Monopoly in Queensland's Electricity Network

The paper discusses the monopoly power of Queensland's electricity network and its impact on households and businesses. It examines the characteristics of monopoly market, analyzes the case of Queensland's electricity network as a monopoly, and discusses the inefficiencies and possible government solutions.

Running head: ECONOMICS FOR BUSINESS
Economics for Business
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1ECONOMICS FOR BUSINESS
Table of Contents
Introduction................................................................................................................................2
Analysis......................................................................................................................................2
Characteristics of monpoly....................................................................................................2
Monopoly: A case study of Queensland’s eletricty network.................................................2
Inefficiencies in the monopoly market government intervention..........................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................7
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Introduction
The paper attempts to discuss monopoly in Australia. The case of monopoly power
particularly taken into consideration is Queensland’s electricity network. The monopoly
power of few large firms in the electricity network affects both household and business.
Households end up with paying a high bill following a high price of electricity. Increase in
energy costs increases cost for businesses (Grant, 2018). The paper examines characteristics
of market power of firms similar to a monopoly in the concerned industry, inefficiencies
rising from monopoly and possible government solution to correct the inefficiencies.
Analysis
Characteristics of monpoly
Monopoly is defined as a form of market in which, only a single seller operates in the
market. Some common characteristics of monopoly market include single seller serving a
large group of buyers, unique product, entry barriers and price making power (Cowen &
Tabarrok, 2015). Unlike competitive firms, monopolist can enjoy an above normal profit both
in short run and long run.
Monopoly: A case study of Queensland’s eletricty network
The electricity network is considered as a natural monopoly. Because of very high
costs of business, set up it is generally cost effective for government to allow a single firm in
the market (Nelson et al., 2017). In Queensland, massive high price of electricity is creating
hurdles for residential customers. High-energy prices are destroying international
competitiveness for businesses. Review of electricity market reveals that the main driver of
high electricity prices is the high profit margin and price influencing power of monopoly
networks in Queensland. Energex, Ergon Energy and Powerlink Queensland enjoy significant
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monopoly power in the market. In the last decade, electricity prices have increased at the
fastest rate in the nation (Accc.gov.au, 2018).
Figure 1: Change in electricity bills resulted from high price
(Source: Accc.gov.au, 2018).
Like monopoly, these companies exploit their monopoly power and charge
unnecessary high price in order to secure revenue above that of the efficient level. In the last
five years, electricity networks in Queensland attained an annual profit margin growing up to
48 percent constituting an average margin of 28.3 percent (Grant, 2018). The average profit
margin of electricity companies are higher than that of other energy businesses. In every
dollar spend by consumers of electricity, these networks earn a profit margin close to 47
percent.
Figure 1: Annual average rate of profit in the last five years
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(Source: Grant, 2018)
The return of government owned networks is in sharp contrast to that of the
government owned generators. In contrast to the monopoly network of Queensland, the
competitive market structure of government owned generators constituted inefficiency and
over-investment. The government owned generators suffered a loss in the last few decade
(Simshauser & Whish-Wilson, 2017). Operating in a monopoly market, the electricity
networks have enjoyed high profits over since 1990s.
The high profit resulted from higher long-term financial return. The return for
electricity network grids are higher than most other sectors in the economy (Accc.gov.au,
2018). The profit margin is 23 times more than Australian construction, 15.5 times higher
than telecommunication sector, 10.5 times than Australian resource and mineral sector and 10
time higher than Australian banking.
Figure 2: Comparison of returns with other sectors
(Source: Grant, 2018)
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Inefficiencies in the monopoly market government intervention
Figure 3: Inefficiency under monopoly market
(Source: Cowen & Tabarrok, 2015)
The efficient competitive market equilibrium occurs where price equal marginal cost
of production. In contrast, equilibrium in a monopoly market is achieved at the point where
revenue earned from the last unit sold is same as the additional cost of producing the last unit.
The price under monopoly is higher compared to the marginal cost while output produced in
the market is lower than the socially efficient outcome (Stoneman, Bartoloni & Baussola,
2018). The inefficient allocation of resources under monopoly leads to a deadweight loss
indicated by the area E+F.
Currently, both residential customers and business suffer due to high price of
electricity. Government therefore should take measures to control price and secure interest of
customers. ACCC has already attempted to find out the root cause of higher electricity prices
and taken several policy measures to reduce electricity prices (Accc.gov.au, 2018). Instead of
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allowing the monopoly networks to manipulate national regulator, government should ensure
that companies set prices at the socially efficient level. In order to restrict profit of the
monopoly network, Australian National Regulator puts an upper limit of revenues.
Government should implement fiscal controls to restrict income extraction within the
sustainable level.
Conclusion
Given high cost of setting up electricity grid, there is only a few large company
controlling the electricity network of Queensland. The near monopoly structure of the market
allow firms to charge a high price and enjoys a high return. The burden of high electricity
bills adversely affects both residential and business customers. Realizing the inefficient from
the monopoly power government attempts to control price and revenue. However, there is
room for government intervention to restore efficiency in the market.
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References
Accc.gov.au. (2018). ACCC releases blueprint to reduce electricity prices. Retrieved from
https://www.accc.gov.au/media-release/accc-releases-blueprint-to-reduce-electricity-
prices
Accc.gov.au. (2018). Restoring electricity affordability and Australia’s competitive
advantage. Retrieved from https://www.accc.gov.au/system/files/Retail%20Electricity
%20Pricing%20Inquiry%E2%80%94Final%20Report%20June%202018_Exec
%20summary.pdf
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Grant, H. (2018). Biggest winners, and biggest losers, of network monopoly game. Retrieved
from https://reneweconomy.com.au/biggest-winners-and-biggest-losers-of-network-
monopoly-game-36731/
Nelson, T., Bashir, S., McCracken‐Hewson, E., & Pierce, M. (2017). The Changing Nature of
the Australian Electricity Industry. Economic Papers: A journal of applied economics
and policy, 36(2), 104-120.
Simshauser, P., & Whish-Wilson, P. (2017). Price discrimination in Australia's retail
electricity markets: An analysis of Victoria & Southeast Queensland. Energy
Economics, 62, 92-103.
Stoneman, P., Bartoloni, E., & Baussola, M. (2018). The Microeconomics of Product
Innovation. Oxford University Press.
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