Consider a farmers market, where the farmers are selling cantaloupes. On the first day, they offer their cantaloupes for $5 apiece, but few people buy them, so as the end of the day draws near, the farmers find that they have a surplus of cantaloupes. Consequently, the farmers drop the price of their cantaloupes to $1, quickly selling their surplus. For most products, as their price increases, the supply increases but the demand decreases. If the sellers raise their price too high, where the demand is less than what they have to offer, then they will have a surplus that will force them to lower their price until they can sell their entire supply. Show On the other hand, if the sellers set their price too low, then they will sell their entire supply before they can satisfy the demands of the market, thereby causing a shortage for the buyers and lesser profits or greater losses for the sellers. Some people who wanted to buy the product will be unable to obtain it. Surpluses and shortages reduces the allocative efficiency of the economy, because the distribution of goods and services is less than optimal. Supply increases with prices because the suppliers earn greater profits and can easily cover their costs; higher prices increase the producer surplus for the sellers. Demand increases with lower prices because the products become more affordable and the buyers get more value for their money, i.e. consumer surplus. Because people only buy a product if the benefit at least equals its cost, and because people's preferences vary widely, a lower product price will have a benefit worth the cost for more people, thus increasing demand. This is why when demand and supply quantities are plotted according to price, the supply curve moves upward with price, while the demand curve moves downward with price. When the amount demanded equals the amount supplied, then market equilibrium (aka supply-demand equilibrium) is achieved, where the quantity equals the equilibrium quantity and the price equals the equilibrium price. Furthermore, if prices are different from the equilibrium price, then the law of supply and demand states that the price of any product will adjust until the supply equals the demand.  In a highly competitive market, sellers must set the price of their product so that they can sell what they have. Hence, prices have a rationing function in that those sellers willing to sell at the equilibrium price will be able to sell all their product, while buyers willing to pay the equilibrium price will be able to buy all they want. Sellers, who are unable or unwilling to sell their product for the equilibrium price, will stop producing it. Likewise, only the buyers who are willing to pay the equilibrium price will get the product. Those who do not desire the product as much will be unwilling to pay the equilibrium price. This is how the resources of an economy are allocated to produce the most desirable products. How Market Equilibrium Changes in Response to Non-Price Changes in Supply and DemandAlthough prices change both supply and demand quantities, demand and supply determinants other than prices can also change either demand or supply, in which case, they will also change the market equilibrium. If only prices change, then the law of supply and demand will cause both quantity and price to revert back to the equilibrium. However, if other determinants causes changes in either demand or supply, then the market equilibrium also changes, because either the demand curve or the supply curve or both shifts. Supply determinants other than prices include the prices of the factors of production used to create the product, technology, taxes and subsidies, number of sellers, price expectations, and the prices of other related goods. If supply determinants increase supplies, while the demand remains constant, then the equilibrium price will decline, because it must adjust to the new, higher equilibrium quantity, which can only be sold at lower prices. Supply determinants that decrease supplies will cause the equilibrium price to rise, since it will take fewer buyers to buy the product at the higher price and only those willing to pay the higher price will buy it. Demand determinants other than price include consumer preferences, income, prices of substitutes and complements, and the number of buyers. If the supply remains constant, but non-price demand determinants increase demand, then the equilibrium price will rise, since the equilibrium quantity will also increase, and the suppliers will only supply more product at a higher price. Likewise, if demand decreases because of factors other than price, then the equilibrium price will decline, since suppliers will only be able to sell the new, lower equilibrium quantity of their product. S1 toS2 , representing an increase in supply caused by non-price supply determinants, causing the equilibrium price to decline from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2. In the 2nd diagram, it is the demand curve that shifts rightward, fromD1 toD2 , representing an increase in demand from demand determinants other than price, causing the equilibrium price to increase from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2. Note that if the supply curve shifts leftward, fromS2 toS1 D2 toD1 .If non-price determinants change both supply and demand, then how the market equilibrium will change will depend on how much the supply changes compared to the demand changes. If the change in supply exceeds the change in demand, then the same analysis applied to shifts in the supply curve while the demand remained constant applies here also. If the change in demand exceeds the change in supply, then the market equilibrium changes in the same direction as when the supply was held constant.
A good example of the economics of supply and demand can be found in how tickets are sold. When promoters of big events want to sell tickets, they price their tickets so that they can sell enough to fill the available seats. However, there are always some people willing to pay more, especially after the tickets have been sold out. Ticket scalpers seek to satisfy the needs of these people by providing tickets at higher prices. Like the big event promoters, ticket scalpers want to be able to sell all that they have — otherwise, they will have unsold tickets that will reduce their profits by the amount paid for the unsold tickets. Although some people consider scalping unethical, and in some places, it is even illegal, the ticket scalpers are simply providing a service to people who really want to see the event but were unable to get tickets for one reason or another. Although the late buyers are paying higher prices, they are willing to pay the higher prices to see the event. If ticket scalpers did not earn a profit, then they would not provide the service. Profit, after all, is the objective of most businesses.
What the ACCC does
What the ACCC can't do
Market power is a business’s ability to insulate itself from competition. A business with market power has more freedom to act without needing to worry how competitors, suppliers or customers will react. For example, it may be able to raise prices or lower quality without having to worry about losing customers. A market can have more than one business with substantial market power. To work out if a business has substantial market power, we might look at:
A business owns the only cement works in a regional town. The next closest cement works is far away, so it’s expensive to have cement brought into town from elsewhere. With no other commercially viable suppliers of cement in the town, the business can raise its prices above competitive levels. The business has substantial market power in the supply of cement in the regional town. It's not illegal for a business to have or use market power. For example, a business with market power may raise its prices above competitive levels. While charging high prices may seem unfair, it's not illegal. Learn more about what is and isn’t allowed when setting prices. A business with substantial market power is also allowed to out-compete other businesses. For example, it can:
Competitive practices that improve efficiency, innovation, product quality or price competitiveness are unlikely to be a misuse of market power. Learn more about the difference between competitive and anti-competitive conduct. It’s illegal for businesses with substantial market power to do anything with the purpose, effect or likely effect of substantially lessening competition. Businesses with substantial market power must not do something which stops other businesses from competing on their merits. The law doesn’t label specific practices as a misuse of market power. However, there are practices that can sometimes be a misuse of market power. Whether any particular example of these practices is a misuse of market power depends on the specific circumstances. Our Guidelines on misuse of market power provide examples of some types of conduct that have greater potential of breaching the law. Refusal to dealBusinesses are generally entitled to choose whether they’ll supply or deal with another business. This includes competitors. Even if a business has substantial market power, they are usually not obligated to deal with other businesses. In some situations, a business with substantial market power that refuses to deal may contravene the law if it limits the ability of others to compete on their merits. Restricting access to an essential inputIn some situations, a business with substantial market power may prevent or restrict a competitor’s access to an essential input. This may breach the law where this conduct has the purpose, effect or likely effect of substantially lessening competition. An ‘essential input’ is a resource that can’t be substituted and is essential for the provision of goods and services. Restricting access to an essential input may prevent competitors from competing with a business on their merits. Predatory pricingBusinesses compete by providing more compelling offers to consumers than their competitors. This often involves businesses undercutting prices offered by rivals. Low pricing almost always benefits consumers and is part of the competitive process. However, in rare circumstances, very low pricing by a business with substantial market power may be predatory. Predatory pricing occurs when a business substantially reduces its prices below its own cost of supply for a sustained period:
Predatory pricing may result in a business losing money in the short to medium term. However, if the practice leads to reduced competition or the potential for competition, the business may be in a position to charge higher prices and maintain or increase its market share in the longer term. While predatory pricing by a business with substantial market power can harm an individual competitor, the test is whether the conduct has the purpose, effect or likely effect of substantially lessening competition in a market. Loyalty rebatesBusinesses are generally free to set their own sales promotions, including rebates. Rebates usually don’t harm competition. In many cases, rebates are an example of the benefits of the competitive process. They give retailers an incentive to promote the supplier’s products and reduce the overall price that customers pay. However, in a small number of situations, a business with substantial market power can substantially lessen competition when they offer rebates. This is most likely to occur where a rebate is conditional on a retailer meeting certain targets. This type of rebate can result in retailers being prevented from purchasing from competing suppliers. It can breach the law if it substantially reduces competition. Unconditional rebates, which reduce the price of an item with no extra conditions placed on the retailer, will likely only raise concerns if the reduced price amounts to predatory pricing. Margin or price squeezingBusinesses are generally entitled to charge different prices to different buyers for the supply of goods or services along the supply chain. However, a business with substantial market power in the supply of a key input can disadvantage its competitors in downstream markets by reducing the margin available to these competitors. It could do this, for example, by charging its competitors an input price that makes it uncommercial for them to sell at a competitive price. As competitors in the downstream market require the input and have limited alternative sources of supply, a margin or price squeeze can prevent equally efficient competitors in the downstream market from competing with the business on their merits. Tying and bundlingBusinesses are generally entitled to supply goods or services as part of a tied or bundled arrangement. ‘Tying’ occurs when a supplier sells one good or service on the condition that the purchaser buys another good or service from the supplier. For example, a printer supplier may sell a printer on condition that the customer also acquires ongoing servicing from the supplier. ‘Bundling’ occurs when a supplier only offers two products as a package or for a lower price if the two products are bought as a package. For example, a mobile phone operator may offer bundles of handsets and mobile phone service plans where the price of the handset and plan is cheaper if consumers buy them together than if they buy each one separately. Tying and bundling are common commercial arrangements which usually don’t harm competition and, in many situations, promote competition by offering consumers more compelling offers. However, in limited circumstances, tying or bundling by a business with substantial market power may contravene the law. This can occur when a business with substantial market power in one market uses a tie or bundle to extend or ‘leverage’ this market power into another market. A business can apply for authorisation for conduct related to market power that is potentially anti-competitive. Authorisation is an exemption process and gives protection from legal action. We assess whether the conduct is likely to substantially lessen competition and, if so, whether it's still in the public interest. Competition and anti-competitive behaviour Exclusive dealing Guidelines on misuse of market power Exemptions Competition and Consumer Act 2010
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Government may place legal limits on prices when it is determined that prices are unfairly
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