Inefficiencies of Monopoly Power: ComfortDelGro in Australia

This report focuses on the company ComfortDelGro which operates in Australia with significant monopoly power. The report further identifies the inefficiencies that may arise if the firm is free to exercise that power. Government intervention is explained for the purpose of curbing that power and providing more efficient power for the Australian economy.

Running Head: BUSINESS ECONOMICS
Business Economics

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Contents
Introduction......................................................................................................................................2
Background of the Company...........................................................................................................2
Identification of Inefficiencies which may arise in Outcomes if the Company is Free to Exercise
Monopoly.........................................................................................................................................3
Intervention of Government............................................................................................................5
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
A monopoly exists when a particular enterprise or person is the only supplier of a specific
commodity. It can further be characterized as the lack of economic competition for the
production of goods and services and a lack of viable substitute goods. The monopoly price is
generally higher than the marginal cost of the seller which, in turn, leads to a higher monopoly
profit (Hubbard, Garnett, Lewis & O’ Brien, 2015). In other words, a firm has a monopoly if it is
capable of ignoring the actions of all other firms. This further implies that the other firms are not
involved in the production of close substitutes. This report focuses on the company
ComfortDelGro which operates in Australia with significant monopoly power. The report further
identifies the inefficiencies that may arise if the firm is free to exercise that power. At the end of
this report, the use of government intervention is explained for the purpose of curbing that power
and providing more efficient power for the Australian economy.
Background of the Company
ComfortDelGro Australia is the Australian subsidiary of the company and operates Blue
Mountains Transit, Hunter Valley Buses, Hillsbus, Qcity Transit, CDC Ballarat, CDC Geelong,
Transborder Express and Tullamarine Bus Lines. This subsidiary was started in the year 2005 in
the form of a joint venture between ComfortDelGro and Cabcharge (Australian taxi company).
The company has attained the position of major Australian operator of commuter buses
(ComfortDelGro, 2018).
It has also acquired Buslink which one of the largest privately owned bus business of Australia
for A$ 190.9 million which, in turn, made it the largest acquisition of the group till date. With
the help of such acquisition, ComfortDelGro have gained immediate access to Queensland and
Northern Territory which are the unchartered territories of the group and has helped it to achieve
further growth in its existing bus operations in Victoria and New South Wales (NSW) (Meixian,
2018). The company can be said to have monopoly in Australia since there are no major
competitors and a large market share has been obtained by the company.

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Identification of Inefficiencies which may arise in Outcomes if the Company is Free to
Exercise Monopoly
In case if ComfortDelGro is free to exercise monopoly in Australia, certain level of inefficiencies
may arise in the outcomes. In a monopoly, a specific price is set by the firm for the service which
is provided by it to the customers. The prices set under a monopoly market is also higher for the
service provided. A deadweight loss is created as a result of monopoly pricing because the
transactions with the customers are forgone by the firm. The deadweight loss can be described as
the potential loss which did not go the consumer. As the consequence of the deadweight loss, the
wealth or combined surplus of the monopoly and the customers is lesser that that obtained in the
competitive market. Inefficiency is witnessed by monopoly in total gains from trade as compared
to that in the competitive market. The inefficiencies in the outcomes of the monopolies is the
result of their less innovativeness over a period of time as they are not required to compete with
other producers in the marketplace (Lumen, 2018).
If ConfortDelGro is free to exercise its monopoly in Australia, it will notice a reduction in its
economic efficiency over a period of time. In a perfectly competitive market, equilibrium results
in a greatest amount of economic surplus or the total benefit to the society from the production of
the service (Gwartney, Stroup & Clark, 2014). However, as far as a monopoly is concerned, the
production of service is less and the prices charged are higher as compared to that in a perfectly
competitive industry which produces the same service.

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Figure 1 The Inefficiency of a Monopoly
(Source: Hubbard, Garnett, Lewis & O’ Brien, 2015)
This figure provides that a higher price is charged by a monopoly, PM, which in turn, leads to the
production of smaller quantity, QM, as compared to the output produced in the perfectly
competitive industry in which price equivalent to PC is charged and output equivalent to QC is
produced. An area equivalent to the rectangle A and triangle B leads to the reduced consumer
surplus resulting from higher prices. Some of the consumer surplus reduction is captured by the
monopoly in the form of producer surplus while some results in deadweight loss, which is the
area equivalent to triangle B and triangle C (Hubbard, Garnett, Lewis & O’ Brien, 2015).
Lack of competition in the market provides less incentive to ComfortDelGro to make the needed
investment in the new and innovative ideas. Even if economies of scale results from the
operations of such a monopoly, there is still little incentive for exercising control over costs
which, in turn, imply that there are no real cost saving as compared to that in the competitive
market. In the long run, a competitive industry will produce in a way such that market demand =
market supply (Smyth, 2016). The conditions for the allocative efficiency are met by the industry
in such a case and the price = MC (Marginal Cost). On the other hand, if a monopolist such as

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ComfortDelGro takes over the public transport industry of Australia, then it is capable of
charging higher prices from the customers for its services by way of restricting the total output
and thereby causing a reduction in the welfare (Zeuthen, 2018). This is done by way of causing a
rise in price and reducing the customer surplus. This is often related with the market power as it
is the ability of the firm which allows it to charge a price which is greater than its marginal cost
(Sloman & Garratt, 2016). Funds are required to be spent by the firm in the research and
development for finding out new ways in which the service can be provided to the customers.
Since economic profits are mostly earned by the firms with market power, they are likely to
make the introduction of new services from time to time and the same case is with
ComfortDelGro (Merhav, 2017).
Intervention of Government
The government intervenes in Australia by monitoring the competitive behavior with the help of
Australian Competition and Consumer Commission (ACCC). The trade practices of the
companies is Australia is governed by the major regulatory law i.e. the Competition and
Consumer Act 2010 (Leigh & Triggs, 2016). This Act covers a number of areas such as anti-
competitive agreements like price fixing, misuse of market power through factors such as
predatory pricing, exclusive dealing such as third- line forcing and market sharing agreements,
resale price maintenance, product reliability and safety, boycotts such as an agreement between
purchasers and suppliers relating to not supplying to or purchasing from a specific competitor or
firm, and misleading and unconscionable conduct such as deceiving people by making them
signing the contracts which are not understood by them. The regulation of the natural
monopolies in Australia take place with the help of state regulator commissions which are
normally responsible for the setting up of prices (Hubbard, Garnett, Lewis & O’ Brien, 2015).

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Figure 2 Regulating a Natural Monopoly
(Source: Hubbard, Garnett, Lewis & O’ Brien, 2015)
A price equivalent to PM is charged by a natural monopoly which is not subject to the regulations
of the government and its production is also equivalent to QM. The green shaded area in the graph
is the economic profit at this level. If the government regulators am at the achievement of the
economic efficiency, a regulated price equivalent to PE is set by them and QE is produced by the
monopoly where there is an equality between the rice and the marginal cost. However, as the
result of the fact that PE is below the average cost, a loss is suffered by the monopoly as depicted
by the red shaded rectangle in the graph. If a loss is suffered by a monopoly, it will not continue
to produce in the long run and then a price is set by the government regulators which is
equivalent to the average cost depicted by PR in the figure (Hubbard, Garnett, Lewis & O’ Brien,
2015).
Government often provides subsidies which is a form of direct payment made to the firm
equivalent to the economic loss suffered by it. In order to pay the subsidy to the firm, the revenue
must be raised by the government by way of taxing some other activity. However, taxes are also
responsible for the generation of deadweight loss (Anderson, Sweeney, Williams, Camm &

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Cochran, 2014). Subsidies may be provided by the Government to ComforDelGro for the
purpose of reduction of the prices and trying to compensate them by reducing the taxes
applicable on their services. Subsidy implies that the part of the cost will be paid by the
government to ComfortDelGro which, in turn, will lead to the shifting of the supply curve to the
right side implying an increase in the quantity demanded and reduction in prices (Du, Lu,
Reardon & Zilberman, 2016).
The government regulates the prices at ATC above the MC level for protecting the firm from
incurring losses and protecting the customer by providing the product at affordable price.

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This figure provides that when subsidy is provided by the government, there is a decrease in
price to 20 from 25 and increase in the quantity to 125 from 100.
The basic motive behind the regulation of the monopolies by the government is the protection of
the interest of the customers. For the purpose of curbing the power of ComfortDelGro, the
government of Australia can use of yardstick competition, price capping along with the
prevention of the growth of monopoly power. Rate of return regulation or yardstick regulation is
a different way of the regulation of monopolies by the government. Rate of regulation will firstly
consider the size of ComforDelGro and will then evaluate what would result in the reasonable
level of profit from the available capital base. In case it is found that ComfortDelGro is making
too much profit in comparison with its size then price cuts may be enforced by the regulators.
However, it practice may often result in the disadvantage of providing encouragement to cost
padding. This occurs when the increasing of costs are allowed by the firms such that the profit
levels are not estimated to be excessive (Mankiw, 2014).
On the other hand, the government can also deal with monopoly of ComfortDelGro by making
the use of price capping. Price capping involves putting limits on the amount charged by the firm
for a specific service. This method will improve the productive efficiency of the firm and will
bring about reduction in the real prices which will be helpful for the household and industrial
customers. Another measure that can be taken by the government is the prevention of the growth
of monopoly by way of preventing mergers (Nguyen & Wait, 2015). This can be done with the
help of formulating a policy to investigate the mergers that have the capability of creating
significant monopoly power. In case, if the new merger is expected to be resulting in a firm
which will have greater than 25% of the market share then it will be automatically referred to the
Competition Commission. Then the final decision will be that of the Competition Commission to
allow or block the merger (Karier, 2016).
Conclusion
Therefore, it can be concluded that a monopoly exists when a particular enterprise or person is
the only supplier of a specific commodity. This report focused on the company ComfortDelGro
which operates in Australia with significant monopoly power. The company is the major
Australian operator of commuter buses. The report further identified the inefficiencies that may

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arise if the firm is free to exercise that power. Furthermore, the use of government intervention is
explained for the purpose of curbing that power and providing more efficient power for the
Australian economy.

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References
Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., & Cochran, J. J.
(2014). Essentials of statistics for business and economics. Cengage Learning.
ComfortDelGro. (2018). CORPORATE PROFILE. Retrieved December 27, 2018 from
https://www.comfortdelgro.com/web/guest/about-us
Du, X., Lu, L., Reardon, T., & Zilberman, D. (2016). Economics of agricultural supply chain
design: A portfolio selection approach. American Journal of Agricultural
Economics, 98(5), 1377-1388.
Gwartney, J. D., Stroup, R., & Clark, J. R. (2014). Essentials of economics. Academic Press.
Hubbard, G., Garnett, A., Lewis, P., & O’ Brien, T. (2015). Essentials of Economics. Pearson
Australia.
Karier, T. (2016). Beyond Competition: Economics of Mergers and Monopoly Power:
Economics of Mergers and Monopoly Power. Routledge.
Leigh, A., & Triggs, A. (2016). Markets, monopolies and moguls: The relationship between
inequality and competition. Australian Economic Review, 49(4), 389-412.
Lumen. (2018). Impacts of Monopoly on Efficiency. Retrieved December 27, 2018 from
https://courses.lumenlearning.com/boundless-economics/chapter/impacts-of-monopoly-
on-efficiency/
Mankiw, N. G. (2014). Essentials of economics. Cengage learning.
Meixian, L. (2018). ComfortDelGro buying Australia's Buslink for A$191m in its largest
acquisition Down Under. Retrieved December 27, 2018 from
https://www.businesstimes.com.sg/companies-markets/comfortdelgro-buying-australias-
buslink-for-a191m-in-its-largest-acquisition-down
Merhav, M. (2017). Technological dependence, monopoly, and growth. Elsevier.
Nguyen, B., & Wait, A. (2015). Essentials of Microeconomics. Routledge.

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Sloman, J., & Garratt, D. (2016). Essentials of economics. Pearson Education.
Smyth, A. (2016). Competition, cost innovation, and x-inefficiency in experimental
markets. Review of Industrial Organization, 48(3), 307-331.
Zeuthen, F. (2018). Problems of monopoly and economic warfare. Routledge.