What is a monopoly?
In this paper, we will look at how monopolies affect the market: the case of Melbourne Water. Lord Acton once said, “Power tends to corrupt and absolute power corrupts absolutely.” (Goulston, 2017, para. 3). Unfortunately, that happens to be the mantra monopolies live by. However, before we delve deeper, it’s important to understand what a monopoly is, how it operates and how it affects the market. A monopoly comprises of a sector or market dominated by one firm (Evans, 2018). Monopolies exist for several reasons and some of them may collectively benefit the people but in general, they disrupt the demand and supply equilibrium that competitive markets enjoy (Wood, 2015).
According to Dubin (2012), the best way to identify a monopoly is by calculating Herfindahl-Hirschman Index (HHI). This is done by adding the square of market shares of firms in a particular market. A perfect monopoly has an HHI the highest score that can arise which is 10,000. Monopolies are despised because they raise prices of goods and services arbitrarily (Kollmorgen, 2016). They are mostly protected by governments and exert numerous barriers to entry for competitors.
There are in general four types of monopolies. The first one is a natural monopoly. This monopoly emerges when multiple reasons prevent competitors from establishing. In electricity distribution, for instance, the regulators may allow only one supplier to prevent cluttering neighborhoods with wires. It could also be as a result of extremely high costs of investment in the sector such as establishing wired telephone network (Evans, 2018).
Secondly, there’s the Geographic monopoly. This results when one firm exclusively serves one or several geographical areas. It could, for instance, be that there are very few inhabitants to warrant competition (Wood, 2015)
Legal monopolies exist as a result of government rules and regulations. They are mainly established and run by the government. There are many examples of legal monopolies in Australia. They include government-run or leased electricity distribution agencies, roads and rail networks, and water and sewerage distributors among others (Minifie & Percival, 2017).
Lastly, we look at the technological monopolies. These arise when companies hold patents and copyrights to their inventions thereby restricting other companies from direct competition such as software companies and pharmaceutical manufacturing companies (Evans, 2018).
This paper will focus on water and sewerage market in Melbourne. The metropolis is served by one company. Melbourne Water Corporation. It is a company mandated and ran by the Government. As already described, the firm has a market share of 100% hence a HHI of 10000 given that it dictates the supply of water and sewerage services in the Melbourne metropolis. Its customers are three water distribution companies namely City West Water, Yarra Valley Water and South East Water (Coombes, 2017).
Types of monopolies
Through these companies, Melbourne Water serves more than 1.8 Million households, major construction works, bulk water handlers, and offer sewerage services. Each company handles a distinct geographic area with Yarra Valley Water controlling the northern region of Melbourne. City West Water handles the West Melbourne and central regions while the South East Water handle then south and east areas of Melbourne. These are the three distinct customers of Melbourne Water (Crase, 2011).
According to Kollmorgen (2016), there have been many studies done on monopoly operations in the past in many parts of the world and Australia. While those studies revealed concerns grave enough to institute antitrust legislation, there isn’t an elaborate study on the effects of Melbourne Water supply to the market (Grafton, 2016).
In terms of efficiency, it is not clear how Melbourne Water compares to other companies that operate in competitive markets particularly in Sydney where water supply is privatized (Coombes, 2017). For this reason, it is necessary to establish if taxpayers get efficient services particularly in terms of quality, pricing and quantity supplied (Dubin, 2012).
A major concern afflicting monopolies the world over is political abuse in the course of decision making. It is not clear to what extent the political influence in Melbourne Water affects the water distribution and sewerage in Melbourne market (Evans, 2018).
As the company operates using funds from the public and entrusted to it by the Government. It is not clear if the company utilizes the funds collected for any public good such as Corporate Social Responsibility and to what extent (Wood, 2015).
To address the problems mentioned, the research will seek to fulfill the following objectives
- To find out how monopolies affect the efficiency of service delivery in Melbourne
- To inquire the extent to which monopolies affect the pricing of services in Melbourne
- To examine how political influence in monopolies affects the supply of services in Melbourne
- To establish whether monopolies serve the public good in the market
To fulfill the mentioned objectives, the study will seek to answer the following questions
- How do monopolies affect the efficiency of service delivery in Melbourne?
- To what extent do monopolies affect the pricing of services in Melbourne?
- How does political influence in monopolies affect service delivery in Melbourne?
- Do monopolies benefit communities through corporate social responsibility?
To accomplish the study, various data sources will be employed. To begin with, the study will use secondary sources of data such as book reviews on information regarding monopolies in other parts of the world, Victoria in general and Melbourne in particular. The study will also use news articles particularly on water supply and sewerage services in Melbourne. This will ensure that the latest information is captured to develop an accurate review.
Moreover, the study will utilize journal reports on water supply in Melbourne. In addition, government reports, financial reports and statistical reports and reliable websites on water supply, and the performance Melbourne Water will be used in the study. Lastly, primary sources such as questionnaire, telephone interviews, and observation will be used.
Melbourne Water Corporation: A case study
The primary study will use explicit exclusion and inclusion criteria to recruit study participants. In exclusion criteria, who do not live in Melbourne will be excluded. On explicit inclusion, only top management, line management and support staff with more than five years of work experience at Melbourne Water will be considered.
A study of numerous monopolies indicates that they do not serve their customers efficiently (Smyth, 2016). There are complaints that since monopolies are not threatened by competition, they are slow to respond to customer requests and end up wasting resources. This indeed has been noted of Melbourne Water which is riddled with customer complaints (Crase, 2011).
Monopolies have been accused of destabilizing the market by locking out competition (Iminds, 2009). This often leads to unmet demands since the supply of goods and service s to the market may be inadequate. This often leads to other forces like cartels taking advantage hurting consumers further (Wells, 2017).
Since monopolies set their own prices as opposed to having the market dictate the prices by reaching demand-supply equilibrium, the customers are often overcharged for inferior services. This is more so in the supply of utilities by government agencies (Dubin, 2012).
The operations of many monopolies are dictated by the politicians by virtue of being established and regulated by the government. Abuse by politician often results in additional expenses which are passed to consumers (Evans, 2018).
Some time monopolies do benefit the consumers by supplying goods and services at a regulated price lower than the market value. They do this by giving back to the community, setting prices below the market value and, exercising CSR.
The study will be on How Monopolies affect on the Market: Case of Melbourne Water. It will involve the 3 customers of Melbourne water. These are Yarra Valley Water, South East Water and City West Water (Grafton, 2016). Questionnaires and interview schedule will be used to gather data for analysis and reporting. Both quantitative and qualitative techniques will be employed in the study by use of close-ended and open-ended questionnaires respectively.
Conclusions
In conclusion, the study has identified the various types of monopolies and potential effects they have on the market. This study proposes to look at those effects through the lens of Melbourne Water. The study has identified the problem and proposed ways to cover it through salient objectives and research questions. Finally, the study opts for use of secondary sources of data such as financial reviews, company reports, books and news articles as well as primary sources like interviewing and questionnaires.
References
Coombes, P. (2017). Why the water supply needs a splash of competition. Financial Review. Retrieved 26 March 2018, from https://www.afr.com/business/infrastructure/water/why-the-water-supply-needs-a-splash-of-competition-20170118-gtts9u
Crase, L. (2011). Water Policy in Australia: The Impact of Change and Uncertainty (pp. 147-158). Hoboken: Taylor and Francis.
Dubin, J. (2012). Empirical Studies in Applied Economics (3rd ed., p. 150). Boston, MA: Springer US.
Evans, K. (2018). Types of Monopolies in Economics. Bizfluent.com. Retrieved 25 March 2018, from https://bizfluent.com/list-5972946-types-monopolies-economics.html
Goulston, M. (2017). How Power Absolutely Corrupts Your Mind – The REAL O’Reilly Factor. HuffPost. Retrieved 26 March 2018, from https://www.huffingtonpost.com/entry/how-power-absolutely-corrupts-your-mind-the-real_us_58fe1e3be4b0f02c3870ecc3
Grafton, Q. (2016). Understanding And Managing Urban Water In Transition (pp. 428-430). Canberra: Springer Science.
Iminds. (2009). Monopoly Power (p. 1). [Mosman]: iMinds.
Kollmorgen, A. (2016). Market monopolies in Australia – Choice. Choice. Retrieved 25 March 2018, from https://www.choice.com.au/shopping/everyday-shopping/supermarkets/articles/market-concentration
Minifie, J., Chisholm, C., & Percival, L. (2017). Australia isn’t dominated by big businesses that gouge customers: Grattan report. The Conversation. Retrieved 25 March 2018, from https://theconversation.com/australia-isnt-dominated-by-big-businesses-that-gouge-customers-grattan-report-88465
Smyth, J. (2016). Australia to end ASX clearing monopoly. Financial Times. Retrieved 24 March 2018, from https://www.ft.com/content/5b4d48ae-f62d-11e5-9afe-dd2472ea263d
Wells, C. (2017). Cartels caught ripping off Australian consumers should be hit with bigger fines. The Conversation. Retrieved 24 March 2018, from https://theconversation.com/cartels-caught-ripping-off-australian-consumers-should-be-hit-with-bigger-fines-78750
Wood, T. (2015). Regulated natural monopolies: can electricity and gas networks reinvent themselves? | Utility Magazine. Utilitymagazine.com.au. Retrieved 25 March 2018, from https://utilitymagazine.com.au/regulated-natural-monopolies-can-electricity-and-gas-networks-reinvent-themselves/
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