Telstra's Market Structure: An Economic Report on Pricing and Profit

This report provides an economic analysis of Telstra, an Australian telecommunications company, operating in an oligopolistic market. It examines the conditions for entry and exit, noting the high capital investment and regulatory requirements that create barriers. The report discusses Telstra's product pricing strategies, including price skimming and competitive pricing relative to its rivals, considering the homogeneous nature of the services offered. It further analyzes Telstra's profitability, highlighting the potential for long-term supernormal profits due to limited competition and barriers to entry. Figures illustrating short-run and long-run profitability are referenced, with the report concluding by outlining the key entry and exit conditions for Telstra within the Australian telecommunications market. Desklib offers more solved assignments and past papers for students.

~ 1 ~
ECONOMICS ASSIGNMENT

~ 2 ~
Table of contents
1.0 Entry and exit of Telstra.......................................................................................................3
2.0 Product pricing of Telstra.....................................................................................................3
3.0 Profitability in the long run..................................................................................................3
4.0 Entry and exit conditions of Telstra.....................................................................................4
Reference....................................................................................................................................5

~ 3 ~
1.0 Entry and exit of Telstra
Telstra is a telecommunication company based in Australia. The market structure of Telstra is
more like an oligopoly where a small number of players are operating to meet the service
needs of the Australian customers. As per the principle of an oligopolistic market, barriers do
exist in the market that is less intense than the barriers of the monopolistic market. In the case
of Telstra, the requirement of high capital investment is one of the forms of barrier that
prevents easy entry and exit from the market. Apart from that regulation from the side of the
authority also puts a barrier in the way of entry and exit in the market (Kakarot-Handtke,
2014). These barriers reduce the competition among the players and hence allow them to earn
a supernormal profit in the long run.
2.0 Product pricing of Telstra
Due to the fact that the number of rival players in the market is small, the product pricing for
the case of Telstra is more than competitive price. Goodwin et al. (2015) highlighted that, due
to the presence of a small number of rivals Telstra has a fixed set of loyal customers which it
can use to earn more producers surplus. The company also uses the strategies of price
skimming in order to increase its customer base attracting customers from other companies of
the market. This also includes offers and discounts and products that in turn work as a USP
for the products and the services of the company. The nature of the product provided by
Telstra is homogeneous relative to the other products of the market. This also justifies the
pricing strategies of the company. Other sellers of the market are offering the same products
and services. Thus, in the absence of cartel among the rivals, little above the competitive
pricing is justifiable. Weber (2017) highlighted that, in the oligopolistic market setting,
buyers have alternatives and price cutting works as a mean to increase the market share.
Telstra balances between market share and revenue and hence use this pricing strategy for the
products and the services.
3.0 Profitability in the long run
The industry offers a long-term supernormal profit to the sellers due to the lack of
competition among the players in the market. Furthermore, the barriers to entry in the market
allow the sellers to enjoy a supernormal profit too. In the short run, the company sets the
price above the average cost being a price setter and hence earns a supernormal profit. The
profitability of Telstra increases even more in the long run due to the fact that, increasing
output leads to a lower average cost and hence higher profitability.

~ 4 ~
Figure 1: The profitability of Telstra in the short run
(Source: Mankiw, 2015)
Figure 2: The profitability of Telstra in the long run
(Source: Kakarot-Handtke, 2014)
4.0 Entry and exit conditions of Telstra
 The high amount of capital investment.
 License from telecom regulatory authority of Australia.
 Exit condition includes substantial profit after the closure of the company.

~ 5 ~
Reference
Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Principles of
economics in context. Routledge.
Kakarot-Handtke, E. (2014). Objective Principles of Economics.
Mankiw, N. G. (2015). Ten principles of economics. Principles of Economics, 3-18.
Weber, C. M. (2017). Principles of Economics I.