Fundamentals of Microeconomics Market Structures

Discuss about the Fundamentals of Microeconomics Market Structures.

Introduction

Australian economy plays hosts to a plethora of market structures. However, the most prevalent amongst all those is the oligopoly market structure.  It may be defined as a particular market structure when the industry is dominated by the presence of few sellers only. A particular case of oligopoly involving two sellers is known as duopoly and the organised retail industry in Australia is a prime example of the same. The two players in this duopoly are Woolworths and Coles. Also, there are certain instances in the market where the underlying market is monopoly. One of the prime examples of monopoly in the Australian market is Australia Post which tends to the most dominant player with regards to offering of postal services to consumers. Before the presence of Uber, the taxi service was also an example of an industry characterised as monopoly. It is defined as a market structure where there is only one seller. Monopoly tends to be an inefficient market structure as the seller is driven by the possibility of maximising the profits and hence causes deadweight loss.  The presence of monopolistic market is rather limited in Australia.  The main aim of this essay is to discuss the prevalence of various market structures in the Australian market.

Oligopoly – Australia

As discussed above, oligopoly is characterised by a market which has limited sellers. In such markets there is a possibility that collusion may occur amongst the various sellers in a bid to maximise profit and this could be detrimental for the consumer. The organised retail industry is oligopoly with presence of only Coles and Woolworths. The decision taken by the two firms is interrelated with the decision taken by the other firm as both firms are constantly competing for enhancing market share. Off late the market dynamics are slowing altering with the increased presence of discount retailers such as Aldi (Cummins, 2015). The characteristics of the oligopoly in the form of organised retail are given below (Mankiw, 2014).

  • Significant exit and entry barriers are present.
  • The firms tend to differentiate not only on price but on quality as well.
  • The firms tend to heavily influence the pricing and tend to the price makers.

Duopoly-Australia:

As stated, duopoly is a special case of oligopoly which is at play in the Australian retail industry.  Due to the existence of duopoly, a plethora of market power is concentrated in the hands of these two players.  As a result, there have been instances in the recent past when the suppliers have been pressurised to agree with unreasonable terms. Further, there are frequent pricing wars between the two companies as a result of which the customers benefit (Heffernan, 2016).. The competition existing the two players is strategic with various economic models used to analyse the choices available to the retailers and the optimum choice they should exhibit using game theory fundamentals along with economic models such as Cournot Model and Bertrand Model.  (Krugman & Wells, 2013)  Hence, this is a dynamic market structure where the decision making in interdependent. Further, due to the similar size of the two players, the two do not compete on quality but mainly on prices in a bid to offer the lowest prices.

Monopoly=Australia:

In the private taxi market, a virtual monopoly was existing which has been ended with the entry of Uber Ever since its inception, Uber has become a sizable competitor for the existing players (Lawson 2015). Additionally, it has immensely increased the competition by decreasing the overall prices that prevailed in the market. The reasons for existence of monopoly of Canberra taxis before the introduction of Uber can be attributed to the following reasons (Nicholson & Snyder, 2011).

  • The existing taxi drivers in Canberra were huge in number and thus reaped scale economies especially on back of technology.
  • Since they have to serve such a large area, hence the fleet size was large which automatically lowered the operational costs and hence enhanced the profitability of the operators.
  • There were no close availability of substitutes and hence due to the presence of only one player, the market was monopoly.

Monopolistic Structure- Australia:

As mentioned below, the incidence of this structure is rather low in Australia. The closest examples of these could be the restaurants and hotels. In this market structure, there is imperfect competition between the players who tend to offer differentiated products and services to the customers. An example of this is the online gaming industry. It is dominated by two major players i.e.Tab Corp and Sportsbet along with a plethora of smaller players that have small market shares. Recently, there was attempt to merge the two companies which would have essentially transformed the industry structure to more like monopoly (Thomson, 2010). However, this merger did not go through. The monopolistic market is characterised by the following features ( Pindyck & Rubinfeld, 2001).

  • The number of buyers and sellers present in the market are typically many but the products sold are not homogeneous.
  • The existence of entry and exit barriers is typically limited in nature.
  • The producers tend to have some degree of control over the prices

Conclusion

It is apparent from the above discussion that there is a presence of various market structures in the Australian economy. As per the discussion carried out, the oligopoly market structure is the most common and pivotal with incidence of duopoly in the organised retail industry. However, as the competition increases with the entry of foreign retailers, the market dynamics are changing and gradually the market is tending towards oligopoly which is beneficial for various stakeholders especially the suppliers. Also, the other market structures are also prevalent based on the underlying circumstances in various markets

References:

Cummins, C 2015, Influx of international retailers shaking up retail sector shows no signs of abating, The Sydney Morning Herald, Available online from http://www.smh.com.au/business/property/influx-of-international-retailers-shaking-up-retail-sector-shows-no-signs-of-abating-20151117-gl0ws5.html (Accessed on August 18, 2016).

Heffernan, M 2016, ACCC’s Rod Sims says Woolworths has more problems with suppliers than Coles, The Sydney Morning Herald, Available online from http://www.smh.com.au/business/retail/acccs-rod-sims-says-woolworths-has-more-problems-with-suppliers-than-coles-20160722-gqbqp3.html (Accessed on August 18, 2016).

Krugman, P & Wells, G 2013, Microeconomics,  3rd eds. Worth Publishers, London

Lawson, K. (2015). Uber arrival on Friday ends taxi monopoly, but how many drivers will be on the road?.

The Sydney Morning Herald, Available online from http://www.smh.com.au/act-news/uber-arrival-on-friday-ends-taxi-monopoly-but-how-many-drivers-will-be-on-the-road-20151029-gklwph.html (Accessed on August 18, 2016).

Mankiw, G 2014, Microeconomics, 6th eds., Worth Publishers, London

Nicholson, W & Snyder, C 2011, Fundamentals of Microeconomics, 11th eds., Cengage Learning, New York

Pindyck, R & Rubinfeld, D 2001, Microeconomics, 5th eds., Prentice-Hall Publications, London

Thomson, J 2016, Tabcorp and Tatts Group fail to agree on merger, The Sydney Morning Herald, Available online from http://www.smh.com.au/business/tabcorp-and-tatts-group-fail-to-agree-on-merger-20151115-gkzo5c.html (Accessed on August 18, 2016).

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