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MB0041 Monopoly And Monopolistic Competition

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MB0041 Monopoly And Monopolistic Competition

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Course Code: MB0041
University: Edith Cowan University

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Country: Australia

Question:

Answer the following question ensuring that you apply economic principles or theory related to the concepts of benefits, costs and market structure in which a firm operates to inform your analysis and support your decisions. Communicate your ideas with correct grammar, spelling and writing style and support your answer with diagrams and illustrative examples as necessary.
 
Identify, from Australian industry, examples of monopoly and monopolistic competition and explain how and why governments may engage in policy intervention with respect to monopolies but not do so with respect to firms operating in a monopolistically competitive industrial structure.

Answer:
Introduction:

Almost all industries have their prevailing market structure. Market structure is a term that is used to refer to the particular social organization that exists between those who want to buy and those who are selling. In this pattern, the constituent parts of any given market follow a known pattern. This kind of a structure examines the way in which the buyers and sellers are linked to a unit. Market structure is used in the determination of the relationship that exists between the buyers and sellers and also the relationship between one seller and the other. There is also the examination of the relationship that exists between the buyers themselves.
There exist certain characteristics of a market that determine the behavior of a firm. The number of firms in a market will be a distinguishing feature in the determination of the components of the firm in a given market. In most cases, this affects the number or amount of output and also the decisions made concerning the prices in the market (Salop, 2013). The presence of differentiated products is also used in the determination of the pricing techniques by the firms involved. Another important aspect is the cost of the market. Low cost of information leads to low available opportunities that are present for the pricing policies of a firm and also the distinctions of quality. Barriers to entry in a market also determine whether there will be the existence of economic gains in the future (Panzar & Rosse, 2014).
A monopoly market structure refers to a market structure in which there is only one seller, but buyers are many. In this kind of a market structure, the entire market is dominant by a single firm, and there is no competition evident. The firm is known to take the role of price determination and also the levels of output that will lead to the maximization of their profits. The products that are manufactured by the monopolists are very unique, and they do not have any close substitutes in most cases. As a result of this, there is inelasticity in demand for products that come from a monopolist (Chamberlin, 2015). Any increase in the output will in most cases not lead to any loss in the total sales. There is also the presence of pronounced barriers to entry and exit that are attributed to the increased technological and investments in the capital which is required in the development of the monopolistic organizations. Additionally, there exists imperfect information between the buyers and the sellers regarding the quality and the price of the products (Tremblay & Tremblay, 2014).
More than often, monopolies in Australia arise as a result of blocked entry that is brought up by the existing firms. In most cases, the firms that are necessary make use of the economies of scale in the production of goods with the aim of smothering the entrants by supplying the whole market with products that are cheaply priced as compared to their rivals. The legislation of the government and also the enactment of the barriers in the form of business permits, licenses, and rights to patent finally result to monopolies in Australia (Mussa & Rosen, 2014). In other cases, some firms may opt to gain control in the supply of the raw materials that are highly required and therefore this makes it very unfavorable for the rivals of these companies to remain in the market. In the long run, the companies that are not able to acquire these strategic raw materials will have to exit the market hence leaving the firms that have control of the raw materials to prosper in their business. An excellent example of a monopoly company that operates in Australia is the Australian Post (Lerner, 2016). Australian post operates infamously in Australia by making use of its market power with the aim of establishing delivery of its gains regarding monopolistic profits. The firm makes use of its predatory pricing and the legal barriers to make sure that the other firms are deterred from the attainment of a market share of its niche.
The diagram shown below is used to display the marginal revenue and demand curves being downward sloping. Production in a monopoly happens at the point where the marginal curve intersects with the demand curve, and this is where profit is maximized (Triffin, 2016).
Monopolistic Competition
This is a kind of a market structure that comes up as a result of the merging of the perfectively competitive market and the monopolistic market. Sellers are many such that they can come up and merge to form conditions that are competitive in the market. There is heterogeneity in the kind of goods that the sellers in a monopolistic competition sell and in most cases the products are slightly differentiated. The firms possess the market power over the goods that they sell, and hence they are the price makers. The assets that are sold in a monopolistic competition do not have close substitutes (Stigler, 2015). The information that exists in the market is also imperfect among the buyers and sellers, and it is brought about by the differentiation of products, the quality of the product and then the differentials in prices.
An excellent example of monopolistic competition in Australia is the pizza places and restaurants. The primary sites well known for the production of pizza include Domino Pizza, the Borruso’s Pizza and Pasta and pizza Gusto among others (Chamberlin, 2015). The above places and also few others compete in the market for the same product. However, each of these places has their product being unique in a way at the same time when competing for the same customers in the market. The perceived or even real difference in the pizzas is what determines the loyalty of the customers at any given pizza house. The following diagram is used to show the monopolistic competition and their pricing strategies. The demand curve, in this case, is highly but not perfectly elastic. If firms want to maximize their products in monopolistic competition, then they will have to produce goods up to a point where the value of marginal revenue is equal to the value of marginal cost as shown below (Chamberlin, 2015).
How the government controls monopoly
Monopolies are generally known as social evils since they charge extremely high prices. They do not produce at full capacity and hence this resort to discrimination in rates. The government can regulate monopolies through taxation, the regulation of the conditions of a monopoly as in for the case of regulated monopolies or through the use of anti-monopoly laws and policies that are used to prevent the unfair discrimination in prices that exists among different consumers (Mussa & Rosen, 2014). Taxation can be done through the imposition of specific tax or imposition of a lump sum tax. The purposes of government intervention in a monopoly are several. The government may intervene to prevent excess prices since, in the absence of the government regulation, the monopolies can put the prices above the competitive equilibrium, and this could lead to a decline in the consumer welfare (Lerner, 2016).
Given that a firm has monopoly power over the provision of a certain service; it may end up offering poor quality service. The government, therefore, will have to regulate the firm to ensure that it meets the minimum standards of service. Given that a firm possesses a monopoly selling power, it can also exploit the monopsony buying power (Panzar & Rosse, 2014). For instance, the Australian Post can use its dominant market position with the aim of squeezing the profit margins of its customers.in some given industries, the government will need to encourage competition and hence it will be forced to regulate them. Some firms are natural monopolies, and as a result of high economies of scale, the number of firms that will be most efficient is just one. There is hence need to regulate these firms to prevent abuse of monopoly power (Panzar & Rosse, 2014).
Imposition of tax
The state can control the monopoly through the levying tax per output or just the imposition of lump sum tax that goes irrespective of its output. Specific tax is in most cases very similar to a variable cost. When specific tax is imposed, there is a reduction in the level of outputs sold, an increase in the price that is charged which imposes a burden to the consumers and there is also a reduction in profits. The extent to which a monopolist shifts the burden of tax to consumers depends on the elasticity of demand and supply of the products that he is supplying (Tremblay & Tremblay, 2014).
Imposition of lump sum tax
The government might also levy a lump sum tax on monopolies. The latter may be in the form of the license fee which is imposed on a firm regardless of the number of goods produced. This tax is treated as a fixed cost, and hence it does not enter the marginal cost of the monopolist. The effects of imposing a lump sum tax are: the outputs that are not sold remain unchanged, there is no change in the prices, and there is a reduction in the profits (Lerner, 2016)
Public utilities to the essential services like water supply, power supply, the transport facilities, the communication facilities and facility services. These services should be availed to the society at very reasonable prices. Most of the public utility organizations are natural monopolies, and hence the government needs to regulate them to make sure that the customers are not overexploited. The Australian Posta is a good example of a natural monopoly, and it is a corporation that is owned by the state. The retail firm is regulated by the government to make sure that it offers its services to the public at very much prices. The latter has been limiting the monopoly power of Posta Australia (Tremblay & Tremblay, 2014)
This is whereby price discrimination pea and off peak and alternating price. The Australian Posta might show different demand curves at different times of the day. When there is increased demand, then this is an indication of a peak, and when the demand is low, then this indicates an off peak. The Australian Posta is at peak during the weekdays as people are at work and faces an off peak over the weekends. The monopoly needs to charge different prices in the two periods. The costs are higher at peak periods and lower during off peak. The firm is meant to produce more envelopes during peak and also to extend their working hours (Stigler, 2015).
Conclusion
Economic market that has many sellers who are selling similar product but not identical is said to be monopolistically competitive. Here firms maximize their profits through the production of quantity where the marginal revenue is equal to the marginal cost in both the long run and short run.in a monopoly market, there is only one buyer but many sellers. The Australian post discussed above is an example of the monopoly. The firm determines prices and it can easily exploit its customers. However, the government of Australia intervenes to make sure that customers are not exploited through hiked prices.
References
Chamberlin, H. E. (2015). Theory of monopolistic competition: A re-orientation of the theory of value. Oxford University Press, 5(2), 67-89.
Lerner, A. (2016). The concept of monopoly and the measurement of monopoly power. In Essential Readings in Economics, 5, 79-88.
Mussa , M., & Rosen, S. (2014). Monopoly and product quality. Journal of Economic theory, 37(3), 453-465.
Panzar , J. C., & Rosse, J. N. (2014). Testing for” monopoly” equilibrium. The journal of industrial economics, 6, 55-56.
Salop, S. C. (2013). Monopolistic competition with outside goods. The Bell Journal of Economics, 3, 134-154.
Stigler, G. W. (2015). Monopoly and oligopoly by merger. The American Economic Review, 3, 78-89.
Tremblay , V. J., & Tremblay, C. H. (2014). Monopoly and Monopolistic Competition. In New Perspectives on Industrial Organization, 7(2), 245-248.
Triffin, R. (2016). Monopolistic competition and general equilibrium theory. Melbourne.

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