Q

Study focuses on various types of market economy prevalent in Australia with key features of monopoly markets

Home, - ECON20039- Economics for Managers

Introduction

A perfect market structure may refer to a theoretical or hypothetical market, which possesses the characteristics of an ideal market as per the concept of economics. The features of an ideal market states that the firms operating within the market are price takers, implying that they cannot influence the price of their products. Furthermore, the product is homogeneous in an ideal market. However, this overall concept of economics is hypothetical. Therefore, monopoly, oligopoly, and other components such as a competitive industry are common in the real world. This study evaluates the key features of a competitive industry, along with the the features and an overall discussion on oligopoly. Furthermore, the paper illustrates issues related to the housing affordability crisis prevalent in Australia. In addition to that, it may be mentioned that media and advertising play a vital role in facilitating the economy of a country, hence a discussion has been made in that regards as well. 

Key features of each market structure

A competitive industry refers to the industries operating in a market, wherein the organisations are willing to compete in over to gain advantage over the others, and to remain on top of the competition (Roesler & Szentes, 2017). A competitive market would also entail the lack of monopoly within the system. Hence, no mutual dependence is observed within the firms. The number of buyers and sellers in a perfectly competitive industry may be regarded as infinite. Furthermore, the product is to be ‘homogeneous’ or identical to be sold by the multiple firms operating in the perfectly competitive market (Head & Spencer, 2017). In addition to that, it may be mentioned that there are no barriers in the entry into the market. The features of a perfectly competitive market include the existence of numerous firms, the absence of governmental control and availability of market information (Roesler & Szentes, 2017). Figure 1 illustrates the prime differences between a perfectly competitive industry and a monopoly. 

A monopoly, on the contrary, refers to a market wherein there is no prevalence of competition, and there is just one prime seller. In addition to that, the firms become the ‘price makers’ in this type of industry (Roesler & Szentes, 2017). Abnormal profits are received by the form in question. Furthermore, since there is a lack of competition, it becomes evident that there is only one seller in a monopoly. Additionally, no proper information regarding the market is available to the potential consumers (Roesler & Szentes, 2017). Moreover, the barriers of entry into the market are high. For instance, the complete control on the supply chain for the firms is maintained by the monopolist (Roesler & Szentes, 2017). Hence, no visible difference is exhibited by an industry and a firm. The product sold generally has unique features. Figure 2 represents the a comparison between the marginal and average profits of the competition. 

Probable short run and long run profits or losses

In case of a monopoly, the possible profits observed in the long run are generally positive, since the barrier for the entry into the market becomes high. However, in the short run, the monopolist requires time to create its position in the market for developing a monopoly (Head & Spencer, 2017). Figure 3 depicts the probable short run and long run profit and losses for a monopoly. Abnormal profits are expected in case of a monopoly in the long run, as the profit margins are expected to go higher as the life cycle of the product moves with time. 

On the contrary, in case of a perfectly competitive industry, abnormal losses are observed in the short run. However, the margin of profit can never equal the abnormal profits enjoyed by monopoly firms. Figure 4 represents the possible profit and loss outcome in the short and long run of a business in case of a perfectly competitive industry. In case of a monopoly, the costs are reduced, while the profits are maximized through the creation of monopoly (Amir, Jin, Pech & Tröge, 2016). Furthermore, as depicted in Figure 4, the average revenue becomes equal to the marginal revenue in the long run, resulting in the outcome of normal profits. 

Comparison of price, quantity, consumer surplus, producer surplus and deadweight loss

A comparison between the industry representing perfect competition and monopoly can be undertaken by comparison through the basis of the consumer and producer surplus. It may be mentioned in this regards that the monopoly output is determined to be less as compared to the perfectly competitive output as observed in case of a perfectly competitive industry (Zeuthen, 2018). Furthermore, this occurrence is witnessed as the monopoly price is kept higher than the average price for the perfectly competitive industry. In addition to that, the deadweight loss in case of a monopoly is observed while performing a comparative study on the output and the price of the product. Furthermore, it may be stated in this regards that the combined summation of the loss in the producer surplus and the loss in the consumer surplus constitutes the net ‘deadweight loss’ by the firm (Zeuthen, 2018). 

The overall comparative study on the deadweight loss, along with the marginal profit and loss, in addition to the relationship with the producer and consumer surplus. It is evident from Figure 6 that the Price is greater than the marginal cost or MC in case of a monopoly market. On the contrary, the price is equal to the Marginal cost for a perfectly competitive industry. The ‘deadweight loss’ is often referred to as an unconsummated wealth which is responsible for the creation of transactions within a market (Bergemann, Brooks & Morris, 2015). Hence, deadweight loss may be ascertained through performing a detailed study for the price, the market supply, the demand as well as the output of the product. Nevertheless, it is to be taken into account that the occurrence of the deadweight loss is prevalent only in case of a monopoly market, but not a perfectly competitive industry (Bergemann, Brooks & Morris, 2015). The reason has been identified as the perfect balance between the commodity prices, the demand, thee supply or output as well as the marginal cost involved in the production of the commodity. 

Key features of oligopoly

Oligopoly refers to a distinct economy within a market which relies on interdependence. For instance, in the Australian market, the prevalence of oligopoly is quite pronounced and evident in case of the grocery industry. Firstly, oligopoly can be characterized by the presence of a small number of large firms or organisations (Bonatti, Cisternas & Toikka, 2017). While the products sold by the firms may be identical or even different. For instance, Woolworths and Coles are two leading organisations in the Australian market in the Grocery sector. However, the dependence of the firms or the stores on the supply chain can be vividly highlighted (Gil-Moltó, Poyago-Theotoky, Neto & Zikos, 2018). The provision of supply of the various grocery products, related to homewares or other raw materials are dependent on the markets or the farms which supply the product to the organisation (Bonatti, Cisternas & Toikka, 2017). In a market demonstrating oligopoly, advertising plays a key role in the development of the market economy. It may be stated in this regards that Coles or even Woolworths, two of Australia’s leading grocery giants, have implemented the aid of advertisement to promote their businesses. 

In addition to that, one of the key features may be attributed to the presence of competition. The presence of competition may be distinguished as a middle ground between monopolistic industry and monopoly (Dana Jr & Williams, 2018). Furthermore, the number of sellers is few. For instance, considering the Australian Grocery sector, it may be taken into account, that the retailers operating in the market are namely, Coles, Woolworths, Aldi and a few others. Additionally, there are no prominent barriers for market exit or entry, as a result of the pronounced competition observed among the firms representing oligopoly (Gil-Moltó, Poyago-Theotoky, Neto & Zikos, 2018). Moreover, since the size of the firms vary in case of an industry demonstrating oligopoly, the lack of symmetry or uniformity is pronounced in such an economic situation (Gil-Moltó, Poyago-Theotoky, Neto & Zikos, 2018). Furthermore, an emphasis on the price rigidity is exhibited in an oligopoly. 

Role of advertising in oligopoly

It may be mentioned in this context that the major decisions of a firm, such as changes in the policies of the firm, may a significant impact on several other competitors, in a market exhibiting oligopoly (Gil-Moltó, Poyago-Theotoky, Neto & Zikos, 2018). Hence, rival firms are to remain alert for updates regarding policy changes or advertisements of the competitor. In addition to that, it may be stated in this aspect that advertisement is a crucial component for an oligopolist (Dertwinkel-Kalt & Wey, 2015). Launching an aggressive advertising or marketing campaign may facilitate the involvement of other competitors to do the same (Dana Jr & Williams, 2018). This phenomenon is often termed as defensive advertising. In order to justify this information, the advertising campaign by Woolworths and Coles may be taken into account. The print ads for both the organisations have been known to outshine other competitors and often each other. 

It is to be noted in this regards, in case of a perfectly competitive market, advertisement lacks importance. However, since the existence of a perfectly competitive industry is disputable, the importance of advertisement is profound in this regards (Colombo & Labrecciosa, 2018). It may be mentioned in this context, that the implementation of advertisement as a strategy for promoting economic growth for an industry may also prove beneficial for a monopoly (Dertwinkel-Kalt & Wey, 2015). However, the role of advertisement is not vital in monopoly, since the unique features of the products and the control over the market and the supply chain enables the monopolist to even control most of the sale of the product as well (Colombo & Labrecciosa, 2018). Nevertheless, according to scholars, oligopoly is an economic situation, wherein the net business or the sale of the product as well as competing with potential competitors may all be dependent on the scope and execution of the advertisement campaign started by one firm, which is often followed by the others to maintain the ability to sustain itself in the market (Dertwinkel-Kalt & Wey, 2015). 

An example of the marketing campaigns by Woolworths can be cited as the popular subtle messages hinted at, along with the nostalgic brand image has been the key to advertising in the oligopolistic market (Minifie, 2017). A profit surge of 38% had been announced by the organisation as a result of the marketing strategies implemented (Minifie, 2017). On the contrary, Coles had announced an increase in the growth in sales as only a 1.9% (Knox, 2015). However, the advertisement campaign by Coles used the slogan “Down Down”, which in itself may have a potential negative impact on the customers (Minifie, 2017). However, when Woolworths had attempted to mock and imitate the slogan by Coles, a negative impact had been evident on the sales of the organisation. Regardless, the reversion to the original style of maintaining subtlety through the messages and slogans had the desired effect (Knox, 2015). 

Brief description of the Australian grocery industry and the impact of advertising

The grocery industry of Australia constitutes one of the major industries or segments of the retail industries operating in Australia. It may be mentioned in this regards that though Woolworths and Coles are the biggest retail giants in Australia, the rapid expansion and growth of Aldi has compelled the organisations to cut down prices significantly to encourage competition, and subdue its growth (Cavagnino, 2018). The reduction in price, along with the acceptance of lower profit margins has led to the Australian retail industry to boom into one of the most competitive industries demonstrating oligopolistic behaviour. The current market shares of the major players such as Woolworths have been reported to be around 37.2%, while Coles has a market share of 30.3% for the year 2017-2018 (Cavagnino, 2018). The price among the largest players, Coles and Woolworths, combined with the rapid expansion of Aldi has led to constraint among smaller retailers. 

As a result of the expansion of Aldi, 10% of the market share is known to belong to the organisation (Cavagnino, 2018). Hence, advertising and marketing strategies are being credited for the growth of Aldi in the oligopolistic market. However, certain guidelines are to be complied with for advertising to children and so on. For instance, the Australian Food and Grocery Council, in accordance with the regulations set forth by the Australian Competition and Consumer Commission, implements specific regulations for advertising to encourage responsible advertising (Knox, 2015). 

Housing affordability crisis in Australia

Discussing the housing sector in Australia, the prime factors that drive housing affordability and availability can be attributed to supply and demand. In addition to that, factors such as economic growth as well as rates of interest play a vital role in the affordability of houses. It may be mentioned in this context that the price and quantity or supply of the housing market is primarily dependent on the equilibrium of the housing or real estate market. Figure 8 illustrates a statistical representation of the housing affordability in several regions of Australia.

It may be noted that Sydney and Melbourne are the regions in Australia experiencing extreme levels of crisis with respect to housing affordability. Firstly the significant tax incentives for the occupiers as well as owners for purchasing property which is residential. Another statistical representation represents the age groups which are likely to face the consequences of the crisis in the region. A 10 year study on the housing affordability shows that the rise in the percentage of owning residential facilities is evident in Figure 9, in regions of Greater Sydney, Greater Melbourne and the rest of Australia. 

Solutions attempted or are proposed to address housing affordability

The issue related to the housing facility can be demonstrated through the pie chart, which provides an estimation of the prices of the houses in different regions of Australia. Furthermore, a shift in the housing demands in Australia has been provided in Figure 11, which illustrates the shift in the market curve of the housing facilities in Australia. 

The government at both regional as well as national levels has been adamant at providing adequate facilities for the individuals residing in Australia. It may be taken into consideration that despite the government's concerns, a serious lack of initiatives and strategies has turned the housing affordability situation into a crisis. Rebalancing the tax system has been regarded as one of the major proposed solutions for the ‘crises’. 

Effect of first home owners’ subsidy on price and quantity

According to relevant data from ABS as well as the Australian Housing and Urban Research Institute commonly known as AHURI, the first-home buyers loan had approximately risen to 18% of the mortgages for the owners and occupants. Furthermore, between 1994 and 2014, an average of 62% has been noted to be resulted on the weekly housing rental costs in Australia. Therefore, taking the inflation into consideration, the rise in the rates of mortgages at 42% for owners, and 45% for public renters have hindered the affordability of the houses for the common population of Australia. Figure 12 represents a demand-side subsidy in case housing facility in Australia. 

In addition to the demand-side subsidy, a supply-side subsidy  represent the shift in the supply for the housing affordability. However, the interaction between the demand-side subsidy , demonstrate the shift in the demands for housing as well. Therefore, combining both the analyses, one may evaluate the role of supply and demand involved in the housing affordability crisis in Australia. 

The addition of supply elasticity as a factor to be taken into account for studying the housing affordability crisis in Australia. It may be mentioned in this regards that the perfectly elastic supply is evident when a decrease in the price of the product is observed. However, perfectly inelastic supply fits the current housing affordability situation in Australia. The observation is evident from the current circumstances that no change in the supply of the houses has been noted with regards to the change in the price. 

Conclusion 

This study focuses on the various types of market economy prevalent in Australia. The key features of markets exhibiting monopoly as well as oligopoly have been mentioned. Furthermore, a comparison of the market features has been done in accordance with a perfectly competitive market. It was found that though advertisement does not pose as a requirement in case of a perfectly competitive market, it is crucial for an oligopolistic market or industry. Examples relevant to Coles and Woolworths have been made in this regards to understand the prevalence of oligopoly in Australian markets. Additionally, the supply and demand side subsidy for understanding the housing crisis in Australia has been illustrated in this paper. 

Leave a comment


Captcha

Related :-