Increasing industry concentration a concern

Economists have long understood that competition between firms brings the advantages of lower prices, improved quality and greater consumer choice. This is because firms deliver on these or they will be competed out of the market. 

The Australian Competition and Consumer Commission (ACCC) chairman has warned that market concentration (the percentage of market share held by the biggest firms) has risen to a level where consumers are possibly going to be worse off.

If a firm has monopoly power then they typically charge more and sell less, but earn higher profits. Over the last few decades mergers and takeovers have led to a very high proportion of Australian output being concentrated in the top 100 firms.

This provides a problem for the ACCC who regulate competition. The article below suggests that a change of rules whereby the firms that merge or want to takeover another have to prove the result will not harm competition. At present the ACCC have to prove it would harm competition.

An interesting point made by the ACCC is that if we want the benefits of economies of scale to work through to lower prices then we have to maintain a competitive environment. In other words a merger/takeover may improve productive efficiency but harm allocative efficiency.

The ABC cover the story here

This article deals directly with competition policy in Australia so is directly relevant to VCE economics. This is a part of IB economics also, and the harm that monopolies do to efficiency is often visited on Paper 1 of Higher Level in questions on the theory of the firm.

Closure of Toyota raises many (old) issues

The closure of Toyota should come as no surprise. Australia is not a place where anyone can make standard cars competitively.

There are three areas to be interested in this story, which is a VERY LIKELY candidate for the exam in November.

* Why Australia is an expensive place to make cars

* Whether governments should provide assistance to declining or uncompetitive industries

* The winners and losers from putting a tax on imports

There are so many issues here that I can't attempt to talk about them in one post, but I will return to each in the future and expand upon each heading.

For now lets think about why the car makers say it costs them four times as much to make a car in Australia than in Asia and twice as much as in Europe.

One issue is the Minimum Efficient Scale of production. The Economies of Scale of car making mean that as the size of a plant increases the long-run average cost of production falls. But unlike the 'text-book' examples Diseconomies of Scale never occur meaning that there is a point at which every additional unit of production costs the same. This is shown in the diagram below.

 

For the Australian car makers the scale of production never reaches the quantity MES, (Minimum Efficient Scale) indeed it is probably at best 40% of that quantity.

Although there are other factors to consider, such as comparatively low productivity and high wages in Australia, the small scale of production is  major reason why the car making industry was always doomed.

The Guardian has an excellent article which connects most of the relevant issues.

The Guardian article is here