Characteristics of Monopolistic Competition Market Structure
The present essay highlights on two parts, the first part focuses on differentiation between two forms of market structure and the second part reflects on the issue of housing affordability in Australia. Market structures signify to the degree as well as nature of competition for the products and services in the market (Baldwin & Scott, 2013). There are four basic kinds of market structures, which includes- perfect competition, oligopoly, monopolistic competition and monopoly. The two forms of market structures that are differentiated in this first part are monopolistic competition and oligopoly. The key characteristics and short run as well as long run profits or losses of each of these market structures is discussed in this segment. This section also focuses on the comparison between allocations of resources and efficiency in these two market structures. The second section elucidates on the housing affordability issue in Australia. Housing affordability basically relates to the relationship between income of households and total expenditure on housing. Over the past few decades, housing affordability issue has been continuously increasing in this nation. This housing affordability analysis in this nation is mainly analyzed using various factors such as changes in income of consumer, prices of housing and so on (Carraro, Katsoulacos & Xepapadeas, 2015). The measures or policies adopted by the government of this nation to this issue of housing affordability are also outlined in this segment. Furthermore, recommendations on this issue are also explained in this part.
1.Monopolistic competition refers to the kind of imperfect competition in which several manufacturers sells products which are differentiated from each other that are close substitutes of one another (Baumol & Blinder, 2015). All the firms existing in this form of market structure have relatively low extent of market power and hence are all price makers. The key features of this kind of market structure are given below:
Product differentiation- The enterprises operating under this form of market structure manufacture the products that are slightly differentiated from one another. The commodities being slightly differentiated remain close substitutes of one another (Dhingra & Morrow, 2012). The products are differentiated based on four types, which involve- physical features, marketing activities, distribution methods and human capital.
Huge number of sellers- Large number of enterprises operates under this form of market structures and hence rigid competition exists between these enterprises. Each enterprise acts independently and thereby has limited market share. In fact, these firms have less control over the price prevailing in the market.
Characteristics of Oligopoly Market Structure
No barriers to entry and exit- The firms have no barriers in entering or exiting the industry. The firms incurring huge loss can exit the industry at any time while new entity can enter this market freely provided that it produces different variety and unique feature products.
Product pricing decision- Firms operating under this market structure is neither a price- maker nor price- taker. Therefore, each entity has partial control over product price by manufacturing innovative products (Nicholson & Snyder, 2014). The degree of power for controlling price mainly depends upon the customers attached with the specific brand.
Non- price competition- This refers to competition with other entities by offering gifts, favorable credit terms without varying prices of commodities. The enterprises operating in this market uses both non- price and price competition strategy for promoting sales and attracting large number of customers.
Oligopoly signifies the, market structure in which few entities sells similar or differentiated products. In fact, oligopoly occurs in a sector where there has been considerable degree of market concentration (Taussig, 2013). The key characteristics of oligopoly market structure are explained below:
Less number of entities- Few firms operates in this market structure and each firm manufactures considerable amount of total output. As less firms exists in the market, action taken by one entity likely impacts the rival entities.
Barriers to entry- New entities faces huge barrier in entering this market owing to some reasons that involves- patents, control over raw materials, requirement of huge capital etc. However, the existing entities can earn abnormal profits in long run.
Product nature- The entities operating in this market might manufacture similar or differentiated commodity. However, the entities with differentiation of product comprise impure oligopoly.
Interdependence among the entities- Each entity treats the other one as its rivalries. Each entity sets their product price by considering reaction of other entities.
In short run, the monopolistic competitive entity minimizes losses or maximizes profit by manufacturing that quantity which corresponds to marginal revenue (MR)= Marginal cost (MC). The profits of monopolistic competitive firm mainly depend on position, strength of demand and elasticity of demand curve. However, the entities might have the ability to attain supernormal profits in short run. The diagram below reflects this situation –
Figure 1: Monopolistic competitive firm in short run
Source: (Author’s creation)
When the SAC is above market price, the entity in monopolistic competition might incur loss. The firm might reduce loss by manufacturing that amount where MR = MC. Eventually these firms might either reverse losses or exit the sector. The figure below reflects this situation:
Short-term and Long-term Profitability of Monopolistic Competition and Oligopoly
Figure 2: Short run loss in monopolistic competition
Source: (Author’s creation)
The entities in monopolistic competitive market produces output where MR = MC and thereby sets the price based on demand curve (Rios, McConnell & Brue 2013). However, economic profit will be eliminated in the long run by entry or exit. Hence, this leaves the monopolistic competitive entity with zero economic profit. This is shown in the figure below:
Figure 3: Zero economic profit in monopolistic competitive entity in long run
Source: ( Authors’ Creation)
Oligopoly entities might retain abnormal profits in the long run. Huge barriers to entry prevent the new entities to enter this market for capturing excess profit. As the actions of existing entities impacts the market conditions, one entity becomes aware of other’s action. In the short run, the oligopoly firm will attain profit as well as loss. This is highlighted in the figure below:
Figure 4: long run profit of oligopoly firm
Source: ( Author’s creation)
Figure 5: Short run loss of oligopoly firm
Source: (Author’s creation)
Monopolistic competition and oligopoly are the two common forms of market structures that prevail in the Australia. Banking industry is one of the vital sectors in Australia that exists in the oligopoly market structure. Oligopoly basically exists in this sector as four enterprises dominating this industry. The four main enterprises existing in this industry includes National Australian Bank (NAB), Australian and New Zealand Banking group ( ANZ), Westpac (WBC) and Commomnwealth Bank ( CBA). All these firms accounts to near about 85% of total banking sector. In addition, the market capitalization of these enterprises is generally 5 times market cap of remaining banks, other institutions and mutual funds. These four banks have formed a cartel arrangement since majority of the shareholders of these banks are same and thus have same interests. Owing to this cartel arrangement, barriers to entry prevail in this industry. Moreover, the new entrant faces difficulty in competing with these players without minimum risk as well as cost. Even the competition in this market is low, which facilitates these banks to attain higher profit margin. Furthermore, the support received by these banks from the Australian government helps to dominate this sector on regular basis.
The wine industry in Australia operates under the monopolistic competitive market structure. The firms operating in this market are the price makers and sells slightly differentiated wine. As there are no barriers to entry as well as exit in this industry, the enterprises operate where MR becomes equal to or below the MC. Over the last few years, this industry has been attaining short term profit where MR exceeds MC. This facilitated the wine sector in this nation to attract large number of players . The forecasted impact of this was mainly that supply of wine might exceed the demand to that level when the price based competition forcers the product price down. It has been found by the some researcher that the wine industry in Australia has achieve huge success in the global market over the last ten years. The main reason behind the success of this industry is its ability to access appropriate external knowledge sources. Few investors still believes that rapid growth of this industry insulated it against oversupply. At present, this industry has been safeguarded from both success or failure that influences other products of the farms.
Barriers to Entry and Exit in Monopolistic Competition and Oligopoly
The long term outcome of entry as well exit in the perfectly competitive form of market structure is that each firm that sell their products at specific price level is basically determined by lowest point on AC curve. This however displays that productive efficiency occurs under perfectly competitive market structure since the products are being manufactured at lower average cost. In the monopolistic competitive market, free entry as well as exit of enterprises basically ends up with the price lying on downward sloping part of AC curve. However, the monopolistic competitive market will not be efficient. Similarly, the oligopoly market structures are also not productively and allocatively efficient. The main reason behind is that it mainly lead to non- optimum output levels. The main reason behind is that the total output manufactured under this market structure mainly depends on market share held by enterprises. Hence, the firms in this market structure thereby fail to create optimum scales of economies as well as attain optimum output. In fact, societal efficiency has been low in this market structure. Another reason behind which this market structure is also not allocatively efficient since the firms manufacture at Price> MC. Likewise, the producers in this sector are productively inefficient as they manufactures at P> minimum ATC ( average total cost). But this market structure derives high dynamic efficiency since they have the ability as well as incentive to do so.
In monopolistic competitive market, the entities do not allocate resources efficiently. The main reason for inefficiency in resource allocation has been found with negatively sloped demand curve and market control. However, this negative slope indicates that price charged by entity in this market is higher than MR. As the price that the monopolistically competitive entity charges is greater than MC, this inequality between MC and price makes it inefficient. In addition, firms under oligopoly market also do not allocate resources efficiently. An oligopoly firm charges higher price on the product and also manufactures less output in relation to efficiency benchmark Taussig, (2013). This reflects that the actions taken by the entities in both monopolistic competition and oligopoly market are similar in relation to resource allocation.
2.Housing affordability refers to the housing that is considered to be affordable to those with median household income that is rated by government of nation with the help of affordability index. It has been reflected from some research that affordable housing generally has the ability to enhance health of residents, prospects of employment and access to education. Conversely, increasing housing cost leads to adverse outcome in people’s life such as decrease in parental enrichment expenditure, decrease in education among children and so on. It has been opined by Burke (2012) that, housing affordability has become an important problem mainly in developing nations where majority of population do not have the ability to purchase houses at market prices. Disposable income of individuals is the crucial factor that determines affordability. Owing to this, it has become the responsibility of government of specified nation to meet the increasing demand for housing. Housing affordability is usually measured by varying relationships between prices of houses and rents and also between people’s income and house prices. The National housing affordability Housing Summit group in Australia has further explained housing affordability as the housing that is adequate in location as well as standard for middle or lower income people and do not cost so high that the household cannot cater their other requirements on sustainable basis (Agarwal, Jain & Karamchandani, 2015).
Housing Affordability Issue in Australia
Housing plays a crucial role to social well being of the people residing in Australia. it has been evident from recent facts that housing industry contributes largely to the GDP ( Gross Domestic Product) and employment in Australia (Clapham et al., 2012). While residence ownership is crucial for the Australians, residence is becoming gradually unaffordable to several Australians. There are several factors that influences housing affordability in Australia, which involves-
- Increase in income- As this nation has benefitted from increased prices of product exports owing to increased resources, average households income have increased over the years. As a result, the households of this nation also wanted to expend their income on improving their housing quality.
- Demographics-As Australia has high population growth, immigration is also high in comparison with comparable nations. However, higher rates of immigration have led to increased housing demand (Gan & Hill, 2009). Few researchers found out that rapid growth in population led to housing crisis in this nation.
- Higher rents-Increase in rents also increased the renters desire to purchase houses despite renting. Therefore, higher payment of rents also reduced the households ability to save deposits.
- Larger availability of credit- Loans for houses have become easier to attain in Australia owing to lower rate of interest. Non bank lenders also increased credit availability of housing in this nation. However, the Australian housing market has developed huge product range for the borrowers who have the affordability to repay the amount.
Figure 6: Credit affordability in Australia
Source: (Gan & Hill, 2009)
Australia housing has been becoming expensive over the last few years. In fact, the housing prices also accelerated by near about 5% per year (Henman & Jones,, 2012). Increasing prices of housing in Australia reflects higher values of land. In the year 2016, lands in Australia accounted for about 70%of the residential property value. Moreover, price of houses have been considerably higher in major cities rather than regions in Australia. For instance, the prices of houses in Sydney are $1.1 million higher than price in NSW. Australians total spending on housing has enhanced by about 10% of pre- tax household income over the years. In addition, low income Australian has been spending more income with respect to others.
Figure 7: Prices of houses have increased in cities of Australia
Source: (Tomlinson, 2012)
The OECD data on price to income ratio of this nation reflects 78% increase between the year 1980 and 2015. As a result, housing affordability in this nation declined slightly over the years. It created difficulty for the beginners to enter the property market. The affordability crisis in Australia caused due to following reasons-
- Easy credit – The main reason behind increase in prices of houses in Australia is cheap as well as easy credit. This facilitated to increase investors demand in property’s , which then flowed to property values (Quigley & Raphael, 2004).
- Excess of international ownership- Recent study reflects that the Chinese investment in real estate of this nation has increased in current years. As foreigners purchasing properties in Australia also increased, it led to increase in housing prices.
- Australians holding on their houses- Retired Australians holding their residences created issues of housing undersupply (Glaeser & Gyourko, 2002). This in turn fuels housing prices in recent years and leads to affordability crisis.
The Australian government has taken few measures for reducing the affordability crisis in this nation. These policymakers committed to review housing policies as well as programs and bring about reforms in taxation policies. They have also announced to form Affordable Housing working group in order to identify different methods of enhancing supply of housing to low income Australians. By adopting measures of boosting housing supply will help to meet the increasing demand for housing. Additionally, the government of this nation has also taken responsibility to establish housing bond framework in order to gain market interest. In fact, ity is recommended that the federal governments should that presently regulatory arrangements relating to regulation of community housing industry is remediating to engender confidence of investors.
Increasing housing prices as well as variation in supply of housing is also explained using economic theory. Rising prices of housing in Australia reduces the demand for housing in the market. Moreover, scarcity of land in this nation, physical structure and constrained regulations of government also creates shortage of housing supply. However, inelastic land supply coupled with rising income of households leads to increase in housing prices. As a result, housing affordability crisis occurs in this nation. This situation is illustrated in the diagram below:
Factors Contributing to Housing Affordability Issue in Australia
Conclusion
From the above study, it can be concluded that several factors influences housing affordability in Australia such as- income, housing prices etc. Due to these two factors, affordability crisis occurs in this nation. However, the government of this nation has been adopting several measures for reducing this crisis and enhancing growth of housing market in Australia.
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