Australian Wine Industry And Monopolistic Competition, Australian Banking Oligopoly, Price Discrimination In Airline Industry, Negative Externality Of Climate Change, And Australia’s Economic Performance

Monopolistic Competition in the Australian Wine Industry and its Comparison with Perfect Competition

Monopolistic competitive firm characterizes a market structure producing similar yet differentiated products from other firms in the industry.  It produces at a price level equal to AC , a feature of perfect competitive market structure while, it has some control over the market as a consumer keep buying its product even if the prices are increased which is a feature of monopoly market structure. Hence, this form of market structure is known as Monopolistic competition.

The assumptions are as follows:

• Low Industry concentration ratio implying there are large number of buyers and sellers
• They have little control over the price thus entitling them to be price makers than price takers
• There is a presence of product differentiation indicating that firms don not produce substitute goods but similar goods and buyers also perceive them to be two different yet similar products.
• There is low barrier to entry and exit the industry.

Wine industry is characterized by the firms that produce differentiated good- different varieties of wine. They are differentiated on the varied ground such as consumer preferences/tastes ( some prefer red and other white), grape type ( a wine made from a very rare or famous type of a grape like Chardonnay grape leads to a higher price), a unique production method( good vintage wine stored for a certain period or wooding in French Oak). All these factors influence pricing strategy of the Wine industry and thus impacts consumer tastes and preferences due to which they are loyal to their particular brand, which is again one of the significant feature of this market structure.  

Wine industry is a monopolistically competitive industry and not perfectly competitive industry for several reasons. First, the winers are required to make advertising expenditure and incur selling costs to popularize their product. This doesn’t occur in perfectly competitive industries. Secondly, they produce differentiated wines and all wines are different yet similar from each other unlike perfectly competitive firm selling perfectly substitute goods.  Thirdly, firms in this wine industry are price makers as they have some control over price while perfectly competitive firm are price takers having no influence over the price.

(b).

Oligopoly is a form of market structure where there is a presence of few firms controlling the major chunk of the market. There exists huge barrier to entry, thus indicating a limited competition in the industry.

The model assumptions are that there are two firms producing homogeneous products at a same marginal cost (MC).Moreover, their output are perfect substituted and that their market is evenly distributed.

i- –  Since the Australian Banking sector is dominated majorly by 4 banks (having a collective market cap of more than USD 400bn, they are in a position to manipulate the market and thus forcing smaller companies and consumers to comply with. Such situation leads to the lack of competition in the Australian banking services market.

ii- Australian Banking Industry has one of the highest barriers to enter into the market, not only because of the several capital and regulatory requirements but majorly on the account of preexistence of the dominance of the major firms in the industry which makes it difficult for the smaller firms to compete and discourages them to undertake the risk of the losses which they may incur. Hence, this barrier to entry limits the level of competition in the Australian Banking Oligopolistic Industry.  

(c ).

Price discrimination is the phenomenon of charging different prices from the different set of consumers for the same product. The main mechanism behind this principle is that the seller charges prices based on the different price elasticities of demand. For example, an inelastic demand for a good would command a higher price knowing that a consumer would be willing to pay higher price to own that product thus higher revenue are . Alternatively, an elastic demand is sensitive to price alteration and react positively in the case of discounts/offers.

Lack of Competition in the Australian Banking Sector and Barriers to Entry

Price discrimination by airline industry are done on the basis of time of the booking tickets, number of tickets bought, age profile, time opted for travelling. Tickets are cheaper if bought several months before the travelling date and higher if bought closer to the travelling date. Moreover, the tickets would be cheaper for odd hours and higher for the peak hours/ social hours or the prices would higher during the weekend and lower in weekdays. This is done in order to attract consumers who are sensitive to the price changes.  Moreover, people travelling in weekdays during peak hours are mostly business travellers and hence their demand is inelastic. In this case, the prices would be higher during the peak hours and lower during odd hours.

(a). Unemployment rate stands at 5.9% y/y in Mar-17 against 5.8% in Feb-17. There is an increase of 0.1 pts on monthly basis.  The overall monthly trend shows that the unemployment rate remains stable. Inflation rate remains at +2.1% y/y in March 2017 and +0.5% on quarterly basis for Dec 16- Mar 17 period. The rise in price was on account of hike in automotive fuel, real estate and medical services while travelling and furniture prices had offsetting impact on the price.  GDP growth rate reflects the measure of economic activity of the economy. For December 2016 quarter, economic growth rate stands at 1.9% y/y.

Overall stable unemployment rate, rising inflation and improving GDP growth rate point towards the recovery in the Australian business cycle. Increase in household consumption and government capital expenditure would have played an important role in the recovery process. Moreover, the increase in terms of trade would be a significant factor behind bringing extra foreign reserves back into the economy thus improving the economic health of the country.

Circular flow of income shows a flow of income between the four sector of the economy – household, firms, government and external trade and their inter-relationship as they engage in mutually beneficial transactions. Leakages are the withdrawal of the income from the economy while injections are the increase in the money flow in the economy.  For circular flow of income to function indefinitely, leakages must be equal to injections.

 Payment on external government account Net tax payments

External World

Factor services   Government purchases/ transfer payments

Remittances

     Payment for Factor service

Payment towards goods and services                                                  

    Transfer Payments  Tax payments

Government       Goods purchases/transfer payments

                           Tax Payments

         Receipts of international payment

Diagram : Circular flow of income – Four sectors

The above diagram explains the flow of income among the sectors of the economy.  The transaction between household and firms is a two sector economy, with government its three sector economy and finally with rest of the world, it is a four sector economy. Savings are considered as a leakage and investments as withdrawals.

i- Neither. This is simply a redistribution of factor payments.

ii- This is the case of injections as there is increase in investment

iii- Government increasing tax free threshold is injections as there is more money with the people to spend on goods.

Method of Price Discrimination Used by Airline Industry and Examples

iv- Investing money in credit unions is actually an increase in the withdrawals  as this investment is actually a saving.

v- There is reduction in withdrawals as there is fall in the net outflow of income to abroad from the people’s sector.

vi- Withdrawing from the savings to finance holidays is actually a decrease in saving implying fall in withdrawals.

(a).  GDP in expenditure approach consists of four main components- aggregate expenditures. Household expenditure, government expenditure, business investment and net exports (exports less imports). The formula is as follows:

GDP = Private Consumption Expenditure + Government Expenditure+ Business Investment + Net Exports        

(b) i- GDP as a factor measuring the economic wellbeing of the people of the country is not a very useful indicator and there are several reasons that restrict its usage as an indicator of wellbeing of the country. Firstly, as GDP is calculated at market prices, it ignores the externalities or environmental issues. Furthermore, it also fails to capture the quality of life of its people. It implies that wealth, employment, education, physical and mental health of the individuals is not taken into consideration.  It doesn’t take into account whether basic necessity of life is being met by its people. This indicator merely shows the standard of living based on income. It is very likely that a huge inequality of income would be prevalent in the society.  Lastly, this indicator makes no provision for informal market or parallel market. It only takes into account formal market prevalent in the economy.  

ii- Human Development Index is a measure of both social and economic wellbeing of the people.  It uses three main factors to create an overall score between 0 and 1 where 0 is the low level of development while 1 is the high level of development.  The three factors are: life expectancy index implying the average life expectancy to a global life expectancy, education index is the combination of average years of schooling and anticipated years of schooling and lastly, income index is simply the gross national income at purchasing power parity.

HDI index for Australia in 2015 is 0.939 (the second highest after Norway) where,  the life expectancy at birth is 82.5 years , expected years of schooling is 20.4 years and mean years of schooling is 13.2 years.

(a).

Externalities are the situation where one’s activity impacts the welfare of the other person who is not a part of that transaction or exchange. For example, a neighbor looking after the garden will cause positive impact on me in terms of view and freshness.  These can be in the form of positive and negative and can happen in case of production or consumption or both.  A positive externality happens when the person not involved in the transaction is benefitted from the entire act without actually being a part of it. Former example is the case of positive externality. A negative externality occurs when third party had to bear the cost without being involved in the production or consumption process. For example, people living in industrial area are forced to breathe in polluted air, deal with the hard water and other negative impacts without actually being a part of the production process or consumption process.

(a).  Vaccinations are example of positive externality.  A person receiving vaccination would lead a long healthy life and if not taken would dampen their living standard and earning potential.  Moreover, people not getting vaccinations are also benefitted as they won’t be infected by the other person. Hence, in this case, total benefit is greater than total value of consumption at private levels.  Private sector won’t be motivated to provide vaccination as the social benefits are more than the private costs in this scenario. Moreover, the demands for vaccinations are also low so the suppliers won’t be interested to put their resources into this as they cannot charge a price that would cover up the cost. They tend to underprovide vaccines as it is not in their best interest to produce vaccine at the socially optimal level of production.

   Marginal Social Benefit

Underallocation Marginal Private Benefit

(c). Through government intervention, the country residents must be encouraged to provide vaccinations to the kids. It is important that parents must be made aware of the significances of such vaccinations and possible impacts of the disease which their child may have to deal with , if vaccination not taken. Government has also taken several steps in this regard. Removal of childcare subsidy if parents do not vaccinate their child is one of the measure undertaken by the Australian government. It also denied access to a few childcare facilities for the children who are not vaccinated. All such policies have played a significant role in increasing the number of children getting vaccination.  

References

Case, K & Ray, C (2007). Principles of Economics, 8th edition,Pearson Education, Inc.

Mankiw , G  (2007). Economics: Principles and Applications, 4th edition South Western, Cengage Learning India Private Limited.

Pindyck, RS & Rubinfeld D. (2006). Microeconomics, 6^th edition, Prentice Hall.