Monopoly and Monopolistic Competition in Australia

This paper discusses the characteristics of monopoly and monopolistic competition in Australia, their examples, advantages, and misuse of market power. It also highlights the need for government regulation in monopoly markets and the absence of regulation in monopolistic markets.

Running Head: Market Structures
Monopoly and Monopolistic Competition in Australia
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Market Structures 2
Monopoly and Monopolistic Competition in Australia
Introduction
The four market structures that exist in all world economies are monopoly, perfect
competition, oligopoly and monopolistic. These for are classified according to different
characteristics possessed by each. The classification are based on the number of both sellers and
buyers (especially the suppliers), the availability of substitute, and the entry and exit barriers.
This paper is aimed at determining the characteristic of monopoly and monopolistic structure and
then use those characteristics to determine the various examples of each market structure that
exist in Australia. The paper will also identify the advantage of each possessing different
characteristics and how they misuse such advantages. The misuse of market power calls for
intervention by competitive authorities mandated by the government (Kollmorgen, 2016). In
market where there is a significant level of competition, the government fails to impose some
regulations since it is believed that competition makes the firms only to offer fair prices. This
paper shall confirm therefore the existence of regulation for monopolies, and the absence of
regulation in monopolistic market structures.
Analysis
The monopoly market structure is characterized by only a single producer and very many
buyers. This producer supplier to all consumers in an economy and thus have market power over
output and price it offers (Carmody, 2015). What makes this producer to have no competition is
because the product offered has no close substitutes and that there is high initial cost to be
incurred for a new firm to start producing this good. This is given that the monopoly has
economies of scale that enables it to produce and deliver products at the lowest cost. The
monopoly sets its price too high and faces no competition (Murphy, 2017).
An example of monopoly firms in Australia include; the railways, the Australian Post,
electricity production and supply, water service, a large employer operating in a small town
(May, 2015). Most of the products provided by monopolies are necessities and thus they are on
high demand (Mankiw, 2016). For instance, irrespective of the prices of electricity, households
will continue consuming it because there is less option for electricity. Other sources such as
generators may be found to be costly and inefficient. When you come to water, it has no other
substitute, thus, the price does not affect consumption. Even if consumers cut their level of water
spending owing to price increment, the cut will be insignificant. In order therefore to ensure that

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these products are sold at a fair price affordable to all, the government regulate such firms to
avoid exploitation of consumers. If monopoly firms were not regulated, they would implement
unfair market practices because, most private firms are aimed at improving their profits even at a
cost to others (McTaggart, Findlay & Parkin, 2007). They would charge higher prices because
the know that necessities have an inelastic demand, or rather, they would supply less in order for
demand to exceed supply such that price will rise. The government intervenes to ensure that a
fair quantity of such products is produced and sold at a price affordable to many.
Fig: Graph: Monopoly market structure.
Price
ATC
Pm MC
Supernormal Profit
Pr
MR AR or Demand
Qm Qr Quantity
Without government’s regulation, monopolies normally produce Qm output; this is at the
point where they maximize profits since the Marginal Revenue (MR) is equal to its Marginal
Cost (MC) (Agarwal, 2017). This output is then sold at price Pm which is very high. At this
price, the MC is lower and thus allocatively inefficient. Due to the absence of competition,
monopolies are x-inefficient and have no incentives for price reduction. This raises the greater
need for regulation by the government. The government regulates the monopoly by ensuring they
produce Qr output and sell it at price Pr which is lower than Pm (Pettinger, 2017). This is where
the MC = AR and the ATC is at its lowest level. This ensures that, monopolies breakeven but

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makes just economic profits. The society’s welfare is improved since households are buying at a
lower price than what they were offered before the regulation.
Graph: Economies of Scale
Costs
AVc
AVm L.R.A.C
Qc Qm Quantity
Furthermore, it has been confirmed that these monopoly firm possess economies of scale
and thus are able to supply the product at a very low price. The average cost of producing Qm is
low AVm, that when there are many firms each producing Qc; the average cost of producing Qc
is high at AVc. The government cannot promote competition in this sector since the economies
of scale will be lost and thus the firms in the market would only be able to supply at a higher
price than what was charged initially when only one firm was supplying.
Examples of monopolistic competition in Australia according to (Baum & McPherson,
2012) include; restaurant and Pizza places. Others include; salons, coffee shops, Nightclubs,
pharmacies, dry cleaners, furniture stores, gas stations, hardware stores, car washes, automotive
service companies, etc. (Lipovsky, 2018). In monopolistic competition, the firms producing the
good, and the buyers are many. However, they are fewer compared to perfect competition. The
products are differentiated and entry and exit is free. With free entry, firms cannot exploit the
consumers because new firms are attracted to the market and they end up sharing the abnormal
profit, eventually, in the long run, firms will be so many such that any given firm will only make
normal profit. In some extreme cases, firms will be so many such that loses will be incurred.
Again with free exit, some loss making firms will opt to exit the market and thus leaving the
other firms with only normal profits. Differentiation of products means that the differentiating
firm gets some market power of the product but competition still holds. There are two forms in
which these firms can differentiate their products and thus sell at a higher price than the

Market Structures 5
competitive price. The first one is real differentiation where the firm improves the quality of the
product or makes it more user friendly than the others such that it becomes more useful than the
initial product. The other form is that of imaginary differentiation where the firm tries to make its
product look more attractive than those of others through advertisement.
Unlike in the perfect competition where there are no selling costs, in monopolistic
competition selling costs exist because firms always try to make their product look better mostly
through advertisement since their goal is to gain maximum profit from selling the product at the
best price possible (McEachern, 2012). In this market, there exist the challenge of imperfect
information since the sellers are not sure of what products the buyers would prefer to buy since
there are many close substitutes. On the other hand, buyers are not very sure of the best products
to buy based on quality and prices; thus they are forced to buy what is locally provided to them.
Buyers are also aware of the existence of lower priced substitutes offered elsewhere but due to
time and conveyance costs, they are forced to buy the local goods (Kumar, 2018). In this case,
there is no party that is able to take advantage of the other. The demand curve in this case of
monopolistic competition is elastic to prices such that a firm can only sell more by lowering
prices which again will be beneficial to consumers.
Graph: Monopolistic competition
Price
MC
P* AC
MR AR or Demand
Q* Excess capacity Quantity

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Monopolistic firms produce Q* output and sell at price P*. Since these firms do not
produce at the point of minimum AC, they therefore have excess capacity of which is not
produced because it would only raise costs. The absence of no economic profit in the long run is
attributed to free entrance that allows for new firms to enter the market in the short run when
firms are making supernormal profits.
Conclusion
The monopoly markets are regulated whereas the monopolistic markets are not regulated
because monopoly firms have much market power which is frequently abused. There is no
competition for monopoly markets while there is competition in monopolistic markets. The lack
of competition is the source of this market power for monopolies. Since monopolies are
considered x-inefficient in that they have no intention of price cutting, they call for regulation.
Competition in monopolistic markets is such that a firm may decide to cut its price to enable it to
sell more and this is good to the consumers. Due to the lack of competition, monopolies also lack
innovation and if were left unregulated they would offer low quality products at a high price.
Since monopolistic firms are in constant attempt to differentiate their goods, they are always
innovative and thus quality products are produced. Regulation for monopolies raises the
society’s’ welfare and thus important. The government can therefore be concluded to impose
regulation because there would be market failure if the market operated freely.

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References
Agarwal, P. (2017). Monopoly Market Structure. Retrieved from
https://www.intelligenteconomist.com/monopoly-market-structure/.
Baum, S., & McPherson, M. (2012). Monopolistic Competition and the Very Small College.
Retrieved from https://www.chronicle.com/blogs/innovations/monopolistic-competition-
and-the-very-small-college/31279.
Carmody, B. (2015). Australia Post is hurting small businesses with PO Box monopoly, says
delivery company. Retrieved from https://www.smartcompany.com.au/growth/49035-
australia-post-hurting-small-businesses-with-po-box-monopoly-says-delivery-company-
sendle/.
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monopolistic-competition/7297.
Lipovsky, W. (2018). 12 Monopolistic Competition Examples, 33 Oligopolistic Competition.
Retrieved from https://firstquarterfinance.com/34-monopolistic-competition-examples-
around-world/.
Mankiw, N. (2016). Principles of microeconomics. Australia: Thomson Nelson.
Murphy, J. (2017). The companies that make big profits even when customers shop around.
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