Monopoly, Monopolistic Competition, Oligopoly, and Pure Competition - Case Study Example

Introduction The conventional economic analysis identifies four fundamental types of market structures namely monopoly, monopolistic competition, perfect competition, and oligopoly. This paper aims to demonstrate the characteristics of an oligopoly by exploring the grocery market, which is a market in which Woolworth Limited sells some of its products line. Overview of an oligopoly An oligopoly is a market structure in which few businesses or sellers dominate an industry or rather a market. Most often, and since only a handful of sellers exist, each seller probably knows about the action of their competitors. Furthermore, the actions of any one single firm are likely to influence the actions of the other companies. This necessitates oligopolists to consider the likely reactions of other key participants in the market during their strategic planning. Woolworth Limited and an Woolworth Limited is one of the major companies in Australia. The firm has invested hugely in retail chains, which include bottle shops, hotels, petrol stations, consumer electronics, general merchandise and convenience stores (Burch & Lawrence 2007, p.160). Furthermore, it is the largest supermarket in whole of Australia (Burch & Lawrence 2007, p.160; Freeman 2003) in terms of market capitalization and revenues. The company began organic or rather grocery retailing in the beginning of 1990s with limited market for grocery but has in the recent increased its sales and market share considerably to become the largest grocery retailer (Symons 2007, p. 212). The supermarket stocks more than 200 varieties of grocery products, including meat and fresh produce (Burch & Lawrence 2007, p.160). Although the markets for some of its other products are oligopolistic (Burch & Lawrence 2007, p.161), this study is focused on the market for its grocery products, or rather Australia’s grocery market. The oligopolistic grocery market The market in which the Australian company offers its grocery products is an oligopoly. In an oligopoly, a few sellers control a large portion of the market share; they receive a very high percent of the total sales revenue (Council of Australian Food Technology Associations 2007; Perloff 2008; Freeman 2003; MacKenzie 1989). This scenario is characteristic of Australia’s grocery market. The market is dominated by only two retailers: Woolworths Limited and Coles Group. In fact, the grocery retail industry is a duopoly because only two firms control the market. It is worth to note, nonetheless, that a duopoly is also an oligopoly. Meyers (2010) and Young (2007) have concurred that the grocery market is served mainly by the two retailers. The seller concentration ratio, which economists use to gauge whether a market is oligopolistic, is approximately 80 (%) percent; that is, the four largest grocery stores in Australia – Woolworths, Coles Group, and Franklin’s and Davids constitute the 80% of the total sales in this market (Carson 2007; Dixon 2002, p.112; Symons 2007, p.211-212). Carson (2007) points out that Coles Group has controls about 35 (%) percent of the Australia’s liquor and grocery market, while Woolworths Limited controls about 40 (%) percent. This shows that about more than 70% percentage is controlled by the two supermarkets; the other two grocery stores – Franklin’s and Davids controls a very small percentage. Products differentiation: advertising and marketing Typical with oligopolies, advertising and marketing forms an important aspect in the grocery retail market in Australia. Since pricing strategies are not solely reliable in driving the market into a certain direction, marketing and advertising are used to attract more customers. It is evident that both Woolworth Limited and Coles Group have put a great emphasis on marketing and advertisement, including branding of their products. The two leading retailers in Australia, Coles Group and Woolworth Limited spend huge amount of money on advertisement (Meyers 2010; MacKenzie 1989). Young (2003) has listed the two retailers among the biggest spenders in commercial advertising within Australia. These companies have spent as much as one percent of their sales revenue of advertising alone (Ramaseshan 1990). In 2001, Coles Group, which was then known as Coles-Myer and is the biggest rival to Woolworth Limited, spent a total of about $30 million in advertisement to make it the second highest spender in advertisement in Australia (Young 2003). Woolworths’ expenditure on advertisement is close to that of Coles-Myer (Meyers 2010; Young 2003). Indeed, the companies are in a tight race of marketing campaigns and promotions that seek to show their products as of most value. Meyers (2010) and Burrow (2007) agree that both Woolworth Limited and Coles Group are relying largely on marketing promotions and advertisement to bring customers on board. This tight race in marketing and advertisement campaigns can be a good illustration of the oligopolistic nature of the Australia’s grocery market. Firms’ interdependence The market in which Woolworths sells its grocery product can be described as an oligopoly on the aspect of the interdependence between the major players. As stated earlier, an oligopoly market structure has only a few sellers or suppliers such that one action or decision of one firm affects the actions and decision of another. Furthermore, when companies are developing their strategic plans in an oligopoly market they often strive to known and understand the strategies of their competitors in order to position themselves competitively (Miller & Antler 1985; Perloff 2008). These phenomenons are apparent with Woolworth and its competing rival Coles Groups. For instance, the recently introduced “Rollback program” that allows Woolworths’ customer to buy it offerings at lower prices triggered Coles Group to introduce the “price rewind program” to counter Woolworths’ move (Meyers 2010). With Woolworth’s Rollback program the prices of certain commodities that the consumers buy more frequently are reduced to their originally lower prices (Meyers 2010). Similarly, Coles Group program allows customer to purchase certain items at earlier lower prices when the items are bought frequently. Burrow (2007) acknowledges that Coles Group price rewind program was a move meant to counter Woolworth Limited rollback concept. Ideally, when “two enterprises pick individually‐profit maximizing prices and then produce to meet demand” in a market where the two enterprises compete on price, then they are likely to lower their prices to seize a market “as long as the revenue from selling one more unit of the good exceed the marginal cost of producing one more unit” (Vives 2001) The interdependence between these two firms is also seen in their private branding strategy. The two companies have strived to maintain customer loyalty through use of private labels on particular items. Miranda and Joshi (2003) have concurred that consumer can base their loyalty to a store on its offering of specific brands that are unique to it since “private labels are exclusive to a store.” In addition, Meyers (2010) has identified that both Woolworth Limited and Coles Group are increasingly building their private brands; in this respect, the two supermarket chains have a market of 75% in Australia. These private brands are associated with high-quality and Australian authenticity (Miranda and Joshi 2003). Burch and Lawrence (2007, p.161) reveal that Woolworths’ range of grocery products are branded as well as indentified under the label ‘Natura’. Close substitutes and prices sensitivity In an oligopolistic market, firms sell similar products that are close substitutes such that consumers are highly sensitive to prices (Vives 2001, p. 132). In the same way, sellers in Australia’s grocery market provide goods that are close substitutes. For instance, both Woolworths and Coles Group sell organic products that are basically the same, but that are mainly differentiated through branding and various marketing efforts. In addition, the grocery market in Australia is highly sensitive to prices (Brown 1990; Freeman 2003; Meyers 2010). Meyers (2010) has also noted that Woolworths and Coles Group are keen to the price sensitivity in Australia’s grocery market. The two supermarkets have often emphasized on low prices with Woolworth using the slogan, “the fresh food people”, while Coles Group use the slogan, “something better every day” (Meyers, 2010). It is worth to note that Woolworth Limited has also used the skimming pricing strategy where the entry prices of its products are higher than those of its competitors, but later reduce prices drastically (Botha, Fairer-Wessels and Lubbe, 2006, P.68). The supermarket has used high price strategy to highlight its focus on quality standards (Botha, Fairer-Wessels and Lubbe 2006, P. 68). However, Woolworths has maintained low prices for its grocery products (Meyers 2010). In fact, the supermarket has sometimes sold some of its products at a very low and/or zero profit margins such that smaller sellers have been driven out of the market (Symons 2007, p. 211). These low prices often act as barriers to smaller firms. Barriers to entry and exit There are a number of barriers to entry into an oligopolistic market that characterise Australia’s grocery market. These include economies of scale, high capital requirements, patents, product differentiation, availability of distribution channels, government control, and cost concerns such as cost of raw materials and a unique location (Vives 2001; Perloff 2008). Brown (1990) Freeman (2003) and Symons (2007) have concurred that actions by the two leading grocery retailer in Australia are hindrance for small scale businesses to capture the country’s grocery market. For instance, the actions by Woolworths and Coles Group to keep low prices for its products and sometimes selling at very low profit margins have had debilitating consequences to some smaller entries (Symons 2007, p. 211). Young (2003) has also recognized that huge capital requirements, distribution channels and economies of scale as some of the aspects that characterise Australia’s grocer market. It has also been highlighted earlier that the two major retailers in the grocery market have emphasized on product differentiation, which in itself requires capital investment. Each of the two giant retailers has also established extensive distribution channels in the whole of Australia, which is a challenge to entrants with low capital. Furthermore, Woolworths and Coles Group are capable of dictating to their suppliers what they want and have often forced suppliers to reduce their prices (Freeman 2003). This has given them an advantage over smaller firms that cannot buy products in large quantities. In addition, the action has forced some small scale suppliers out of business (Council of Australian Food Technology Associations 2007) because they lack the capacity to supply at the prices dictated. It worth to note that the huge investments that is required to serve this grocery market is also a barrier to exits. It is common knowledge that both Woolworth and Coles group would be reluctant to relinquish their huge investment even in hard economic times. Conclusion This paper has described oligopoly by exploring the market in Woolworth Limited sells one line of its retail products, that is, Australia’s grocery market. It reveals that the market is an oligopoly given that it has a very high seller concentration ration so that only a few sellers control the market; firms are interdependent on each other; firms use branding and advertisement in their efforts to create product differentiation; there are close substitutes and price sensitivity as well as increased barriers to entry and exit. Reference list Botha , M., Fairer-Wessels, F. & Lubbe, B. 2006. Tourism entrepreneurs. Juta and Company Ltd, Brown¸ L. 1990. Competitive marketing strategy: developing, maintaining and defending competitive position. Nelson, Canada. Burch, D. & Lawrence, G. 2007. 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