Basic Characteristics of Monopoly Market Structure
The economic theory defines market as an exchange relation occurs between interested group of buyers and sellers. Under condition of free market, the invisible hand or price mechanism ensures optimal distribution of resources. Presence of buyers and sellers in the marketplace results in varying degree of competition. In some cases, sellers are in a dominant position while in some others buyers may be in a dominant position. Difference in level of competition results in separation of market structure into four major categories – perfectly competitive, monopoly, monopolistic competition and oligopoly (Baumol & Blinder, 2015). A market is classified as a perfectly competitive market if large number of sellers and large number of buyers compete in the market. In such a market, neither buyers nor sellers have any degree of market power. In contrast to perfect competition, monopoly is a market where single seller dominates the market. The essay aims to discuss monopoly primary characteristics of monopoly market structure taking Australian post as an example.
The monopoly market structure refers to a market characterized by operation of single seller in the market. Followings are the basic characteristics of a monopoly market.
Number of buyers and sellers
The monopoly market is characterized by presence of a single seller and a considerably large number of buyers.
Type of product
The single seller in the monopoly market produces a unique product that do not have any close substitute product (Cowell, 2018).
Barriers to entry
There are strict barriers for any new firms to enter the market. The barriers can be either natural or artificial. The presence of natural barriers in such a market results in natural monopoly.
Market power
In a monopoly market, single seller dominates the market and serves a large number of buyers. Given entry is completely barred in the market; the monopolist has a significant market power (Cowen & Tabarrok, 2015). The monopolist takes the decision related to price and quantity. The monopolist is the price maker in the market.
Industry
In the monopoly market, as there is a single seller there is no difference between the firm and the industry.
Like every other firm, the monopolist wishes to maximize profit. The firm needs to satisfy two necessary condition to attain maximum profit. The first order condition for maximizing profit is the additional revenue earned from additional sales should be equal to additional cost incurred by the firm to produce the additional unit (Nicholson & Snyder, 2014). This is to say that curve showing marginal revenue of firms should cut the curve showing marginal cost. The second order condition for profit maximization is the marginal cost curve passes through the marginal revenue curve from below. The monopolist usually sets a price that is well-above the marginal cost and hence, earns above normal profit. The monopolist might incur a loss in the short run and continue production as long as costs can be recovered.
Profit Maximization in Monopoly Market
In the production process, long run refers to a time when firm has a sufficient time to expand plant. The monopolist having complete control over the market does not necessarily expand the plant to the full size. The monopolist instead of operating at the minimum of average cost in the long run, may operates to the left of the minimum point and produces below the optimum quantity (Bade & Parkin, 2015). Given entry is completely restricted in the market; the firm continues to earn supernormal profit over the longer time horizon.
Figure 1: Equilibrium in the monopoly market
In the above figure, monopoly equilibrium occurs at the point E. At this point, both necessary and sufficient condition for profit maximization are satisfied. Profit of the monopolist is shown by the area P*ABC.
Australian Postal service is an example of monopoly market in Australia. The firm has the responsibility for delivering parcels or letters in different regions of Australia. It is considered as a statutory authority having monopoly power in the delivery of letters with the condition that letters have weight below 250 grams. The cost for delivery of letter is below $2.40 (accc.gov.au., 2018). In the monopoly market, entry is strictly restricted in the market. In case of Australian post, entry is restricted following government regulation or legal barriers. Australian government plays an important role in restricting entry in this segment of postal service. This results in a legalized monopoly for Australian post.
Before discussing monopoly market in details, it is necessary to discuss source of monopoly power. There are four commonly known for monopoly power. First, existence of high fixed cost automatically prevents entry of new firms, as they are unable to bear the cost burden. Single firm optimally serves the market by enjoying benefits of economies of scale. Second, single firm enjoying ownership of particular resources enjoys a monopoly power. Third, presence of network externality acts as a source of monopoly power. Fourth, regulatory barriers preventing new entry in the market (Sloman, Norris & Garrett, 2013). The source of monopoly power for Australian post is legal or regulatory barriers imposed by Australian government. In return, the company needs to deliver letters or percent to the different regions at a relatively cheaper price. Additionally, the company requires fulfilling a mandatory delivery to 90 percent addresses in different areas for five times a week (Saunders & Foster, 2014). The government also mandates the required minimum outlets covering all the areas (rural as well as remote).
Australian Post as Example of Monopoly Market
Presence of monopoly in Australian post limits competition in the market of postal service. The legal barriers prevent small postal companies to operate in the market or deliver parcels. This hurts growth of small postal companies. In the absence of competition, the single company charges a high price. People in Australia thus forced to pay a price that is above the fair price (Jaag, 2014). Australian Post exploits its power to control the market of letters and parcel delivery. Australian post and its subsidiaries are the only players in the market.
The monopolist always in a position to exploit the market price. Price in the monopoly market thus can be increased or decrease any time. When Australian post raise price, consumers in Australia suffers. In view of increasing cost burden, Australian post has recently proposed an increase in postal rate for delivery of business mails (accc.gov.au., 2018). Some changes have been also proposed for in the structure of off-peak charges.
Australian post though has an advantageous position due to its monopoly position in the market, the increase in use of online delivery system and internet in recent years hurt the company’s business. There is a significant decline in the volume of physical parcel and mail. With decrease in volume of letter and parcel delivery, profit declines by a significant extent (Novak, 2014). The postal company fears to suffering a loss if this continues. The monopolist never stays in a market having long run loss. Australian post attempts to manage declining profit or loss by raising price of its services. The company increases postal rate for business mail delivery and pre-sort services offered to the wholesale customers. Australian post has submitted proposition for price hike with the claim of preventing future loss.
Two types of efficiency concepts are used to determine efficiency of a market. These are productive efficiency and allocative efficiency. Productive efficiency occurs when firms in in the long run produces at the minimum point of long run average cost. Allocative efficiency is achieved when long run price in the market is same as marginal cost. Monopoly market is inefficient in the sense that neither allocative nor productive efficiency is reached (Mankiw, 2014). The monopoly market suffers from allocative inefficiency because monopoly price is always greater than the marginal cost. The monopoly market is productively inefficient as the firm in the long run does not expand plant size to the minimum point of long run average cost. Deadweight loss or efficiency loss in the monopoly market can be understood by comparing outcome in the monopoly market to that of socially efficient or perfectly competitive outcome.
Sources of Monopoly Power
Figure 2: Efficiency loss in the monopoly market
The socially efficient equilibrium occurs at point Ec. At this point price, P* equals the marginal cost of production. Corresponding efficient quantity is Q*. In comparison, monopoly market equilibrium occurs at the point EM. Price in the monopoly market, P1 is higher than competitive price and monopoly output, Q1 is smaller than efficient quantity. The efficiency loss arising from relatively higher price and smaller quantity under monopoly shown by the triangular region marked as deadweight loss.
Government intervention is necessary in the monopoly market to ensure efficiency in the market. In nations like US, antitrust laws are used to control monopoly power. Australian Competition and Consumer Commission controls market power of monopoly firms. The ACCC implements number of regulatory responsibilities to assess the price increase for basic postal rate. ACCC keeps a close watch to examine whether Australian Post uses the revenue earned from the monopoly power to subsidize services that are in competition with other businesses (sunshinecoastdaily.com.au., 2018). The ACCC has the responsibility to monitor cross subsidy given by Australian post as the competitors of Australian Post complaint that those subsidies are actually damaging competition in the market.
Conclusion
Monopoly market is signified by dominant operation of a single firm in the market. Some features of monopoly market are single seller and many buyers, availability of no close substitutes, significant entry barriers and large amount of market power. Resulting market power in the monopoly market enables the firm to enjoy profit in the short run as well as in the long run. Australian Post is an example of legislated monopoly in Australia. Australian Post has a statutory monopoly over standard letters and parcels. Australian Post by using its monopoly restricts competition and increases price. The Australian Competition and Consumer Commission monitors the activity of Australian post and restricts the monopoly power of the company.
Reference list
accc.gov.au. (2018). ACCC delivers final decision on Australia Post’s business mail prices. Retrieved from https://www.accc.gov.au/media-release/accc-delivers-final-decision-on-australia-posts-business-mail-prices
Bade, R., & Parkin, M. (2015). Foundations of microeconomics. Pearson.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson Education.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan International Higher Education.
Jaag, C. (2014). Postal-sector policy: From monopoly to regulated competition and beyond. Utilities Policy, 31, 266-277.
Mankiw, N. G. (2014). Principles of economics. Cengage Learning.
Nicholson, W., & Snyder, C. (2014). Intermediate microeconomics and its application. Nelson Education.
Novak, J. (2014). Australia Post: Let’s free it up. Retrieved from https://www.smh.com.au/opinion/australia-post-lets-free-it-up-20140624-zsjy0.html
Sloman, J., Norris, K., & Garrett, D. (2013). Principles of economics. Pearson Higher Education AU.
sunshinecoastdaily.com.au. (2018). Australia Post plays fair despite reserved letter monopoly. Retrieved from https://www.sunshinecoastdaily.com.au/news/australia-post-plays-fair-despite-reserved-letter-/2606603/
Saunders, C., & Foster, M. (2014). The Australian Federation: A story of the centralization of power. In Federalism and legal unification (pp. 87-102). Springer, Dordrecht.
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