Monopoly Market Structure: Australian Postal Services and Banking Sector

This article discusses the monopoly market structure in the Australian postal services and banking sector. It explores the characteristics of monopoly and oligopoly, the inefficiencies associated with monopolies, and the government interventions to reduce monopolistic distortions.

Running Head: ECONOMICS. 1
ECONOMICS FOR BUSINESS
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Economics for Business.
Introduction.
A Monopoly market structure is categorised by a solitary trader, who is trading in a
distinctive product in the market. In such a market, the trader encounters no competition,
because he is the only trader of that particular good which has no close substitutes. On the
other hand, when the other firms engage in trading of that particular goods and services, the
industry eventually transform into oligopoly where few firms dominate and have the
authority of the market (Wei-hua, 2014).
The Australian postal services are an example of monopoly market structure. They
offer very perfect services which deter other potential firms from entering the market. The
postal service organization in Australia commands the whole postal service industry and
therefore, acts as a price maker in the industry (Lovelock, 2015). Sole proprietors and
individuals cannot establish a monopoly business and make it for very long time in the
market industry, this is because other few organizations would facsimile the idea and start
immediately the business and this would now mean that the market would shift from
monopoly to oligopoly market structure (Çakır, 2015). The monopoly business is very
successful when being implemented by the government, this is so because the government
will create barriers to entry and remain in the business alone like the case of Postal services
of Australia being dominated by the government. The postal corporation has been given the
mandate to distribute letter post in Australia. This approval came after the amendment and
ratification of an act in the year 1989 (Alexander, 2017). The government enjoys the
monopoly in the postal industry due to the fact that it has the power to pass the approval act
and it also has a remarkable fast and reliable services. The government also acts as a price
maker because they have the solitary ability to effect the prices in the market. This is

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although very dangerous because not all the citizens can afford when prices slog, which is a
common trend with the Australian postal services (Whincop, 2017).
The Australian Banking sector follows an oligopoly market structure. In oligopoly
market structure, the market is dictated by very few firm and it is usually said to be
concentrated. Many other small firms also operate in the market despite the dominance
attributed to the few firms who have solitary authority in the market. In Australia, few banks
operate in the banking sector, they are prospective in nature and strive very hard to maximize
profits they include ANZ Bank, NAB Bank, Westpac bank and the Commonwealth Bank of
Australia (Seltzer, 2017). The firms are known in making abnormal profits. The four banks
operate in the market and share profits amongst themselves. Withstanding the hard economic
times in the banking industry discourages many other prospective entrants to the market. The
small banks that intends to enter the banking industry find it very hard due to the enormous
capital venture required for a start-up. The big four banks of Australia operate in a joint
manner and stakeholders venture in fruitful ventures after thorough analysis of different
investments (Zhang, 2017). The Banking industry is dominated by few firms that causes
unfair competition in the sector resulting to a deadweight loss in the economy and other
negative aspect in the Australian economy. The oligopoly banks acts as the price makers and
rules the industry and therefore, discourages the new entrants in the industry (Abbott, 2018).
Major inefficiencies associated with monopolies.
Allocative Efficiency
This happens when there is an ideal sharing of products, considering the fact that
purchaser’s favourites. Allocative efficiency can also be referred to as the production level
where the cost is equivalent to the Marginal Cost of production (P=MC). It is assumed that
the cost the purchasers are confident spending in a particular goods and services is
corresponding to the marginal utility they are expecting to get from the consumption of the

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product or the utility they are going to derive from the service usage (Fernández-Blanco,
2018). For that reason, the ideal sharing of products is attained when the marginal utility of
the products and services is equivalent to the marginal cost (Svensson, 2017). This can be
explained using a graph below.
Allocatively efficiency
Figure 1: Allocatively inefficient MU>MC.
At a production output of 40 units, the marginal expenditure of the good and services
is $6, with the same production output purchasers would be ready to part with a price
amounting to $15 at this point the sector is allocatively inefficient because the Marginal
benefit is greater than the Marginal Cost. The cost reveals that the products marginal utility is
greater than marginal expenditure which clearly indicate that there is minimal consumption of
goods and services in the market. When the production of output is increased from 40 units to
70 units the price of the goods and services also decreases from $15 to $11. The society
benefits from the increased production of output as it results to price reduction and hence

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more will likely afford to purchase. The reason is that the market is Allocatively efficient, the
Marginal utility is equal to the marginal cost.
Allocatively efficiency.
Figure 2: Allocatively inefficient MC>MU
At a production output of 110 units, the marginal expenditure is $17, but the cost at
which consumers are comfortable incurring is only $7 the market is said to be allocatively
inefficient and the Marginal cost is greater than the marginal utility. At this production level,
the marginal cost $17 exceed the marginal benefits which is $7 there is excess consumption
of the product. It therefore, implies that the society at large producing more of the product.
The Allocative efficiency in this case happens at the price of $11 where the marginal cost is
equivalent to marginal utility MU=MC.

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Allocative efficiency in Monopoly market structure.
Monopoly firms increases the price above the marginal expenditure of production and
are therefore, said to be allocative inefficient. Monopoly market structure have authority to
reduce consumer surplus and are price makers (Biener, 2017).
Monopoly market structures
Figure 3: Monopolies Market Structure.
Monopoly firms will sets a price of PM . At this point, the market is said to be
allocative inefficient because at this production level output QM , the cost is higher than
Marginal Cost (P>MC). Allocative efficiency happens at the point where the Marginal Cost
intersect the demand curve, for instance the Price is corresponding to Marginal Cost. The

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shaded area on the graph representing deadweight loss indicate the allocative inefficiency in
the economy.
\
Allocative efficiency and productive efficiency
Productive Efficiency is determined at making goods at the lowest possible
expenditure. This happens on the production possibility frontier. Is worth noting that
producing goods and services on the production possibility frontiers is not automatically
allocatively efficient, the production possibility frontier only indicates the possible output
(Decker, 2017).
Price discrimination.
Price discrimination can be defined as charging dissimilar prices for the similar goods
or similar price for the segregated goods and services, some purchasers are willing to pay
more prices as compared to when there was a single price. In general, higher production
output happens with a price discrimination. Additionally, some business venture could not be
in operation without the price discrimination. For instance, a private doctor operating a clinic
in a village set-up cannot have a booming business without practicing the price
discrimination (Ding, 2017). When price discrimination rises the production output level and
profits from selling, it in turn decreases the allocative inefficiency. Industries that effectively
practise price discrimination will benefit by receiving higher returns.
Obligatory Conditions for Price Discrimination:
The below conditions are responsible for price discrimination.
i. Presence of a market dominated by single seller with distinct product.

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It suggests a trader can differentiate costs in the case where there is only a single
trader with a distinct product. The level of charging dissimilar prices for similar goods is
determined by the number of single traders with distinct product in the market.
ii. Distinct Marketplace
This suggests a presence of dualistic or extra marketplace that can be certainly
divided for selective prices. The consumer of a selected marketplace remains there without
changing to a separate marketplace and the products traded in that selected marketplace is not
allowed to trade in some other marketplace.
iii. Absence of legally binding agreement among the consumers.
This is the most essential condition for charging dissimilar prices for similar goods.
Sellers can differentiate prices in the absence of legally binding agreement among purchasers
of separate marketplace. Consumers in a separate marketplace realises that prices for goods in
a separate marketplace are slightly cheaper, they will have a preference to purchase the goods
in a separate marketplace and vend it in their marketplace. The monopolists should be
capable of separating marketplace and evade trading the goods in these marketplace.
iv. Different Elasticity of Demand:
This suggests that the elasticity of demand in the marketplace should vary from each
other. In marketplace with higher elasticity of demand, lower price should be charged for
goods, but in marketplace with lower elasticity of demand, higher costs should be charged.
Charging dissimilar prices for similar goods is not possible where marketplace have the same
elasticity of demand.
How the government intervenes to reduce the monopolies distortion?
1. Regulation of quality of service

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Government regulators inspect the quality of goods and service delivered by the
monopoly firms on regular basis. A case where the railway regulator inspects the welfare
performance of railway companies to confirm that they use the required materials during
construction of railway lines.
In the other energy sectors like gas and electricity sectors, the regulators will ensure that the
people of a country are treated with concern and they get the value of their expenditure. for
instance, not agree to a monopoly firm to take off gas supplies during winter season (O'Toole,
2018).
2. Merger policy
The state has a rule mandate to probe unions that intend to dominate and make monopoly
power. If a new union makes a company with more than 30% of market share, it is by design
reported to the commission responsible for competition. The commission therefore, has the
authority to make decision whether to let them operate in the market or disapprove the
merger (Mini, 2018).
3. Breaking up a monopoly
In some cases, the government might resolve to break up a monopoly firm when they
deem that the firm has become too powerful in the market and it is causing more harm than
good to the consumers of their goods and services. This type of resolution occurs in rare
cases. For instance, the United States probed Microsoft and look into possibilities of breaking
up the monopoly, but later they decided to do away with the decision (Hawley, 2015). This
action is very harsh because the government too enjoys the taxes and the Microsoft users too,
get exclusive services from Microsoft providers. Again the United States government were
not sure whether the new firms would not collude in the market.
4. Rate-of- Return Regulation

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Rate-of-return regulation is a structure to set the prices charged by state
controlled markets for single trader with distinct products like water and electricity. If the
companies continue to uncontrolled, they could simply charge much higher amounts since
buyers would be willing to pay any price for products and services such as electricity or
water. A drawback of rate of return regulation is that it may result to cost padding, a situation
where firms let prices to rise so that return margins are not considered extreme. Rate of return
regulation provides a slight encouragement to be efficient and increase returns. Rate of return
regulation may fail to assess how much returns is sensible. When they fix too high, then
companies can exploit their monopoly power (O'Toole, 2018).
5. Probing the abuse of monopoly power
United Kingdom has the office of fair trading and has the mandate to probe the abuse
of monopoly power by firms operating under monopoly (Tigar, 2018). This abuses comprise
of discriminating trading practices like collusion where firms operating in a market agrees
with one another to set higher prices, Collusive tendering where companies enters into
contract to fix the bid at which they will tender for a certain project then the companies will
take in turns to get the contract at much more prices, Predatory pricing which entails fixing
the price very low this discourages and ejects out the other competitor companies out of the
business and lastly the selective distribution where the companies enter into selective and
special distribution to some few selected to keep the prices high in the market for instance the
United Kingdom cars are speculated to be expensive than other European countries (Tigar,
2018).
In conclusion, the Australian postal services are an example of monopoly market
structure. They offer very perfect services which deter other potential firms from entering the
market. The postal service organization in Australia commands the whole postal service
industry and therefore, acts as a price maker in the industry. The government use various

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methods to reduce monopoly power which include merger policy, rate of return regulation,
breaking up monopoly and regulation of quality services.
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