Monopolies and competitive markets can be seen throughout Australian society. Monopolies exist when there is a sole supplier selling unique goods (Pass, 2005), whereas competitive markets have many buyers and sellers competing against each other. This essay will focus on the difference between monopolies and competition, exploring the positive and negative aspects for both. Additionally, I will briefly touch on why governments purposely create monopolies in some industries and whether these can be sustained in a free market.
Competitive markets benefit society when organisations compete to produce goods and services providing consumers with variety of quality and price. In a perfect state, ‘Consumers by their buying or abstention from buying ultimately determine what should be produced and in what quantity or quality. ‘ (Von Mises, 2011). On the upside, competition allows companies to produce quality goods and services at lower prices, generally through innovation. Competition positively impacts economic growth and development, stemming from greater efficiency and productivity (Heyne, Prychitko & Boettke, 2014).
This can result in organisations commencing ‘illegal activities such as kickbacks to secure business, contract manipulation and profit underreporting. An example of a competitive market is the retail sales industry. Where organisations such as Woolworths and Coles compete with smaller ones like IGA and Aldi for the consumer dollar. Even though these larger organisations seem to have the advantage in the market due to their size, the smaller companies are muscling in by being more innovative. In this industry, we see that smaller businesses provide alternatives. Monopolised markets can be on a national basis, or at a local level.
Similar to competitive markets, a monopoly has its advantages and disadvantages. As a sole supplier, profits come easily, so in effect, more funds can be directed into research and development, which in turn improves goods and services. Also, due to economies of scale where increased output leads to decreased costs of production, these savings can be passed onto consumers as lower prices – though they tend to be higher than in competitive markets. The disadvantages of a monopoly can have negative effects on society, where companies have fewer incentives to be efficient, resulting in wastage.
Lack of competition can lead to a decrease in innovation impacting consumers by restricting choices. Before government deregulation of the telecommunications industry, Telstra used to be the sole provider of these services to consumers – a monopoly. Even with government intervention to allow more competition into the market, Telstra still maintains ownership of the physical communications infrastructure, which its competitors must continue to use to provide some of their services (Le May, 2014). Monopolies are created in some industries due to several factors, for example security of the nation.
In society today there is also a strategic importance behind every action of the government as they can grant privileges to organisations to suit and serve the interests of the public, for example the border force. The Australian Border force is required to be a monopoly as it is critical for the safety and wellbeing of the public. They are focused on Australia’s national security and protection of the community through the enforcement of Australian laws (Department of Immigration and Border Protection, n. d. .
To be able to operate without threat to the nation, the force must act as a monopoly as they will be able to properly secure our borders and contact others within the force if they perceive any threats or danger. If there were competitors in this field, each organisation would not be able to work as efficiently and fluidly together. As Peck and Temple (2002) believe that the government has agreed to offer barriers from ‘would-be competitors’, which are protected mainly because of the actions of these firms.
A free market is where vendors and consumers are able to freely set prices for goods and services and where intellectual and physical property rights are sustained (Qatar Financial Centre, 2014). There are a few examples of monopolies in such markets, for example Nespresso and Panadol (paracetamol). Singleton and Howard (1977) explored aspects towards such monopolies and stated that in a free market society they have the ability to charge high prices without question, being the sole providers of such goods or services, therefore giving them impunity.
Nestle’s coffee counterpart Nespresso invented capsule technology as a more convenient way for making coffee and added copyrights and patents to their product in order to prevent competition from other coffee companies. ‘Competitors have emerged to other single-serve coffee products, but Nestle is the first to take legal action to try to ward generics away from the gold mine of coffee by the pod’ (Alderman, 2010).
However, we observe that monopolies cannot remain in a free market for very long without government intervention, as we can see from the Nespresso example, that in the last few years, its capsule delivery method lost its ability to be protected by law with its worldwide patents having come to their limits. When all the protectionist barriers have been removed, other players come into the market to capitalise and provide ‘better options to the consumer’. Players in the coffee industry went into the market such as, Illy and Vittoria, as well as players whose main product did not relate to coffee, such as Woolworths and Coles.
From the evidence indicated above, monopolies cannot be sustained without the help of government intervention and the persistent nature of competition, as DiLorenzo (2011) explains that the relentless forces of competitors, both current and potential, can result in the notion that a monopoly in the free market is an impossibility. The consequences of too much monopoly, ultimately controls the supply of a product or service in its entirety. This can lead to price fluctuations to the benefit of the producer and encourage the lack of ongoing product improvements.
Governments should only aim to support competition in the market place, with the responsibility of ensuring that the basic necessities for their citizens are available and affordable. Governments should not act for the sole purpose of creating monopolies, but only look at doing so to enable the sharing of inequitable products and services to its citizens, particularly those who have limited access to such services. In conclusion, in our democratic society, government’s change, laws change, and so products and services provided to the consumer, which are part of these created monopolies, will change.