.

Mainer, D. (2010). Monopoly and Competition: Government Intervention and its Effects on the Free Market. Retrieved from https://damienmanier.com/2010-03-29/monopoly_and_competition/

Minifie, J. (2017). Competition in Australia Too little of a good thing?. Retrieved from https://grattan.edu.au/wp-content/uploads/2017/12/895-Competition-in-Australia-Too-little-of-a-good-thing-.pdf

Mishan, E. J. (2015). Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.

Myers, D. (2016). Construction economics: A new approach. Routledge.

Nelson, T., Bashir, S., McCracken?Hewson, E., & Pierce, M. (2017). The Changing Nature of the Australian Electricity Industry. Economic Papers: A journal of applied economics and policy, 36(2), 104-120.

Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6) (Vol. 1391). Princeton University Press.

Pigou, A. (2017). The economics of welfare. Routledge.

Sims, R. (2016b). Privatisation needs smarter regulation. Comments made at the Melbourne Economic Forum. https://www.accc.gov.au/mediarelease/privatisation-needs-smarter-regulation.

Sims, R. (2017). The role of the ACCC in restoring faith in free markets. Address delivered to Competition Law Conference, May 6 2017. https://www.accc.gov.au/speech/the-role-of-the-accc-in-restoringfaith-in-free-markets.

Waldman, D., & Jensen, E. (2016). Industrial organization: theory and practice. Routledge.

Yang, M., & Yu, X. (2015). Market Barriers to Energy Efficiency. In Energy Efficiency (pp. 33-42). Springer, London.