Article Summary
Market is a place where transaction between buyers and sellers take place. Based on the number of buyers and sellers there market are segregated into several categories. In the presence of enormous number of buyers and sellers in the market, sellers compete freely without any intervention. Competition in its pure form is rare in real world Imperfect competitions are more prevalent. The imperfection competitions are exists in the form of monopoly, oligopoly and duopoly market. The paper intends to make a critical evaluation of imperfect forms of market structure in Australia. A recently published news article on ‘The Australian’ is reviewed and analyzed using relevant economic theories and concept.
For a small economy, it is natural to have market concentration. In Australia, market concentration is observed in areas of airlines, supermarkets, mining companies and airline companies. In the Airline industry 95 percent of the market share is concentrated in hands of Virgin and Qantas. Woolworths and Coles in the similar manner controls a major share in Australian grocery supermarket. In the telecommunication industry, Telstra alone enjoys 80 percent of the market share. Australia cannot be considered as a small country. The interesting factors to be considered is whether such imperfect competitions are beneficial for the economy in terms of generating productivity and providing innovation incentive (theaustralian.com.au 2017). In the advanced economies, large firms dominate many markets. Car manufacturing, Banking and mining become more concentrated in recent decade. Monopolistic form of competition becomes a concern when it limits production and increase prices and restricts innovation and threatens competitor position. Adam Smith showed concern for monopolies. The monopolies that is considered by Adam Smith is those run with government grant subsidies, privileges, and regulation not those created with commercial success of firm. Even dominating firms often compromise some of its profit fearing entry by other firms in the presence of low entry barriers.
The oligopoly structure in Australia reflects the form of imperfection that Adam Smith did not like. The market imperfection receives government support and privileges are provided by the government in the form of licensing and regulatory facilities with high priority given on innovation. The government created two of the biggest Australian firms Commonwealth Bank and Telstra (smh.com.au 2015). Another concept comes with this is the existence of natural monopolies. An example of this form of market is electricity distribution. Regulatory Authority in Australia should give focus on reforming laws and regulation that inhibits healthy competition by restricting new entry. A good example here is Elliott’s banking. Recently inquiry has been conducted in the banking sector to analyze the status of four major banks. The inquiry reveals that high barriers exist both in the forms of commercial and regulatory. The commercial barriers prevent new entrants from getting information and distribution in the market. The regulatory norms are enforced with pages of rules and prudential.
Relevant Economic concept
Monopoly is a form of market characterized by a single seller and large number of buyers. In this form of market, a single seller controls the entire market. The product sold in the market does not have any close substitutes (Erikson 2014). Being a single seller in the market, the monopolist has control over price. A low quantity of output can be sold at a high price or a high quantity of output can be sold at a low price. The market power enables the monopolist to earn more than normal profit even in the long-term.
Figure 1: Monopoly market equilibrium and profit
(Source: As created by the Author)
Adam Smith in the eighteenth century was against monopolies. The monopoly markets considered were those created with government support. Adam Smith did not take the real or imaginary that naturally developed from commercial success. However, many of the monopoly form that exists in Australia with government support (Roy 2017). Such instances are found in telecommunication, property, mining and finance industry. Telstra and Commonwealth Banks are two biggest firms created by government.
Natural monopoly is a special form of monopoly market. In the natural monopoly market, there are natural barriers to the entry of new firms (Merhav 2017). In this form of market, there exists a high fixed cost. New firms do not show interest to enter in the market due to the high fixed cost retaining the position of the single seller (Neary 2016). It is efficient for a single firm to operate in the market as it can enjoy the benefit of economies of scale. In Australia, distribution of power is an example of natural monopoly.
Figure 2: Market with natural monopoly
(Source: As created by the Author)
In the oligopoly market, few firms exist to meet the demand of a large consumer base. In the oligopoly, market strategies of firms are interdependent. Firm design their marketing strategy after observing the rivals strategy in the market. The market shares are highly concentrated among the few firms (Hawley 2015). Firms often consider a decline in price to capture a greater market share. Once one firm do this, the rival firms follow the same triggering a price war. A kink is observed in the market demand curve because of differences in elasticity. The price war occurs in the range of high elasticity.
Figure 3: Duopoly market and kinked demand curve
(Source: as crated by the author)
When there is only two seller in the market, then the market is called duopoly market (Hebert and Ekelund 2014). In the extensive competition among rival firms in the oligopoly market, the oligopoly structure often reduces to a duopoly structure.
In the presence of perfect competition in the market, neither the buyers nor the sellers have any extent of market power. The surpluses are divided equally among the buyers and sellers. In the imperfect competition, market concentration always place the buyers at disadvantageous position. In Australia, market concentration now observes in different industries. In many cases, government in Australia encourages market concentration. The government should allow concentration only in areas where concentration is beneficial and enhances productivity. In other areas, healthy competition should be encouraged and barriers should be reduced.
Conclusion
The paper critically evaluates a news report focusing on market concentration in Australia. In the airline industry, Virgin and Qantas capture most of the market share. In the grocery supermarket, Woolworths and Coles form duopoly market structure. Telstra alone dominates the telecommunication market. Banking, mining industry are also experiencing form of concentration. Not all forms of concentration are inefficient. Government in some instances support market concentration. However, government should take steps to enhance competition and bring efficiency.
References
Creighton, A. and Creighton, A. (2017). Monopolies push economic cause. [online] Theaustralian.com.au. Available at: https://www.theaustralian.com.au/business/opinion/adam-creighton/monopolies-advance-the-economic-cause/news-story/c6939962c6bdc71a3e8126ad6b971aff [Accessed 25 Oct. 2017].
Erikson, E., 2014. Introduction. Introductory Chapters.
Hawley, E.W., 2015. The New Deal and the problem of monopoly. Princeton University Press.
Hebert, R.F. and Ekelund, R.B., 2014. Welfare economics. Economic Analysis in Historical Perspective: Butterworths Advanced Economics Texts, p.46.
Merhav, M., 2017. Technological dependence, monopoly, and growth. Elsevier.
Neary, J.P., 2016. International trade in general oligopolistic equilibrium. Review of International Economics, 24(4), pp.669-698.
Ramli, D. (2015). Optus chief predicts telecommunications duopoly with Telstra. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/australias-phone-and-internet-market-could-become-duopoly-says-optus-chief-20150604-ghgm5b.html [Accessed 25 Oct. 2017].
Roy, N., 2017. Action revision, information and collusion in an experimental duopoly market.
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