News Article: Monopoly power driving up prices: SA PM (Sky-News) http://www.skynews.com.au/news/politics/state/2017/08/07/monopoly-power-driving-up-prices--sa-pm.html
It is important to understand the nature of business for various reasons, and one of the main tools in comprehending is through its market structure. Baldwin and Scott (2013), defines the market structure as the organizational and specific attributes possessed by a market. The main focus would be on the pricing says the scholars, however, it is also important to assess the market share of each businesses operating under specific industry in order to determine the kind of market structure they holds says Johari et al (2010). At the same time Carraro et al (2013), asserts that it is not significant to focus too much on the market share of the existing organization within an industry, and their argument is mainly due to the emphasize on pricing they give. Amidst of these arguments and views, assessing a marketing structure requires various variables, hence market share and pricing is two of the equally significant variables. Zhu et al (2009) asserts that there are seven characteristics that aid in identification and determining the market structure, and they are the total number of firms; the percentage of market share held by the biggest firms; the cost divisions; the degree of vertical integration; product differentiation; structure of the customers; and the turn of the buyers.
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| Figure 1: Source: Zhu et al, 2009 |
Electricity providers of Australia, especially state enterprise like Energy Australia, are having a monopolistic market structure in the supply of electricity. Energy Australia has the monopoly of energy distribution in the areas including Sydney, Newcastle, Central Coast and some areas of NSW (Council of Clean Energy, 2014). Recently with the unprecedented hike in the energy tariff, the people as well as the various government officials are raising concern over this and demanding an immediate solution over the situation. South Australian Premier Jay Wetherill has affirmed that this price hike is due to monopolistic power held by these companies (Skynews, 2017).
Pure Monopoly and Pricing Power:For the past five years the energy bills in Australia is skyrocketing. As the sources says that electricity bills around the country is going up significantly without any prior cause (Slezak, 2017). The recent news reports also asserts that the hike was up to 20% in few states, comparing to the time period of 2014-15; making the entire amount in between $300 and $400 (Slezak, 2017). And considering the overall percentage of hike while taking past two decades, it would um up to 60% to even sometimes at 99.9% (Slezak, 2017). With this staggering price hike, and the rate in which it is increasing, it would take a large proportion of an average house-hold budget. According to the Skynews (2017), the main reason that is causing the price hike is due to the increasing network cost that the electricity network companies are incurring. And according to Slezak (2017), these electricity network companies has a obvious monopoly in these areas and regions, where they are the only companies that offers wires and poles for the deliverance of electricity in these areas. For this reason only the electricity companies have come under intense criticism from the politicians as well as from the consumers, by stating they are exploiting the monopolistic power they have through over-investing and putting those burden onto the consumers.
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| Figure 2: Graph showing price hike since 2011. Source: Slezak, 2017 |
One of the main aspects that need to be identified through this issue is the market power of monopolistic companies. Hawley (2015), have defined the market power as an organization’s or a firm’s ability to control and manipulate the price of a product or a service within the market, and this mainly done though the manipulation of the level of demand as well as supply. It has been affirmed that the Electrical Networking or the Electrical Companies of Australia are enjoying a monopolistic position in the energy distribution industry; hence as Hawley (2015) defined the market power of a monopolistic organizations, these electrical companies have enormous market power and the capability in manipulating the market-price and thereby increase the profit margin. Merhav (2017) term these companies as the “price makers”, since they have the power to decide and fluctuates the market price of a product or a service without decreasing their percentage of market share. Merhav (2017) also states that the market power is inversely proportional to the number of firms within an industry .i.e. the higher the number of firms lesser will be the market share, and lesser the number of firms created high market power for those firms. As the figure 3 (below) illustrates the number of firms has a greater influence on creating and diffusing the market power. The same can be identified with the Australian Electricity Companies, since the number of firms is less in this industry, which in turn creating a higher market power, manifesting pure monopoly.
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| Source: Mehrav, 2017 |
Recommendations:
Understanding the situation it is important to control and bring down the ongoing exploitation of Australian people by the Australian Electricity Companies. According to Child (2013), monopolistic exploitation occurs when an organization take advantage over its customers, and this happens when that organization become the only provider of a product or service towards their consumer segment. The following recommendations are synthesized in order to bring down this situation in future, and provide the Australian electricity consumers with a fairer tariff that they could afford.
- It is important for the government to develop a strong policy to bring the down the rising electricity tariff, in order to prevent the consumers from further exploitation.
- Enhance the existing unfair contract terms of Australia, and also develop a separate act that would control and bringing down monopolistic exploitation in the nation.
Conclusion:
It becomes evident that market structure, especially monopolistic organizations, has a direct power to control the prices or in other words has an extensive market power. At the same time, it is also important for the respective government of a nation to assure that these organizations are not exploiting their consumers by implementing strong regulations and policies.
References:
Carraro, C., Katsoulacos, Y., & Xepapadeas, A. (Eds.). (2013). Environmental policy and market structure (Vol. 4). Springer Science & Business Media.
Child, N. A. (2013). The theory and practice of exchange control in Germany: A study of monopolistic exploitation in international markets (Vol. 10). Springer Science & Business Media.
Council of Clean Energy (2015). Clean energy Australia report 2014.
Hawley, E. W. (2015). The New Deal and the problem of monopoly. Princeton University Press.
Johari, R., Weintraub, G. Y., & Van Roy, B. (2010). Investment and market structure in industries with congestion. Operations Research, 58(5), 1303-1317.
Merhav, M. (2017). Technological dependence, monopoly, and growth. Elsevier.
Skynews (2017). Monopoly power driving up prices: SA PM. [online] Skynews.com.au. Available at: http://www.skynews.com.au/news/politics/state/2017/08/07/monopoly-power-driving-up-prices--sa-pm.html [Accessed 13 Aug. 2017].
Slezak, M. (2017). Your electricity bill: what are you paying for and why is it skyrocketing?. [online] the Guardian. Available at: https://www.theguardian.com/australia-news/2017/aug/10/your-electricity-bill-what-are-you-paying-for-and-why-is-it-skyrocketing [Accessed 13 Aug. 2017].
Zhu, T., Singh, V., & Manuszak, M. D. (2009). Market structure and competition in the retail discount industry. Journal of Marketing Research, 46(4), 453-466.
