Question

Answer the following question ensuring that you apply economic principles or theory related to the concepts of benefits, costs and market structure in which a firm operates to inform your analysis and support your decisions. Communicate your ideas with correct grammar, spelling and writing style and support your answer with diagrams and illustrative examples as necessary.

Question-- Identify, from media reports on Australian industry, an example of a firm that has significant monopoly power. Identify the inefficiencies in outcomes that arise, or would arise, if the firm was free to exercise that power. Finally, explain how government intervention is used, or may be used, to curb that power and provide a more efficient outcome for the economy.

Presentation

Answers should be typed and diagrams must be clear and neat and preferably drawn electronically. Hand-drawn diagrams are acceptable. Sources used in your answer should be fully referenced in APA 6th style. The answer to the question should be divided into three parts:

Part 1: Introduction

The introduction sets up your response by succinctly stating your understanding of the issues, what you think is the best way to analyse the situation – including choice of theory and sources of evidence, what type of findings you expect and what potential applications you expect there to be.

Part 2: Analysis

The analysis will represent the bulk of your work. Here you will provide your answer in detail by drawing upon the literature, the theory and the evidence to come up with an answer to the question posed. You may find that you want to break this section up into a number of sub-parts – one for a detailed discussion of the issues including your non-technical response, one for a detailed analysis of the tools of analysis you will use (theory), one for your extensive consideration of the evidence, one where you draw together your information and findings along with their implications.

Part 3: Conclusion

In the conclusion you briefly and succinctly review what you have done in answer to the question and indicate what further issues there might be to be considered.

Answer 1

If we had to cite out the example of a firm that has significant monopoly power in Australia, that has to be domestic airlines.

Airport industry is believed to be a regional natural monopoly. As a result price regulation is used to deal with the monopoly of airports. Airport industry is one of the most important sub-industries of the air transport industry. It is a natural monopoly, which is obviously different from the airline sub-industry. This kind of natural monopoly is particularly prominent within a certain distance from the airport.

However, there are certain characteristics of the airport monopoly some of which can be explained as follows;

Airport industry has an obvious characteristic of a regional monopoly. Due to the restrictions of economies of the transport network and economies of scale, airports need to be properly layout and keep an economic scale. This determines that there is usually only one monopoly airport in a certain region. It has formed a sharp contrast between a regional natural monopoly of airports and the competition of airlines. Usually, if there are more airports in one country, the airport industry should be more competitive. Similarly, if there are fewer airlines in one country, the monopoly should be stronger.

It seems that data support such a judgment if the monopoly power can be reflected by the market concentration rate. During the period of 2002-2010, CR8 of China's airline industry was 76.7 %, while CR8 of airport industry was 53.2% in the same period. That is the market concentration (CR8) of the airport industry is far below the airline industry, so does CR4.

The Airport industry has shown a greater monopoly power than the airline industry. However, there are fewer airlines than airports in China, airlines maintained a multi-market contact with each other which led to more competition. In contrast, even if there are more airports in China, they are located in different regions and keep little contact or competition in their own region. Thus, a regional natural monopoly is formed in the region of each airport.

The inefficiencies associated with a monopoly are- prices will be higher and output will be lower. If a firm behaves in a monopolistic manner, instead of a competitive one and also on general results for the firms will be to be better off, while it will be just the opposite for consumers. This is known as the deadweight loss of monopoly that comes as a result of the Pareto inefficiency of monopolies.

Talking about the government's intervention to curb the monopoly power and provide a more efficient outcome for the economy, we can say that the Government may wish to regulate monopolies to protect the interests of the customers. For example, monopolies have the market power to set prices higher than in the competitive markets. The government can regulate monopolies through price capping, yardstick competition and preventing the growth of monopoly power.

Government regulates monopolies due to the following reasons:-

(i) Prevent excess price - Without government regulation, monopolies could put prices above the competitive equilibrium. This would lead to allocative inefficiency and a decline in consumer welfare.

(ii) Quality of service - If a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service. Government regulation can ensure the firm meets minimum standards of service.

(iii) Monopsony power - A firm with monopoly selling power may also be in a position to exploit monopsony buying power. For example- supermarkets may use their dominant market position to squeeze profit -margins of farmers.

(iv) Promote Competition- In some industries, it is possible to encourage competition and, therefore there will be less need for government regulation.

(v) Natural Monopolies - Some industries are natural monopolies - due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition, and it is essential to regulate the firm to prevent the abuse of monopoly power.

However, Government regulates monopolies by taking the following steps:-

(i) Merger Policy

(ii) Breaking up a monopoly

(iii) Yardstick or ' Rate of Return ' Regulation

(iv) Investigation of abuse of monopoly power

Thus, the following steps can be taken by the government to curb the monopoly power and provide a more efficient outcome for the economy.