Contents
Table of Contents
1. Introduction 1
2. Monopolistic Nature of the Market 1
3. Price Wars 2
4. Conclusion 4
6. References 5
1. Introduction
The oligopoly market is defined by the existence of a less number of sellers in the market, selling products which are close substitutes of each other. Where there exists intense price rivalry in the market. Analysts and researchers have spotted a similar pattern in the Australian food retail market. The Oligopolistic nature of the market is evident from the study.
The paper examines the existence of the Oligopolistic competition in the Australian food retail market and as well examines the impact of the recent price wars strategy followed by the food giants and its impact on the players in the economy.
2. Monopolistic Nature of the Market
The oligopoly market is defined as the presence of a few sellers in the market that sells products which are close substitutes of each other. One firm in the market determines the price and that price is assumed by the as the price charged by the industry since the products sold are close substitutes of each other in the market (Research and Education Association, 2003 Pages 176-178). Oligopolistic market has a distinct product differentiation and often is found selling branded products where the distinction is creating through various advertising methods is very important.
An oligopoly has the features that have been discussed below.
The Australian economy experienced rapid development and growth which eventually led to the growth and expansion of the Australian food retail sector after the 1950’s. The Australian food retail sector has continued to grow and has emerged as the one of the main pillars of the Australian economy. The retail sector posted a profit of 69% in 2003-2004, which is an indicative of a high performance sector. The industry has developed with the emergence of a few players indicative of an oligopoly market.
The Australian retail sector developed with the rapid increase in the demand for food products and the availability of the products for consumption to the consumers. Rapid development of the Australian economy led to the emergence of Woolworth’s and Cole’s first by the 1960’s. During the demand for the discount stores also peaked in the period which lead to the emergence of retailers like Franklins ,Bi lo, Shoey’s as well as other half price stores but these stores were not as successful as Woolworth’s and Cole’s.(www.britzinoz.com accessed on 16/05/2012, Page 1)
Figure 1: Shares of Australian food retailers in 2009 (Source: www.britzinoz.com accessed on 16/5/2012, Page 1)
From the above figure it is evident that the major Australian food retailers like Woolworth’s and Coles share nearly 60% of the market between them. The total revenue posted in 2009 by the industry was $75.7 billion, with the share of Woolworth’s alone being $51.9 billion and Coles nearly $30 billion. This high profit margin is an indicator of the dominance of the two over the sector. The 2 retail giant acquired about 108% of the total market share, which is a clear indicator of almost a duopoly in the sector. The dominance in the sector gives Woolworth’s a certain degree of power at its discretion to rule the Australian food market,
(www.britzinoz.com accessed on 16/05/2012, Page 1 and NARGA report 2010, Pages 35-42)
There has been the existence of the barriers to entry in the Australian food retail industry, with the rise of Cole’s and Woolworth’s by the 1960’s, it also encouraged the marching in of smaller discount stores like, Shoey’s etc. these stores however could not compete with Woolworth’s and Coles and eventually shut down within a few years of operation as they were unable to match the scale and operation of Woolworth’s and Coles operation . Ever since there has been no entry of a major food player in the Australian retail market, identifying the existence of barriers have continued to exist. Despite the globalization and global companies looking for new markets no player has merged in the Australian food retail industry. Thus high cost structure for the entry is evident in the Australian food retail industry. (NARGA report 2010, Pages 35-60).
The sector has proved to be highly profitable over the years experiencing a steady rate of growth. Grocery sector has posted a growth of about 70% in the 2008-2009; this has been due to the performance of Woolworth’s and Cole’s. The Woolworth’s revenue has experienced a constant increase from $47,034 in 2008 to $ 54,142 in 2011 has been the main reason for growth. The sharp increase in the revenues of Woolworth’s has been due to the adoption of projects like ‘Project Refresh’ and ‘Everyday Low prices’ which have enabled the retailer to penetrate the market. The projects have resulted in effective and efficient supply chain management over the years. Massive restructuring activities undertaken by Woolworth’s have resulted in the high performance of the retailer in the past few years. Coles reported revenues of $6.09 billion from their food and liquor department an increase of 4.1% from last year.
(www.investsmart.com.au – accessed on 11/4/2011, WOOLWORTHS LIMITED (WOW) – Company Profile Managed Funds – Superannuation Funds – Managed Investments. N.p., n.d. Web. 11 Apr. 2012. Page 1, www.theaustralian.com.a, accessed on 16/5/2012, Page 1 )
3. Price Wars
A market is an Oligopoly market arrangement when the actors in the market like the firms; practice a certain degree of price competition among them. The price wars affect the profitability of the firm; In an oligopoly the price wars can have a detrimental impact on the firms as it creates deflationary pressures on the business. The adoption of the price war strategy has been confirmed by Woolworth’s and its acceptance with its close competitor Cole. Woolworth’s need to consolidate within the market and adopt a long term growth strategy for the corporation rather than indulge in price wars should lead to distortion in the market.
(Au.ibtimes.com- accessed on 16/05/2012, Page 1)
In 2011 researchers discovered something which were best described as the ‘Milk Wars’ The Milk war posed a huge dilemma for the consumers, as the consumers did have a preference for cheaper price of milk but were reported to be extremely unhappy with the price wars being used as a short term strategy for marketing by the retail giants Woolworth’s and Coles. Woolworth’s, Aldi and Franklins have reported changes in the price to keep in line with the competitive prices of Cole’s. Many have concluded that such price wars and the duopolistic nature of the market threaten the interests of both farmers and consumers. The market structure gives power to the retail giants to exercise powers on the various sectors of the economy particularly farmers and consumers (knowledge.asb.unsw.edu. accessed on 16/05/2012, Page 1).
The Chamberlin Equilibrium current market is equilibrium is shown in the figure below.
Figure 2: Equilibrium in an Oligopolistic Market in this a Duopoly (Source: Chauhan , 2010)
The oligopolistic market is in equilibrium , The above figure represents the AR curve faced by the duopolies ,The point where the corresponding MR curve intersects the marginal curve (MC) the equilibrium in the duopoly is reached at the equilibrium quantity of Qm is achieved at the corresponding equilibrium price of Pm. The figure first represents the equilibrium when duopolies A is in the market, now suppose that a firm B enters the market, thus the corresponding quantity supplied by the firm is Qb and the corresponding price set by the firm is Pb. The price set by firm B is lower than firm A, therefore firm B stands a chance to lose the profit maximization levels by supplying higher quantity at lower price. Therefore, on the other hand the firm B stands to gain consumers by supplying at lower price because applying the simple demand rule. Such an equilibrium condition is called Chamberlin equilibrium (Chauhan , 2010).
The demand rule or the law of demand states that the other things remaining the same or citrus paribus, the quantity demanded increases with a corresponding fall in price. The law of demand describes the relationship between the price and the quantity demanded of a product or a particular service. The law of demand makes the following assumptions, that size of the population remains the same, income levels remain the same and the taste and preferences of the consumer remains the same. There exists a negative relationship between price and quantity demanded at the lower levels of prices the quantity demanded increase. This is represented in the form of a downward sloping demand curve.
Figure 3: Downward sloping Demand Curve (Ayasari, 2010)
Therefore such a situation gives rise the price wars, now the other firm A would also subsequently follow the price war strategy.
The Price war leads to the distortion in the market and hence creates market inefficiency giving rise to a higher dead weight loss than in the case of a perfect competition.
Figure 4: Existence of Distortion in Oligopolistic Competition, No Distortion in the Perfect Competition (Source Ayasari, 2010)
The Perfect competition situation there is no economic inefficiencies; the perfect competition situation represents a market where there are a large number of sellers and the equilibrium price and the Quantity is market determined. In the case of perfect competition the AR and TR curve is the same and the equilibrium is achieved where the MC curve intersects the AR curve. There is no occurrence of economic distortion in the case of the prefect competition.
On the other hand in the case of the Oligopolistic competition , since the price is determined by the firms there is an existence of economic inefficiencies which give rise to distortion and the deadweight loss. The government regulation will not lead to creation of a Pareto efficient situation rather would increase the dead weight losses in the already imperfect market situation.
Pareto efficiency can be defined as the allocation of the resources in such a way that no individual is better or worse off in the market. Existence of Pareto efficient market in a monopoly the results are quite ambiguous. As a oligopoly charges a price that is different from the equilibrium price hence all consumers are not willing to pay such a price. The quantity sold and produced by the economy is at below the socially efficient levels. The dead weight loss in the figure can be defined as the area of the triangle between the demand curves and the marginal costs. This dead weight loss is minimised to some extent in the case when government regulation is introduced. The government regulation tries to regulate the oligopolistic market in such a way that some sort of fair pricing is introduced in the system. The inefficiency in the market is reprinted by the dead weight depicted in the shaded area. The dead weight loss is a result of existence of the market inefficiency caused by existence of the Oligopoly.
The introduction of competition in the market can fairly aim to regulate the prices and introduce economic efficiency and minimise the dead weight loss in the market. The proposal to introduce competition in the market would definitely regulate the prices in the economy to some extent. However the imposing high fixed costs to enter in the market would itself pose as a determent to the competition. As high investment costs accompanied with long gestation periods act as deterrent to the competition. On the other hand the regulation of the market is likely to introduce efficiency in the market and is somewhat a better mechanism to control the monopoly market than relaxing fixed costs rules and regulations that already pose as a deterrent in the economy (Chauhan ,2010)
4. Conclusion
The Australian food retail market is therefore an oligopoly. The market also represents more characteristics of a duopoly and therefore can also be called a duopoly to some extent. The duopolistic nature of the market can represented with the presence of the two giant Woolworth’s and Cole’s and the price competition that exits between the two in products like meat as well as dairy. Despite the presence of economic efficiency and the ability of the market to generate higher economic profits in the short run the market can do the same on the long run. The profit generation ability of the market is evident in the financial performance of the firm over the period of time. The company’s should avoid following the price wars strategy as it results in the economic distortion and the high economic inefficiencies. The inefficiencies can be minimised if the players work in coordination with each other to exploit the conditions of the market to achieve higher levels of profits and achieve maximum profit maximization and economic efficiencies. There is should be the existence of transparency in the operations of the company’s and ethical business practices should be undertaken by both Woolworth’s and Cole’s. The role of the government is limited in such a market but the can help in maintaining some sort of efficiency in the market, the government can ensure transparency in the market by adopting appropriate policy measures.
6. References
• • Hirschey, Mark. Managerial economics:. 11 th ed. Mason, OH: Thomson/South Western, 2006. Pages 501-519,Print.
• • NARGA, 2010. “The challenge to feed a growing nation.” NARGA report 2010 1.1 (2010): Pages 35-42. www.narga.net.au. Web. 16 May. 2012.
• “Supermarket Market Share in UK and Australia « Britz in Oz for British Expats.” Information for British Expats in Australia. N.p., n.d. Web. 16 May. 2012. <http://www.britzinoz.com/uk-australia/comparisons/supermarket-market-share-in-uk-and-australia>.
• “Milking the Market: What’s Behind the Coles-Woolworths Price War? – Knowledge@Australian School of Business.” Home – Knowledge@Australian School of Business. N.p., n.d. Web. 16 May. 2012. <http://knowledge.asb.unsw.edu.au/article.cfm?articleid=1373>.
• “WOOLWORTHS LIMITED (WOW) – Company Profile.” Managed Funds – Superannuation Funds – Managed Investments. N.p., n.d. Web. 16 May. 2012. <http://www.investsmart.com.au/shares/asx/WOOLWORTHS-LIMITED-WOW.asp>.
• Hernandez, Vittorio. “Woolworths Suffers 17% Dip in Net Profit Due to Dick Smith Restructuring – International Business Times.” IBTIMES.com: International Business News, Financial News, Market News, Politics, Forex, Commodities – International Business Times. N.p., n.d. Web. 16 May. 2012. <http://au.ibtimes.com/articles/307023/20120229/woolworths-suffers-17-1-dip-net-profit.htm>.
• “The Australian.” The Australian. N.p., n.d. Web. 16 May. 2012. <http://www.theaustralian.com.au/business/companies/coles-dents-wow-factor-as-sales-trump-woolworths-result/story-fn91v9q3-1226336903615>.
• Chauhan, S. P. S.. Microeconomics: an advanced treatise. Eastern economy ed. New Delhi: PHI Learning, 2009. Print.
• Aryasari, A. Managerial Economics And Financial Analysis. Delhi: Tata Mc graw Hill, 2007. Print
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