In terms of economics, market is defined to be a place of interaction of the demand and the supply side players, where the price and quantity related decisions are taken by the same. There exist different types of market in the global framework, depending upon the number of players in the supply and demand side, the powers of the buyers and sellers in the market, the nature of the goods and services dealt with in the concerned market and several other attributes (Baumol & Blinder, 2015). Of the different forms of such markets, two of the popular and widely discussed market structures are that of the perfectly competitive one and the monopolistically competitive one. The assignment tries to discuss these two markets, taking into account their long run equilibrium situations (Nicholson & Snyder, 2014).
The two above-discussed markets have significant differences in the key features, which are discussed in the following sections of the assignment:
Types of product dealt in the market- In case of a perfectly competitive market, the product sold and bought is perfectly homogenous in nature, which implies that the products sold by the sellers are exactly similar in all aspects, including nature, taste, smell and others. However, in case of a monopolistically competitive firm, the products dealt with are somewhat differentiated, at least by the names of the brands (Hall & Lieberman, 2012).
Number of players in the market- In this aspect both the market types are similar as both the number of buyers and sellers are high in two of these markets.
Barriers to entry and exit- In perfectly competitive market, there are no entry and exit barriers and player can enter or exit from the market without any cost. However, in case of monopolistically competitive market, the barriers are very low but still existent.
Market power- In the perfectly competitive market, due to the presence of huge numbers of buyers as well as sellers, neither the buyers nor the sellers has any extra market power and both the parties are price takers. However, as the products sold and bought in the monopolistically competitive market are differentiated to some extent, so the supply side players enjoy some extent of market and price decisive power (Rader, 2014).
Keeping this into consideration, the equilibrium in a market, in terms of economics, can be defined to be the condition of mutual agreement of the producers and the buyers, which is reached by mutual interaction of both the parties in the market. The equilibrium of the market also differs depending on the nature and type of markets, in short run as well as in the long run, which are discussed in the following sections:
In the perfectly competitive markets, the number of buyers as well as sellers being numerous, the products being perfectly homogenous and the firms being price takers, the demand curve existing in the market is perfectly elastic. The demand curve, like that of the average revenue curve and also the marginal revenue curve, is parallel to the horizontal axis, at a particular level of price prevailing in the market. The equilibrium, in such a market, occurs where the marginal cost of producing one additional unit of output by the perfectly competitive firm is equal to that of the marginal revenue earned by selling that additional unit of output (Kolmar, 2017).
Therefore, in the perfectly competitive framework, equilibrium occurs at a point, where,
MR=MC
However, in the perfectly competitive market, the marginal revenue is equal to the price prevailing in the market, which indicates that,
P=MR=MC (Hall & Lieberman, 2012)
Keeping this into consideration, the short run equilibrium in the perfectly competitive market, gives the firms the scopes to earn supernormal profit, subnormal profit (loss) or also normal profit (no profit no loss situation), which depends on the position of the average cost curve, marginal cost curve and the AR and MR curves, which are shown as follows:
As is evident from the above diagram, as the AC curve lies below the AR curve, therefore, the average revenue of the perfectly competitive firm is more than the average cost of production of the same, which leads to super-normal profit for the firm (Boland, 2014).
In this case, the average cost and average revenue at the point of equilibrium being the same, the firms are expected to earn normal profit in the short run.
This situation of loss in the short run equilibrium in the perfectly competitive framework occurs when the average cost of production is greater than the average revenue earned in the equilibrium situation, which leads the firm to accrue loss in such a situation.
Thus, it can be asserted that in the short run, a perfectly competitive firm, in spite of being in the equilibrium, can earn super normal profit, sub normal profit or even normal profit, depending upon the nature of the cost and revenue curves (Chaney & Ossa, 2013).
Equilibrium in the Long Run
If in the short run, the firms in the perfectly competitive market earn super normal profit, then more and more firms are attracted to the market, which decreases the profit level for each form to the normal profit situation. On the other hand, if sub normal profit occurs in the short run equilibrium, then firms exit from the market, the entry and exit barriers being absent, thereby bringing the profit level to the normal level. Thus, any other situation present in the short run equilibrium apart from the normal profit one, will lead to interactions of the supply and demand side dynamics, such that the equilibrium will ultimately occur at the point of normal profit, which can be showed with the help of the following diagram:
Thus, in case of the perfectly competitive firms, though in the short run equilibrium, there are scopes of earning supernormal profit, normal profit or loss, however in the long run, the firms only enjoy normal profit (Boland, 2014).
In this type of market, as each of the producers sell products which are different in some aspect, each of the sellers enjoy some monopoly power and therefore face a downward sloping demand curve. Like that of the perfectly competitive firms, the equilibrium in a monopolistically competitive market occurs when the marginal cost of production of one additional unit of output is equal to the marginal revenue earned by the same from that unit of output, that is where the MR curve is equal to the MC curve (Zhelobodkov et al., 2012).
There are several yardsticks of efficiencies in the market, based on which the feasibility of operations in the markets are assessed. These are as follows:
Allocative Efficiency- The allocative efficiency refers to the most optimal allocation of resources and goods and services in the market, such that the welfare of all the players involved are maximized (Holmes, Hsu & Lee, 2014).
Perfectly competitive firms are productive efficient in the long run as MR=MC and also are efficient in terms of allocative efficiency as the consumer as well as the producer surplus are maximized in this type of market.
On the other hand, the monopolistically competitive firms in the short run keep prices at a level higher than that of the marginal production cost, which implies that at least in the short run the monopolistically competitive firms do not abide by productive efficiency norms. The firms, in this market, also produce less than the maximum capacity to maintain high price, which also indicates towards the absence of allocative efficiency in the monopolistically competitive market (Färe, Grosskopf & Lovell, 2013).
One of the most realistic and practical form of markets, in economic conceptual framework, which has relevance to the economic world in the global scenario is the oligopolistic market. This form of market has several unique features which are as follows:
Taking these into consideration, the presence of oligopolistic market structure in the real economic scenario is examined, with reference to one of the most prominent and leading economies in the contemporary global scenario that is the economy of Australia.
There are evidences of the presence of the oligopolistic market structure in many industries in many economies of the world and the Australian economy is also not an exception to this. The most unique feature of the oligopolistic market structure is that it is not as extreme and hypothetical as that of perfectly competitive or monopolistic structures of the market. In Australian economy, oligopoly is predominantly present in many of the prominent industries of the country (Tyers, 2015).
The Australian economy has shown highly impressive development in many aspects and has emerged as one of the leading and influential economies in the contemporary global scenario. The huge and continuously expanding industrial and commercial growth of the country has been one of the driving factors in the economic growth of the country. Of the most developed industries in the domestic economy of the concerned country, one of the prominent ones is the banking sector (Demirgüç-Kunt & Huizinga, 2013).
The banking industry has developed significantly in the country over the years and has also emerged as one of the key facilitators of the economic and commercial prosperity in the country. The banking industry of Australia not only operates domestically but has huge operational base in the global banking and commercial framework. There are many players in the demand side of this industry and also in the supply side (Beatty & Liao, 2014). However, in the supply side, in spite of the presence of many players, the market is primarily dominated by four big banks, thereby giving the banking industry an oligopolistic structure. The “Big Four” banks in the country are mainly the Australia and New Zealand Banking Group, the Westpac, the Australian National Bank and the Commonwealth Bank.
As can be seen from the above figure, these four above mentioned banks dominate the banking industry of the country significantly and are one of the primary reasons behind the shadowing of the other banks and their low market share and profitability in the economy. These banks, together enjoy nearly 80% of the market share of the domestic banking industry and also enjoys a significant share of operations in the international economic and commercial scenario.
The above discussion and the empirical evidences suggest the presence of huge market power in the hands of each of the big four banks in the economy of Australia, thereby making the presence of oligopolistic trends even more prominent in the market. The big four banks also shadow the other comparatively small supply side players and create considerable entry barriers, thereby asserting the oligopolistic features of the banking industry of the country. The big banks, being only four in number, not only enjoy huge number of clientele in the country itself but also have huge market shares in the international market too. Banking sector being one dealing with the monetary and financial matters of their customers, are driven hugely by the goodwill and brand loyalty factors on part of the customers. These four big players in the Australian banking sector have been in operations for many years and have over the years gained significant trust and goodwill in the market (Busetto, Codognato & Ghosal, 2013). People trust them with their assets and each of the bank have sufficient brand loyal customers whose word of mouth bring even more customers to them, thereby contributing to their long term sustainability and expansion of domain of operations. This in turn creates even more hurdles for the small players and the new supply side entrants in capturing a significant share of clientele in the market.
Another oligopolistic feature of the Australian banking industry is the presence of significant mutual interdependence of the four big banks in the economy. Each of these banks enjoying a big share of the market and having huge clientele, the profitability and long term sustainability of each of these big four banks not only depend on the business strategies taken by the bank itself but also on the strategies and decisions taken by the other three banks. This along with the fact that the big four banks earn huge profits both in the long run as well as in the short run, asserts the presence of oligopolistic characteristics in the banking industry in the economy of the country (Fudenberg & Tirole, 2013).
The presence of profit maximizing objectives and huge competition among the big four banks in the country, leads to the presence of kinked demand curve in the market as price war is highly evident in this particular oligopolistic market, which can be seen from the above figure. This along with all the above discussed attributes indicates towards the presence of oligopoly in the banking industry of Australia.
Australia has over the years emerged as one of the leading economies in the international scenario and has shown immensely impressive growth trends over the time. The economy of the country has experienced consistent growth, in spite of several discrete fluctuations and the country is now one of the most industrially and commercially active centers in the global framework. This economic prosperity of the country has led to an increase in the population of the same.
The population of Australia has increased consistently over the years, the increase being especially high in the urban and commercially active areas like that of Melbourne and Sydney. However, the land area of these cities remaining the same, the increase in the number of residents has directly affected the affordability of housings in the country and has made housing an issue of immense concern in Australia (Worthington, 2012).
The housing sector of the country has experiences constantly increasing demand in the last few decades which can be fully attributed to both the increased in the population of the country and the tendency of investing in housing assets for the purpose of alternative asset building by the residents as well as foreign investors. This in its turn has increased the problem of affordability of housing in the country, especially in the economically active cities.
A significant share of the population of the country has to spend nearly 30% or more of their gross income for the purpose of housing, the share increasing constantly. This affordability crisis has hit the lower income sector of the country the most (Source: Rba.gov.au, 2017).
This issue may be attributed to the following demand side attributes:
The problem can be to some extent solved with the help of the supply side dynamics:
The primary way of solving the problem of affordability crisis in the country is by increasing the supply of housings on face of the increasing demand of the same. This in turn can lead to a decrease in the price of the housings thereby withering out the issue of huge national concern.
To facilitate the same the government of the country has already started limiting the credit availability for the investors in the housing industry such that accommodations are not hoarded and are available for all those who can buy, which includes the lower and the middle income class people. The government has also induced the construction of budget housings for this purpose, especially in the areas near the economically active zones (Gurran & Phibbs, 2013). The connectivity between the cities and the suburbs should also be made robust so that people willingly invest in buying houses in these regions which may contribute in solving the housing affordability crisis in the country.
References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application. Cengage Learning.
Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage Learning.
Rader, T. (2014). Theory of microeconomics. Academic Press.
Kolmar, M. (2017). Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.
Boland, L. A. (2014). Methodology for a New Microeconomics (Routledge Revivals): The Critical Foundations. Routledge.
Chaney, T., & Ossa, R. (2013). Market size, division of labor, and firm productivity. Journal of International Economics, 90(1), 177-180.
Zhelobodko, E., Kokovin, S., Parenti, M., & Thisse, J. F. (2012). Monopolistic competition: Beyond the constant elasticity of substitution. Econometrica, 80(6), 2765-2784.
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton University Press.
Holmes, T. J., Hsu, W. T., & Lee, S. (2014). Allocative efficiency, mark-ups, and the welfare gains from trade. Journal of International Economics, 94(2), 195-206.
Courses.byui.edu. (2018). ECON 150: Microeconomics. Courses.byui.edu. Retrieved 2 January 2018, from https://courses.byui.edu/econ_150/econ_150_old_site/lesson_08.htm
Färe, R., Grosskopf, S., & Lovell, C. K. (2013). The measurement of efficiency of production (Vol. 6). Springer Science & Business Media.
Fudenberg, D., & Tirole, J. (2013). Dynamic models of oligopoly. Taylor & Francis.
Sushko, I. (Ed.). (2013). Oligopoly dynamics: Models and tools. Springer Science & Business Media.
Demirgüç-Kunt, A., & Huizinga, H. (2013). Are banks too big to fail or too big to save? International evidence from equity prices and CDS spreads. Journal of Banking & Finance, 37(3), 875-894.
Tyers, R. (2015). Service Oligopolies and Australia’s Economy?Wide Performance. Australian Economic Review, 48(4), 333-356.
Beatty, A., & Liao, S. (2014). Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2), 339-383.
Rba.gov.au, G. (2017). A Comparison of the US and Australian Housing Markets | Speeches | RBA. Reserve Bank of Australia. Retrieved 19 December 2017, from https://www.rba.gov.au/speeches/2008/sp-ag-160508.html
Busetto, F., Codognato, G., & Ghosal, S. (2013). Three models of noncooperative oligopoly in markets with a continuum of traders. Recherches économiques de Louvain, 79(4), 15-32.
Fudenberg, D., & Tirole, J. (2013). Dynamic models of oligopoly. Taylor & Francis.
Worthington, A. C. (2012). The quarter century record on housing affordability, affordability drivers, and government policy responses in Australia. International Journal of Housing Markets and Analysis, 5(3), 235-252.
Pwc.com.au. (2018). The Future of Banking. Retrieved 2 January 2018, from https://www.pwc.com.au/pdf/pwc-report-future-of-banking-in-australia.pdf
Gurran, N., & Phibbs, P. (2013). Housing supply and urban planning reform: The recent Australian experience, 2003–2012. International Journal of Housing Policy, 13(4), 381-407.
Hsieh, W., Norman, D., & Orsmond, D. (2012). Supplyside Issues in the Housing Sector. RBA Bulletin, September, 11-19.
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