Economics Assignment: Analysis of Gas Market Monopoly in Australia

This economics assignment examines the monopolistic situation in the Australian gas market, focusing on the impact of monopoly pricing by gas suppliers. The report analyzes the market dynamics, referencing an article that highlights the misuse of market power by eastern state suppliers and pipeline operators. It explores economic interpretations of the monopoly, illustrating it with a figure and discussing the resulting economic profit for suppliers. The assignment then recommends policy interventions such as price ceilings and opening the market to foreign competitors to mitigate the negative effects of monopoly pricing on consumers. The conclusion summarizes the key findings and suggests that appropriate regulatory mechanisms are essential to address the issue. The report is complete with references to support its arguments.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction:....................................................................................................................................2
Story’s Essence:...............................................................................................................................2
Economic Interpretations:................................................................................................................3
Policy Recommendations:...............................................................................................................5
Conclusion:......................................................................................................................................5
References........................................................................................................................................7

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Introduction:
Economics as a subject deals with market and market dynamics among other concepts. A
market is generally known to be a place where buyers and sellers interact in order to maximize
individual as well as overall welfare. Markets, however, can be of different types based on the
nature of commodity, number of buyers and sellers and other determining factors. A perfectly
competitive market is an extreme example of free market with no barriers and uniform
distribution of market power among buyers and sellers (Kirzner 2015). However, there are
obvious exceptions to this hypothetical market namely, oligopoly, monopolistic competition and
monopoly. These are generally examples of imperfectly competitive ones, monopoly being the
other extreme form of market. The report tries to analyze the market type that usually prevails in
supply of gas in Australia. To study the market type and the consequences of that market on the
concerned industry the report takes reference of the article named, “Gas supplier monopoly
pricing hits domestic users hard: ACCC”, by Stephen Letts (Abc.net.au, 2017).
Story’s Essence:
Monopoly market implies the presence of single seller or seller group in an economy with
innumerable buyers, thereby implying that the seller enjoys almost all of the market power and
price making powers. The article takes into account the presence of monopoly pricing powers of
the eastern state suppliers of gas and operators of pipelines. It tries to address the issue of
misusage of this monopoly power by these gas providers in the country (Gillespie 2014). The
assessment conducted by the Australian Competition and Consumer Commission shows the

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presence of substantial evidences of monopoly pricing by majority of the gas providers in this
region. In addition to monopoly pricing, the absence of appropriate and sufficient regulatory
measures is also noticed in this market (Abc.net.au, 2017). Gas being one of the most essential
household consumption commodity and a primary source of energy for Australian households,
this issue raises concern among the government officials and policy makers. The commodity in
conern being one of the primary essential ones, the suppliers are enjoying a tremendously high
demand for their product, thereby gaining control of huge market power. On the other hand,
monopoly power of these suppliers collectively and a presence of cost effectiveness are keeping
out any kind of external competition out of the market, thereby making the consumers the direct
sufferers of this issue (Ekelund Jr and Hébert 2013). The market though claimed to be highly
regulated, in reality lacks proper regulatory measures, with even less than twenty per cent of the
east cost suppliers coming under the regulations of the National Gas Law of the country. The
industry also suffers from lack of transparency regarding imposition of restrictions and policy
implications thereby affecting the clientele adversely (Nelson et al. 2013).
Economic Interpretations:
Monopoly market necessarily implies the presence of full market power in the hand of
the supplier, as he is the only one supplying the product, which in general is assumed to have
considerably high demand. The only interest of a monopolist is necessarily maximization of his
own profit. The seller being a price-maker and not a price-maker, in the long run he is expected
to earn economic profit as the surplus generated is attributed to him solely (Longley 2013).

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P
P1 MC
Economic Profit ATC
AR
0 Q1 MR Q
Figure 1: Monopoly Market in Long Run
(Source: As created by author)
From the above figure, it can be seen that, in this market, due to a presence of difference
between the cost of production and the price at which it is sold there is presence of economic
profit for the supplier in the long ring unlike that of the perfectly competitive market (Rios,
McConnell and Brue 2013).

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The above discussion implies that, in this scenario due to the presence of monopoly
power in the hand of the gas providers and a simultaneous absence of appropriate regulatory
policies on these providers, they are trying to maximize their economic profit and to do that they
are resorting to stiff monopoly pricing in this market (Abc.net.au, 2017).
Policy Recommendations:
The continuous and stiff monopoly pricing by the gas suppliers cartel and consequent
sufferings of the direct consumers of the product, which includes the households of the
Australian economy, can be controlled with the help of correcting restrictive policy measures on
part of the government. The projected price hike in this sector can be curbed to considerable
extent with the help of price control mechanisms such as imposition of price ceilings on these
producers which will force them to keep their prices below a certain maximum level. Monopoly
power of these producers can also be decreased by opening the market to foreign competitors,
who will help in taking the overall price levels down to certain extent (Cramton and Ockenfels
2012).
Conclusion:
It is evident from the above discussion that currently Australia is facing a monopolistic
situation in the market of one of its most essential household commodity. This is posing as a
matter of great concern for the Australian government. The absence of proper regulatory
mechanism in the market being the main reason for this monopoly pricing, imposition of proper

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price ceilings and opening the market to potential competitors of these gas providers, can solve
this particular problem substantially.

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References
Abc.net.au (2017). Gas supplier monopoly pricing hits domestic users hard: ACCC. [online]
ABC News. Available at: http://www.abc.net.au/news/2016-04-22/gas-supplier-monopoly-
pricing-hits-domestic-users/7350338 [Accessed 24 Aug. 2017].
Cramton, P. and Ockenfels, A., 2012. Economics and design of capacity markets for the power
sector. Zeitschrift für Energiewirtschaft, 36(2), pp.113-134.
Ekelund Jr, R.B. and Hébert, R.F., 2013. A history of economic theory and method. Waveland
Press.
Gillespie, A., 2014. Foundations of economics. Oxford University Press, USA.
Kirzner, I.M., 2015. Competition and entrepreneurship. University of Chicago press.
Longley, N., 2013. Introduction. In An Absence of Competition (pp. 1-7). Springer New York.
Nelson, T., Nelson, J., Ariyaratnam, J. and Camroux, S., 2013. An analysis of Australia's large
scale renewable energy target: Restoring market confidence. Energy Policy, 62, pp.386-400.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.