Monopoly And Monopolistic Competition In Australian Industry
Understanding the Market Structure
Borrowing from the words of the renowned economist Michael Porter’s new classical competition framework, there are two main reasons why it is important to understand the market structure in which a business operates. The two basic parts are; external forces and the internal competition within the industry (Aungles, 2016, p. 56).
Another factor in understanding the market structure is the speed. What I mean here is the innovation and the speed of transformation. These are also key and essential components of a market structure. Different industries have different ‘clock frequencies’ (Tremblay, 2015, p. 165).
The external forces are essential because they control the entire profitability of a particular industry or rather the success of a particular entity. These external forces are; negotiation power of the suppliers, negotiation prowess of the customers, barriers to entry and exit, the threat posed by the substitute goods (Aungles, 2016, p. 132).
It is necessary to comprehend how these forces would squeeze the players in that particular industry. When a player finds these forces as being too strong, then the probability of success is so low.
The internal competition within the industry is entirely about the number of competitors in the industry. It is essential to know this as it affects or rather have a say in the size of the market shares, economies of scale and the capability to enter into an alliance, commonly known as the industry- internal collaboration (Negishi, 2014, p. 46). Under this internal competition, we shall be concerned with two distinct sources and these are; cost leadership and product differentiation. Another third source is proper definition of your business concept or rather clever segmentation in order to remain at the top.
Below is an in-depth discussion of two of the market structures, namely monopoly and the monopolistic competition in order to understand better how the above forces dictate the success, survival and profitability of any given entity (Dixit, 2013, p. 187).
This is a form of market structure characterized by only one seller of goods and services which have no close substitute. In this type of a market structure, there is no competition as the seller is the sole player and also the products have no close substitutes. Entry into this market is restricted (Rios-Rull, 2015, p. 132).
The sources of this monopoly power are; patent right obtained from the government, ownership of a particular source of raw materials, copyrights, government license and the high cost involved in starting that particular business venture.
Monopoly Market Structure
Combination of all or some of these factors give rise to the restriction in the entry of other players in the market. There also exists information asymmetry in this type of a market whereby the monopolist possesses some information that the other sellers do not have, thus keeping them out of the market (Tremblay, 2015, p. 165).
The monopolist becomes the controller and also the price taker in this kind of market structure. The monopolist often makes supernormal profits due to setting of the price well above his marginal cost.
Monopolies may be formed by the government or by integration of several entities into one or also it can be a natural monopoly. Government-granted monopolies are usually for the purpose of provision of an incentive to venture into a risky business. In this case the state issues copyrights, patents and copyrights (Dixit, 2013, p. 176).
Natural monopolies on the other hand arises whereby there are limited competition as a result of huge resources required and cost required to operate that particular line of business.
The following diagram shows the graph of a monopoly firm. It shows how it makes the supernormal profits and also the deadweight loss to the consumer. The monopolist seeks to maximize on his profits by setting the output at the point where the marginal cost curve intersects marginal revenue curve. He basically increases prices and decreases the output (Aungles, 2016, p. 243).
The blue area shows the deadweight loss while the red area shows the supernormal profits made by the monopolist.
(Aungles, 2016, p. 265).
Examples of such monopolies in Australia are the banking and the retail sectors. I will focus my attention on the retail company known as the Coles and Woolworths which is a monopoly firm. It is famously known as Woolies. This is an Australian grocery store which is owned by Woolworths limited. It was founded in 1924. The company has a total of 111,000 employees and records around $42.132 billion in revenues annually (Panzar, 2016, p. 189).
It is located in the Wagga Wagga market place. It mainly deals in groceries, but the firm also sells magazines, beauty and health products, household products and also stationary items and DVDs.
The company’s slogan is ‘The Fresh Food People’. It has several loyalty schemes that has earned it a very big market share. Examples of these schemes are; a 4 cent per liter discount for purchases of above $30 are made, a further 4 cent discount for another $5 spent at the petrol station (Rios-Rull, 2015, p. 265).
Examples of Monopolies in Australia
It also has a reward program for shopping in its premises, known as the frequent shopper club.it offers $20 voucher for every 2000 points earned by shopping with the company.
The first benefit is the economies of scale. A monopolist reduces his average cost by increasing the output as this leads to lower average costs. In industries with high fixed costs, it is usually better to have a monopoly rather than having many small firms.
(Dixit, 2013, p. 354).
The other benefit is research and development. The monopolist can invest the supernormal profits made into research and development which results into better or high quality products for the consumers (Dixit, 2013, p. 346).
One characteristic of a monopolist is producing less output and selling them at higher prices, a behavior that is so costly to consumers who entirely depend on his products. The diagram below shows the cost of a monopoly borne by the consumers. The cost is the decrease in the consumer surplus that comes as a result of the monopoly pricing and output decisions (Tremblay, 2015, p. 284).
From the below figure, if it were a perfectly competitive market, the consumer surplus would be given by area occupied by the triangle ABD. This area is reduced by the area of the trapezoid FEDB under monopoly market structure. Of this amount, area represented by FECB accrues to the monopolist. EDC is the deadweight loss that comes as a result of the monopolist charging high and inefficient prices. This is the loss to the society.
How and why the government may engage in policy intervention with respect to monopoly
The government may intervene through price capping on certain commodities. This happens when the regulators think that the monopoly is charging too much price on its products. Price capping is whereby the government sets a maximum price that can be charged by the firm on certain commodities (Negishi, 2014, p. 132).
The government may also intervene through the regulation of the quality services. The government examines the quality of services that are being provided by the monopolist to ensure it does not exploit the consumers
There is also the merger policy whereby the government investigates all the mergers and if it finds out that a merger gives rise to a company with more than 25% market share, it is blocked. The government also from time to time investigates any abuse of the monopoly power by the monopolist. Where it is found out that the monopoly abuses its powers, it might be abolished. (Aungles, 2016, p. 167).
Benefits of Being a Monopolist
There is also breaking of the monopoly power. This is where the government comes to break a monopoly if it has grown so powerful. This however hasn’t been so successful, for example the US government tried breaking up Microsoft but it failed in its attempts (Aungles, 2016, p. 231).
The government needs to intervene in order to prevent excess prices being charged by the monopoly. Monopolists tend to charge high prices and without clear guidelines on the price controls, the consumers can be exploited. The government also needs to intervene to control the quality of services being offered by the monopolist. A minimum standard of quality of standards is set to guide the players in the industry to ensure that the consumers are not offered substandard goods and services. In this way, the consumers are assured of the quality for their money (Tremblay, 2015, p. 127).The government also intervenes in order to promote competition. A competitive market offers quality goods and services at a fairly low price
This is a type of imperfect market competition whereby producers sell products that are differentiated, for example through branding or by quality, thus not being perfect substitutes. In this type of competition, firms maintain an excess capacity unlike in the perfect competition. No single firm has the total control over the market here. There are few barriers to entries and exit from the market. The buyers and sellers do not have perfect information about the market. Producers have some degrees of control over the prices. In this type of a market structure, there is a huge deal of non-price competition, which mainly takes the form of product differentiation. Firms in this type of market structure makes zero profits in the long run. Below diagram shows the profit maximization of a firm in a monopolistic competition (Aungles, 2016, p. 156).
The firm still produces where MC=MR, however, the AR and the demand curve shifts as many other entities enter the market and competition stiffens. The price is no longer above the average cost and thus no economic profit.
(Dixit, 2013, p. 159).
In the short run however, the firm maximizes on its profits and thus produces a quantity where its MR=MC as shown below.
(Negishi, 2014, p. 124).
Examples of monopolistic competition industries in Australia are the pizza places and the restaurants.
Examples of restaurants that produces pizza are the Little Pizzeria, Pizza Gusto, Dominion’s pizza and many others. All these restaurants deal in the same line of product but each firm has slightly differentiated its product. As a result of this, each restaurant has some element of uniqueness although they deal in the same line of product. These small differences are what determines their customers’ loyalty (Negishi, 2014, p. 168).
Government Intervention in Monopoly Markets
Starting with the benefits of monopolistic competition, this market structure has no significant restrictions in the entry or exit, making the market contestable by a number of players.
The fact that products in this type of a market structure are differentiated creates diversity for the consumers, it also creates choice to select from.
Monopolistic competition tends to be more efficient than the monopoly which only has a single player. It is however not as efficient as the perfectly competitive market structures (Negishi, 2014, p. 197).
Costs; monopolistic market structures tend to be allocatively and productively inefficient not only in the short run but also in the long run.
(Panzar, 2016, p. 253)
Here we usually have some excess capacity as firms fail to exploit their fixed factors as mass production becomes almost impossible. This makes such firms productively inefficient in both long run and short run (Aungles, 2016, p. 164).
Why the government do not engage in policy intervention in the case of monopolistic competition;
Government regulations would be used to deal with the inefficiencies in the monopolistic competition by simply doing away with the product differentiation but then this would result in single product rather than the many closely differentiated products (Rios-Rull, 2015, p. 179).
Government intervention is therefore not a good idea in dealing with the inefficiencies posed in this type of a market. There are two main reasons for this;
- The market power of each individual firm in monopolistic market structure is small and this means that the deadweight loss and the excess capacity inefficiencies are small too.
- The benefit derived from monopolistic competition is product diversity. The gain from this product diversity may be just large enough to outweigh the cost of inefficiency(Panzar, 2016, p. 168).
Conclusion
From the studies of these market structures, mainly the monopoly and the monopolistic competition, there is an important conclusion that can be drawn based on the performance of the firms operating in the various sectors. For example, the monopolistic dominance of little pizza and pizza gusto in Australia has affected the operations of the small and medium sized enterprises operating in the same sector.
The knowledge of the market structure in which an entity operates is essential as we have discussed above as it defines or rather projects the overall profitability of the entity and its survival in the market.
References
Aungles, S., 2016. Structural conflict between the state,the local government and the monopoly capital. Australian and Newzealand Journal of Sociology, 15(1), pp. 45-67.
Dixit, A. K., 2013. Monopolistic Competition and Optimum Product Delivery. American Economic Review, 67(3), pp. 308-324.
Negishi, T., 2014. Monopolistic competition and General Equilibrium. In General Equilibrium, 5(1), pp. 180-234.
Panzar, J. C., 2016. Testing for monopoly Equilibrium. The Journal of Industrial Economics, 65(5), pp. 450-478.
Rios-Rull, J. V., 2015. On The Quantitave Importance of Market Completeness. Journal of Monetary Economics, 34(3), pp. 467-487.
Tremblay, V. J., 2015. Monopoly and monopolistic competition. New Perspectives on Industrial Organizations, 15(2), pp. 140-189.