BECO001 - Analyzing Big Business Profit Sharing in Australia

This case study report analyzes the article "How big business shares the profit pie," focusing on competition's role in controlling prices and the impact of economies of scale. It identifies key stakeholders such as consumers, firms, government regulators, and the public, and examines the influence of competition, normal and supernormal profits, economies of scale, and regulation. The report concludes that while competition is essential for market efficiency, the government should ensure fair market entry and specialize production, levying taxes to fund public services. It provides recommendations to boost regulation and prevent market dominance, offering alternative solutions to address the issues presented in the article.

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ECONOMICS FOR BUSINESS
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Executive Summary
This paper has analysed an article entitled, “How big business shares the profit pie”. It
has focused the discussion in four parts. The first part details the summary of the main issue or
problem is described in the article. The second part discusses the impact of the question on the
stakeholders in the article. The third part details the vital economic concepts relevant to the
article or problem explained and the last article discusses the recommendation that can
alternatively solve the problem or issue addressed in the article.

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Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Description of the main issue/problem............................................................................................4
Description of the impact on stakeholders.......................................................................................7
Analysis of economic concepts relevant to the case study..............................................................7
Conclusion.......................................................................................................................................9
Recommendations for alternate solutions to thane issue/problem..................................................9
References......................................................................................................................................10

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Introduction
The main issues discussed in the article, “How big business shares the profit pie” is the
competition and its ability to sustain lower prices of products even with the existence of possible
cooperation between big two or three firms dominating the electricity industry. The article
appreciates to some level the ability of competition and innovation to control prices but remains
hesitant about its sustainability. This is because, while economist believes strong competition
between enterprises remain essential in guaranteeing market economies function efficiently to
benefit the consumers and employees, this remains a theory.
Description of the main issue/problem
The main issue discussed in the article is how competition can help control the
overpricing by monopolies. Thus the question begs, “To what degree does competition takes
away the higher prices realised through innovation and delivered them into consumers’ hands,
who usually get better commodities for lower prices? Subjecting this theory in practice proves
otherwise due to the economies of scale. This then disapproves the assumption in theory that any
market has a vast quantity of sellers, each too small to influence the prices in the market.
However, the practical examination shows that two or three or four companies always dominate
many of the markets. This is because the economies of scale ensure that as big firms produce
more, to some point, they will require fewer unit costs (Gittins 2017).
Thus, it is rational to have just a few quantities of large business doing much of the
production so long as the competition guarantees most of cost-saving being shifted to the
consumers at reduced prices. This remains the general rule over the decades. However, there is
still trouble as big firms have a certain extent of control of the prices they charge. Thus, it stays

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common for less big companies in the industry to cooperate and compete by use of product
differentiation and advertising instead of prices (Gittins 2017).
When they manage to implement such unspoken agreement, they will be able to expand
their pricing power by overriding their rivals to get a more significant share of the market. Thus
it is worth noting at this point that it is the responsibility of the “competition policy” to bar overt
cooperation between businesses and takeovers purposed to raise market power. The issue,
however, is, how effective is that role/policy working? “The natural monopolies have ensured
that it is bare would not make economic sense for more than one firm to serve a given market,
such a competitor sets of power lines ascending a street, or two service stations in a small town”-
are an additional common deviation from the theoretical model (Gittins 2017).
Thus, the article sought to present what was found by Minifie in his study of competition
in practice. The result was that plenty of markets with a few businesses doing a significant
proportion of the company. However, “the market shares of the big firms in saturated sectors are
never much higher in Australia as opposed to other economies of relative size; and that they have
never expanded much in the recent past (Gittins 2017). He also discovered that nor did such
significant, and few firms revenues or sales grew swifter as opposed to the GDD. Put differently,
the firms’ profitability-profits comparable to invested funds-has never increased much beginning
2000.
Thus Minifie identified industries marred with natural monopoly (in diminishing order of
size) as “electricity transmission and distribution, wired telecom, rail freights, airports, toll roads,
water transport terminals, ports and finally, pipeline. Again, nine industries with large economies
of scale that are dominated by a few firms were also identified as “supermarkets, wireless
telecom, domestic airlines, and subsequently (of roughly equivalent size) internet service

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providers, pathology services, newspapers, petrol retailing, liquor retailing alongside diagnostic
imaging”.
The study also identified eight industries subjected to extreme regulation by the
administration as “banks, residential aged care, general insurance, life insurance, taxis,
pharmacies, health insurance and casinos.” Such industries stay highly regulated for good public
reasons. However, the regulation usually serves as an obstacle to novel firms that entered the
market hence permitting big few ones to dominate (Gittins 2017). However, it was further noted
by Minifie’s computations that natural monopolies barely denote 3 percent of the “gross value
added” (a GDP variant), whereas high scale-economies industries denote five percent and the
extremely regulated sectors represent seven percent (Brennan, Palmer, Kopp, Krupnick,
Stagliano and Burtraw 2014.).
This then implies that a share of the economy whereby “barricades to entry” restrict
competitive pressure account for nearly fifteen percent of the entire economy. Subsequently, 29
industries have low barriers to entry comprising the balance of the “non-tradables” private
industry, and nearly 0.5 of the entire economy (Gittins 2017). The tradables segment (export and
import rivalling industries) represent fourteen percent of the economy while the public segment
comprises remaining twenty percent. Thus, Minifie verified that, in industries that few big firms
dominate, several firms make “super-normal” profits-such more than what is required to keep
them in industry.
Up to 50% of entire profits in supermarket sector remain super-normal while it is nearly
seventeen percent in the banking industry. The other firms and sectors with a significant super of
profits are Telstra, and certain large-city airports, internet service provider liquor retailers,
agencies for sporty betting alongside insurers (private health) (Gittins 2017). When the last list is

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compared with those of natural monopolies and extremely regulated industries, it is shown that
administration might be doing a much better task of guaranteeing regulators have never been
captured by the firms being regulated.
Description of the impact on stakeholders
The identified stakeholders in this article include consumers, firms (big and small; old
and new entrants), government regulators, and the public at large. To begin with, competition
positively impacts on the consumers but negatively on the producers or investors (Makholm
2015). For consumers, competition ensures that they are charged lower prices for better and
variety of goods. However, to the producers or firms, the competition provides they charge lower
prices which main mean even a loss to them (Gittins 2017). To the government regulators,
competition ensures that they are never captured by the same firms they regulate. In respect to
economies of scale, it benefits the few big firms that wipe away small ones and hence barring
them from entering the new markets or making the big ones dominate them. This is because the
more they produce, the more they get to incur fewer costs per unit and hence can control their
prices and therefore make supernormal profits (Duarte, Langarita and Sánchez-Chóliz 2017).
The small firms are thus negatively influenced by the economies of scale enjoyed by the few big
firms.
Analysis of economic concepts relevant to the case study
Competition: Competition is understood as essential to making sure that market
economies function efficiently and hence benefiting workers and consumers. It is believed to be
that which halts people from being ripped off by capitalists. It makes overpriced companies lose

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business to rivals that undercut their prices (Borenstei and Bushnell 2015). It pushes prices
downwards towards costs defined as “cost of capital” or “normal profit”.
Normal Profits/Supernormal profits: Normal profits is the least rate of profit required to
induce firms to thrive in the market. The supernormal profit is more than what is needed to keep
the firms in the industry. Few get it but big firms capable of competing through differentiation
and products rather than the price (Lim and Yurukoglu 2015).
Economies of scale: This is the benefits that accrue to big firms due to the production of
more and more units leading to increasingly reduced cost per unit and hence making them lock
new entrants from entering the market (Quarcoo, Bonsi, Tackie, Hill, Wall and Hunter 2017).
Regulation: This is how the government regulators use the competition policy and other
policies to ensure that big firms do not cooperate to benefit at the expense of small firms and
hence rip off the people through control over prices (Stern 2016).
Prices: This is the charge on a value of the products that consumers will pay in exchange
for the products from firms.
Natural Monopolies: “This is where it is merely would never make economic sense for
more than a single company to serve a given market, like as rival sets of power lines running
down the street, or 2 service stations in small town are another common deviation from
theoretical model”. These are big firms that can control their prices by controlling output. This
makes them lock out small business (Stiglitz and Rosengard 2015).
Productivity: The productivity is also an economic concept that has featured profoundly
in this article and explains the several measures of production efficiency. It is a measure
expressed as the output to input ratio utilised in the process of production (Atack 2018).

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Conclusion
The main issues discussed in the article is the ability of competition to prevent the people
from being ripped off by few big firms from their unspoken agreement or collusion. The article
has detailed the central issue in the article, the impact of the problem or issue to stakeholders and
the fundamental economic concepts in the article.
Recommendations for alternate solutions to thane issue/problem
 The alternative solution is that the government should always ensure that firms can
specialise in the production of goods and services they can produce best and charge them
higher taxes in return to be passed on to the consumers through the production of public
products and services.
 Alternatively, the government can boost the regulation to ensure that at all times, the
market entry is never limited to the new entrants hence providing lower prices to the
final consumers. This will ensure that natural monopolies do not exist and therefore no
control over the prices (Duarte, Langarita and Sánchez-Chóliz 2017).

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References
Atack, J., 2018. Estimation of economies of scale in nineteenth century United States
manufacturing (Vol. 5). Routledge.
Baumers, M., Dickens, P., Tuck, C. and Hague, R., 2016. The cost of additive manufacturing:
machine productivity, economies of scale and technology-push. Technological forecasting and
social change, 102, pp.193-201.
Borenstein, S. and Bushnell, J., 2015. The US electricity industry after 20 years of
restructuring. Annu. Rev. Econ., 7(1), pp.437-463.
Brennan, T.J., Palmer, K.L., Kopp, R.J., Krupnick, A.J., Stagliano, V. and Burtraw, D., 2014. A
shock to the system: Restructuring America's electricity industry. Routledge.
Duarte, R., Langarita, R. and Sánchez-Chóliz, J., 2017. The electricity industry in Spain: A
structural analysis using a disaggregated input-output model. Energy, 141, pp.2640-2651.
Gittins, R., 16 December 2017 — 12:03am. How big business shares the profit pie. The Sydney
Morning Herald , 1(Competition), pp. 1-3. https://www.smh.com.au/business/how-big-business-
shares-the-profit-pie-20171215-h0558m.html
Lim, C.S. and Yurukoglu, A., 2015. Dynamic natural monopoly regulation: Time inconsistency,
moral hazard, and political environments. Journal of Political Economy.
Makholm, J.D., 2015. Regulation of natural gas in the United States, Canada, and Europe:
Prospects for a low carbon fuel.
Quarcoo, F., Bonsi, C., Tackie, D.N.O., Hill, W.A., Wall, G. and Hunter, G., 2017. Economies of
Scale in Integrated Pest Management in Vegetable and Fruit Production. Professional
Agricultural Workers Journal, 5(1), p.53.

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Stern, N., 2016. Economics: current climate models are grossly misleading. Nature
News, 530(7591), p.407.
Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International
Student Edition. WW Norton & Company.