Monopoly and Market Power Essay

The impacts of market structure and market power
Market structure has many important impacts on Australians. For example, the level of market power or competition between business rivals can have the following effects: • Competition means higher efficiency. Where competition among sellers or firms in a market is weak, there is often less need to be efficient in order to survive. By contrast, when there is strong rivalry, businesses are lean and are forced to cut costs. An exception to this general rule is when having a monopoly and control in a market allows for mass production. Here, some costs per unit of output produced can be lower and spread over higher production volumes. Bigger firms can achieve higher efficiency and gain economies of large scale production.
• Competition results in lower prices and greater purchasing power of incomes. Often prices are higher when there are monopolies and weak competition, since there is no rivalry. In addition, firms in an oligopoly-type market, are sometimes tempted to collude and use anti-competitive behaviour. This restricts competition, pushes up prices and rips off customers. Higher prices reduce the purchasing power of personal incomes and lower our living standards.
• Competition means better quality goods and services. Often when competition is weak, the quality of goods and services is reduced. This is because customers have no choice in products when they make purchases. Customer service is often poor, and consumer satisfaction low. However, an exception here could occur if a large monopoly producer used its size and financial strength to put money into product research and development (R&D) that would otherwise be beyond the reach of small firms.
Customers may benefit in this case.
• Competition means greater output of particular goods and services. When competition is weak and especially when there is collusion among firms with market power, the total supply of a good or service is deliberately restricted as a way of pushing up prices in the market. This causes GDP to be lower and unemployment to be higher than if there was strong competition in the market.
• Competition improves international competitiveness of local firms. If weak competition leads to lower efficiency and higher prices, it is easy to see how this would weaken the international competitiveness of local firms selling products, both here and overseas. This would tend to lower Australia’s exports and, as a result, reduce the levels of national production and income.
FIGURE 1.20 In the game of
Monopoly, the player who owns most of the property is powerful and controls the game. Similarly, business monopolies involving one seller have considerable market power and can use this control to make high profits, because competition from rival firms is weak. The National
Broadband Network is under development in Australia. The network will be paid for, created and operated by a government-owned monopoly.
Economies of large scale production are reductions in per unit production costs that are gained when a firm’s fixed costs (e.g. for product design or advertising) can be spread more thinly across a larger level of output. Purchasing power refers to the quantity of goods or services that can be bought with each dollar of income. It is affected by prices and inflation.
International competitiveness relates to whether a business or country is able to sell its goods and services profitably at prices that are below those for similar goods or services abroad.
20 economics down under book 1
• Competition often lifts material wellbeing and living standards. If weak competition leads to lower efficiency, higher prices, weaker international competitiveness, and reduced levels of national production and incomes, it is clear that it also leads to lower average material living standards.
Strategies used by some firms to increase their market power
Under

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