Market Structure of Economy

This document provides an in-depth analysis of the different market structures in an economy, including monopoly, perfect competition, oligopoly, and monopolistic competition. It explains the characteristics of each market structure and their impact on resource allocation. The document also provides examples of monopoly firms in different industries.

Running head: Market Structure of Economy
Market Structure of Economy
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1Market Structure of Economy
Table of Contents
Answer a..........................................................................................................................................2
Answer b..........................................................................................................................................6
Answer c........................................................................................................................................10
Answer d........................................................................................................................................12
References......................................................................................................................................15

2Market Structure of Economy
Answer a
Structure of market of an economy is of four types namely perfect competition,
monopoly, oligopoly and monopolistic competition. Firms that participate in a market economy
belongs to any of the above said market structure. Competition among firms is most intense in
perfect competition and least in monopoly. The monopoly market structure is the most
appropriate from the producers’ respect and from the consumers’ respect point of view perfect
competition is the appropriate. Thus all the market structures are different from each other.
Oligopoly and monopolistic competition market structure are however, features characteristics
between perfect competition and monopoly. The thorough discussion of the four types of market
structure has been given separate in the following paragraphs.
1) Monopoly: The main feature if the monopoly market is that it has only one firm that caters the
entire market with unlimited buyers. The firm has the maximum market power in this type of
market structure and thus the firm can set and charge any price it willing to charge and
maximizes the profit. Important characteristics of the market that supports the firm to have
complete market power are raw material exclusiveness, unique product and large amount of
fixed cost. In most of the scenarios the raw material is manufactured by the firm exclusively in
its facility that is further used in manufacturing of goods which is unique in nature due to which
the buyers need to depend on the single sellers. The fixed cost in this market structure is huge
that makes entry in the market quite difficult and also existing single firm creates restriction for
the new firms during entrance, thus the monopoly markets structure is featured by extreme
barriers to exit and entry. Indian Railways is a monopoly company though regulated has
complete market power over the railway transport industry. Therefore if it wishes it can charge

3Market Structure of Economy
any price above the competitive market price and supernormal profit. The illustration of the
market structure is given in the diagram below.
Figure 2: Monopoly market structure
Source: (Created by the Author)
Customers in railway market faces monopoly pricing and thus pays more value for the
product. Thus, in monopoly market structure surplus of customer is very low that occurred in the
deadweight loss. The social welfare loss occurs during the monopoly market operation and it
proves that the government is inefficient. Therefore, the market structure is inefficient in
relocating resources.
2) Perfect Competition: The main characteristics of the perfectly competitive market that it has
unlimited buyers and unlimited beers. The large number of players in the market and large

4Market Structure of Economy
number of sellers’ keeps the market power of the firms is the lowest among all the market
structure. Price in this market is thus decided by the free market forces and not by buyers or
sellers and it can be seen that the market is free of any kind of market power enjoyed by any
individual. The product in this market is not unique and similarly the raw materials used in this
industry are exclusive to any single seller and is abundantly available. Thus, the market has no
barriers to exit and entry and thus any new firm can make entry to the market as per their wish
without facing any significant threat of loss. Any exit from or entry in the market does not affect
the price, demand or supply of the market and thus it the market is not dependent on any
particular player of the market for price and output determination. Perfectly competition is the
most efficient market structure among the all in terms of resource allocation. Thus, there is no
loss of consumer surplus, producer surplus and social welfare. In figure 2, the illustration of the
perfect competition is given graphically. The equilibrium quantity is given as Q* and equilibrium
price is given as P*. The firms in the perfect competition earns normal profit, which is also
known as zero economic profit. As the market is featured by free entry and exit super normal
profit is never sustainable in this
market because whenever such
cases arise new firms make entry
and reduces the profit to the normal
level. Suitable example of
perfectly competitive market
is fruit market.

5Market Structure of Economy
Figure 1: Perfect Competition
Source: (Created by the Author)
(c) Oligopoly: in oligopoly market stricture number of sellers are few and buyers are unlimited.
Thus, the firms has market power in this structure of market although it is slower than in the case
of monopoly. Price in this market is decided by the firms and not by the free market forces and
the charged price is higher than the price level of perfectly competitive market and thus the
consumers are exploited as they lose surplus by paying more than they get. However, the price is
most of the times is similar to the fee market prices but when the firms collude the price charged
in oligopoly market is equal to the monopoly market and the firms are super normal profit and
thereby loss of consumer surplus occurs. Moreover, there is deadweight loss that is occurrence of
social welfare loss. The market is characterized by entry barriers and exit barriers because the
fixed cost in this structure of market is high and existing firms pose creates restriction of new
firms entering the market. Oligopoly market is similar to the monopoly structure of market and
thus has same graphical representation like in the case of monopoly. Telecom industry is one of
the most suitable example of oligopoly market structure since in the industry is dominated by
few number of firms and have significant market power.

6Market Structure of Economy
(d) Monopolistic competition: Monopolistic competition is the structure of market where the
sellers manufactures similar category of products but with differentiated aspects. The number of
firms in this structure is numerous and is also has unlimited buyers just like perfect competition,
but he firm has little power over the market and can influence the price of the product type
which is completely identical. Thus, the firms in this market is neither a price taker nor a price
setter. Moreover, unlike perfect competition the sellers in this market experience huge
production cost because of keeping the individual predict differentiated from the product of the
rivals in order to keep the market share safe. The stricture of the market is similar to the
monopoly market but has much falter demand curve. Thus, the firms in the market does not earn
super normal profit. Toothpaste market is one of the examples of monopolistic competition
because the sellers in the markets deals in a same category of product but the individual products
are different from each other. The below given diagram is the graphical representation of
monopolistic competition.

7Market Structure of Economy
Figure 3: Monopolistic competition
Source: (Created by the Author)
Answer b
The market structure of any economy is decided by the total buyers and firms present in
that market. The market categorization is vital as the market power of different firms varies with
the market structure they are working. In monopoly market firms have full market power while
firms in perfectly competitive market lacks market power. Firms present in monopoly market
enjoy the highest marker power compared to the other markets. In case of monopoly market,
only one firm caters the need of the whole market and servers all its customers. Hence, it is
justifiable to state that a firm has the maximum market power when it operates in a monopoly
market structure (Allen 2013). Therefore, monopoly market can be defined as a market structure
where only a single firm, enjoying the highest market power, sells an exclusive product to its
unlimited number of buyers and create a strong entry barriers for other firms (Zeuthen 2018).
The Australia Post that servers the entire country with its postal service system, is the
largest monopoly company of Australia. In fact, most probably, it is the only one monopoly
company operating in the country. The Australian government assisted the postal firm to enjoy
the monopoly power by passing several Constitutional Acts and creating powerful barriers to
entry. Thus, there exists only a single player (Australia Post) in the postal market having a stiff
entry barrier. The postal company enjoys complete monopoly in services like letter, parcels
delivery, stamps and several other significant delivery service. For instance, Australia post
charges $2.40 for delivering letters weighing less than 250 gm. (Auspost.com.au 2019).

8Market Structure of Economy
Australian monopoly market is featured by extraordinary raw materials, presence of the
network externalities, quite high amount of fixed cost and finally the governmental regulations
prohibiting the entrance of new firms in the market. All these characteristics helped the Australia
Post to maintain its power of monopoly. The exclusive source of raw materials makes the
product of the firm unique and easily differentiable as it is not possible for other firms to imitate
its product because of unavailability and inaccessibility of the raw materials. Being a monopoly
firm, the Australia Post has these facilities which enables the company to control the entire
market of postal services in Australia. The high fixed cost in the monopoly market structure
discourages the new firms from entering the market as it is tough for the new entrants to match
with the economies of scale of the existing firm leading to a strong entry barrier (Geroski and
Jacquemin 2013). The positive network externality of the Australia Post due to it widespread
presence in the country enables the company to have large number of trustworthy customers
(Choi and Lee 2017). These advantages give the benefit in terms of natural barrier for entering
the market. Apart from the natural entry barriers, the government policy of regulating the entry
of new firms in the market is more efficient. Hence, the governmental legislation has given the
Australia Post a special right to cater the industry by delivering letters, parcels and other
essentials across the country at a reasonable price. Moreover, it is essential for the Australia Post
to abide the governmental mandate of serving 90% of country’s addresses for 5 times every
week in both rural and urban areas.
The Australian Post does not have to face any competition as it operates in monopoly
market with high entry barrier. As the monopoly power has given the company the ability to
charge at its own will for the service it is providing, so the postal firm charges price which is
generally above the free market price. This results in consumer exploitation leading to inefficient

9Market Structure of Economy
market outcome. In perfectly competitive market the consumers are least exploited due to pricing
effectiveness but in monopoly structure it is not so. Therefore, the exploitation of monopoly
power by the Australia Post resulted in economic and social loss.
Being the only firm of the Australian postal industry, the Australia Post determines the
price for the products and the services it offers to the consumers and so the Australian people
have no other choice rather than opting the service of the postal company at its pre-determined
price. The postal firm revises the price it charges for its services and products from time to time
and this revision sometimes raises the price beyond the free market price thereby exploiting the
consumers and dissatisfying them.
Figure 4: Australia Post’s Monopoly Market Structure
Source: (Created by the Author)

10Market Structure of Economy
The Australia Post, being a government regulated monopoly, charges $1 for a stamp
which is quite reasonable price that a monopoly firm can charge. Therefore, the price charged by
the postal industry is similar to the price that a firm in perfectly competitive market can charge
and is represented by PC while the quantity is given by QC as shown in the above figure 4. The
recent revision on the product price has created a pressure on the customers since the price
surpasses the price offered in perfectly competitive market (Azevedo and Gottlieb 2017). In this
case, the firm partly appropriates the loss in terms of CS (Consumer Surplus) and partly as DWL
(Dead-Weight Loss). Hence from the analysis it can be sad that the Australia Post is a single
player in the Australian postal market earning supernormal profit by charging very high price
and thus depicting the characteristics of a perfect monopolistic firm.
Answer c
A firm of a monopoly market charges higher price but offers lower quantity compared to
the markets that are perfectly competitive. The allocation of resources in perfectly competitive
market is a benchmark for efficient allocation and any deviation from this level of allocation
creates to inefficiency. The maximum level of inefficiency in resource allocation is typically
observed in monopoly market structure. In addition to this, the production of monopoly market
too is not effective. Thus, inefficiency is noticed in monopoly market with respect to both
allocation of resource and productivity (Carraro, Katsoulacos and Xepapadeas 2013). As shown
by the figure 5 below, the Australia Post under regulation of Australian government supplies Q*
amount of products and services at price P* which is equivalent to the quantity and price offered
in a perfectly competitive market, since it is a monopoly firm supervised by government with an
objective to provide postal services to the people of Australia. Therefore instead of being a
monopoly firm the company is working as a perfectly competing from generating socially

11Market Structure of Economy
efficient and desirable outcome. The CS (Consumer Surplus) is gained by the customers and the
PS (Producer Surplus) is received by the producers only in such an effective market structure
without any dead weight loss (Kim, Jeong and Jung 2014). However, the time to time price
revision has boosted up the price beyond the price of the perfectly competitive market resulting
in offering lower amount of goods and services than the competitive market. Accordingly, the
consumers has to pay higher amount compared to the goods and services they receive. Thus the
customers lose a part of their surplus which is appropriated via Australia Post. The inefficiency
in the resource allocations which reduces the amount of productivity is the primary cause of low
rate of supply in the monopoly market (Wilhite et al. 2015). Subsequently, the low market supply
creates inefficient allocation of factors of production leading to a loss in the welfare level of the
society (Scitovsky 2013). In perfectly competitive market, the price is same as Marginal Cost
(MC), Marginal Revenue is MR, Average Revenue is AR and equilibrium occurs at point EC as
illustrated in the figure 5. This type of market is regarded as a benchmark for any allocative
structure of market. The equilibrium of the monopoly market takes place at point EM as
illustrated by figure 5 and in any monopoly market price is equivalent to Average Revenue (AR).
Thus, for the monopoly Australia Post, P1 is the equilibrium price and Q1 is the equilibrium
quantity.

12Market Structure of Economy
Figure 5: Deadweight Loss of Monopoly Market
Source: (Created by the Author)
The deadweight loss, as marked in the figure 5, implies the amount of society’s welfare
loss (Amir et al. 2016). This happened mainly as a consequence of the loss in output level which
occurred mostly due to the market structure of the company and inefficiency in resource
allocation (Nikaido 2015). Loss in CS is regarded as another reason for the social welfare loss.
Hence, it can be said that the perfectly competitive markets are more efficient compared to
monopoly markets in respect to resource allocation and efficient allocation of output level to the
customers.
Answer d
The entire Australian postal service is provided by the Australia Post. Being a monopoly
firm, the postal company has the ability to charge high price therefore earning super normal level
of profit. The Long Run Average Cost (LRAC) declines with the increase in supply of products
and services due to the presence of high amount of fixed cost associated with the industry
(Herbener 2017). The position of Long Run Marginal Cost (LRMC) below the Long Run
Average Cost (LRAC) allows efficient productivity during Long Run (LR) and it will be better if
only one firm runs the industry (Heathfield 2016). Thus Australia Post can be categorized as
natural monopoly that is regulated by Australian government (Lim and Yurukoglu 2018). The
natural monopoly of Australia Post is illustrated graphically in the following figure.

13Market Structure of Economy
Figure 6: Market Structure of Natural
Monopoly
Source: (Created by the Author)
The above figure depicts that P is the price of monopoly market. The product price and
offered services is completely controlled by the government in case of natural monopoly which
is government regulate (Hawley 2015). Hence, in this case, the price charged will be less than
the price of monopoly firm. The price charged for delivering parcels weighing less than 250
grams is $2.40 leads to monopoly price for those parcels with relatively low weights. The
Australia Post, a government regulated natural monopoly, provides efficient allocation of the
factors of production beyond the aforesaid price. Hence, it will be better not to break the
structure of natural monopoly and enter into an oligopoly market (Feng, Li and Li 2013).

14Market Structure of Economy
Introducing oligopoly structure in the postal service market will increase the number of business
firms and then economics of scale will not persist in the postal industry (Ellickson 2013). LRMC
will shift upward over LRAC curve creating less efficient and effective production and output
allocation. It is not possible to control and regulate the market as efficiently as a government
does in case of government regulated market of natural monopoly. Moreover, there can be a
probability of collusion occurrence among the participating firms. If this takes place, then all the
organizations will come together, act like a one firm and take the decisions regarding the market
altogether. This will in turn create a monopoly market again and the price charged for all their
services and goods will be equivalent to that of a monopoly market generating social welfare loss
and creating market inefficiency. Henceforth, as a conclusion it can be suggested that the
Australia Post must provide postal service to the people as an only firm in the Australian market
in order to ensure market efficiency.

15Market Structure of Economy
References
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monopoly. Journal of Public Economic Theory, 18(3), pp.346-362.
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16Market Structure of Economy
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