Service Oligopolies and Australia’s Economy-Wide Performance

The retreat from public ownership of service firms and industries has left behind numerous private monopolies and oligopolies supervised by regulatory agencies. Services industries in government and private ownership generate two-thirds of Australia’s value added, while the newly privatised ones, utilities, telecommunications, finance and transport, supply a fifth. This study offers an economy-wide approach that represents monopoly and oligopoly behaviour explicitly. It examines the implications of oligopoly rents for factor markets and the real exchange rate, the extent of sectoral interactions and the potential economy wide gains from tighter price cap regulation. The results confirm that the level of non-linear interaction between oligopoly sectors justifies an economy-wide approach. Moreover, pricing surveillance and price cap regulation are shown to play very significant roles in sustaining economic efficiency, helping avoid costs from oligopoly distortions that, in the absence of regulation, could amount to a third of Australia’s GDP.