Popular economics

If you have been following the news, you probably have heard of various political parties announcing enquiries into petrol prices and grocery prices. While clearly it would be interesting to see what (if anything) transpires out of these enquiries, it is instructive to consider the economics of the situation.

Consider the following observations.

  1. For many industries, the Australian market is simply too small to sustain anything more competitive than an oligopoly. This is contributed by the country’s big physical size and small population, which result in more industries to exhibit characteristics of natural monopolies when compared with other economies.

    Notice how in Australia there are only a small number of large competitors in key industries. Examples include telecommunications (Telstra and Optus), supermarkets (Woolworths and Coles), banks (the Big 4, sustained by government policy), department stores (Myer and David Jones) and domestic airlines (Qantas/Jetstar, Virgin Blue). It is interest to note how Ansett collapsed shortly after the arrival of Virgin Blue.

  2. This means the players are able to price discriminate to maximise profits. This largely explains the tabloid current affairs shows’ complaints about grocery prices from the same chain being so different among different suburbs in the same city, much more greater than the difference in transport costs. People in affluent areas with little competition are charged more for groceries than those in less affluent areas, or areas where stronger competition exists (e.g. Aldi). And this is all perfectly legal.

  3. Some players seek economic rent quite boldly. Good examples of this include the telecommunications and international airline industries. Players in these industries defend public and vigorously their power to set prices. Whether this sort of behaviour benefits the consumers is unclear.

  4. Simple supply and demand still explain a lot. Petrol prices are higher on weekends and public holidays because it is likely that more people want petrol on those days. It’s probably uneconomic (cost-wise) for petrol companies to ramp up production for such a short period of time in such a short period of time. This is probably a more feasible explanation than collusion or price fixing among petrol companies (although this can’t be ruled out without a thorough examination).

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