Monopoly in Decision-Making by the Duopoly Stores of Coles and Woolworths - Case Study Example

Table of Contents 1.0.Introduction 1 2.0.Main issues 1 2.1.Monopoly in decision making by the Duopoly Supermarkets 1 2.2.Decrease in milk supply in Western Australia 2 2.3.Competition in the market 2 3.0.Impact on Key stakeholders 3 3.1.Impacts on the suppliers/Milk processors 3 3.2.Impacts on the dairy farmers 4 3.3.Impacts on the consumers 4 4.0.Impacts on the retailers and supermarkets 4 5.0.Economic Theories 5 5.1.Law of Demand 5 5.2.Law of supply 5 5.3.Market structure-Duopoly 6 6.0.Solutions 7 6.1.Increasing the prices of other goods 7 6.2.Government strategy 7 6.3.Giving charity from excess profits 7 7.0.References 7 1.0. Introduction Woolworths and Coles are the two largest grocery stores in Australia. The two chain stores form a duopoly of supermarkets with approximately 80% share of the Australian market. Since the establishment of Woolworths in 1924 it has given birth to more branches across Australia and claimed cheapest prices in comparison to many stores (Coles Media Release, 2012). Coles and Woolworths had established ground in as a household name in New Zealand and Australia. As a result, consumer interest has substantially expanded hence claiming more money back. In particular, Coles has established about 741 stores with close to 100,000 employees. Some of the services offered by Coles include smart buy, mid-price line, green choice, Coles finest and mix-clothing. Conversely, Woolworths also has four levels of generic label products; Woolworths home brand, fresh, select and macro wholesale market. 2.0. Main issues 2.1. Monopoly in decision making by the Duopoly Supermarkets The duopoly stores of Coles and Woolworths own approximately 80% of the total market share in Australia thus can easily influence the consumers purchasing and supply behaviour (Coles Media Release, 2012). They have reduced the price of milk without considering its effects in the market both to the competitors and suppliers. The processors of milk who pose as the middlemen between the dairy farmers and supermarkets are overseas-owned hence can misuse their powers to reduce the price paid to the farmers as well as the selling price to the supermarkets. Moreover, farmers are also in control of the unprocessed milk hence increased the gate prices. 2.2. Decrease in milk supply in Western Australia The reduction in prices of milk and other related products by the Coles and Woolworths has drastically reduced the supply of unprocessed milk by the dairy farmers to the market. The dairy farmers are at a state of reconsidering their stance on whether to continue supplying milk. As result of the price reduction, many farmers have started to change from dairy to beef production since the meat price is comparably profitable (Dollery, 2012). As a result of the farmers increasing the gate prices for their milk, the supermarkets will be forced to increase their prices as well hence the demand would reduce. Consequently, the supply will also be reduced since there are few customers who would be willing to buy from such stores. Instead, majority of the customers would resort to buying from the farmers directly or the small stores. 2.3. Competition in the market The two grocery stores lowered the prices of milk to nearly $1 per litre with an aim of attracting customers. Coles managed to reduce the price of milk for come home brands lines using its customer’s attraction strategy of “down, down, prices are down”. According to Woolworths regrets milk price war (2011), this strategy was meant to a marketing tactic meant to attract more customers to Coles particularly those who like shopping in the duopoly stores. The milk war has compelled many competitors to introduce other discounting programs to counteract the two supermarkets with a view to level the market playground. The reduction in price of milk by the two supermarkets has tightened the market for other supermarkets and stores who can manage such prices as result of poor returns. Majority of the dairy farmers are opposed to the down-down campaign gimmick which has since reduced the milk price since this has led to increase in the cost for producing milk and other processed products from milk. Additionally, supplying milk at low prices would mean customers are not able to earn much hence reduced revenue. In spite of the low milk prices to the customers, dairy farmers have also been forced to sell particularly to the store at reduced profits which can still allow them to make profits (Dairy Australia, 2012). The competitive market worsens the situation since other stores also continue lowering the prices to match the cut throat competition that exist in the Australian milk market. As a result of other competitive stores also introducing their own discounting programs the duopoly supermarkets have stretched to an extent of reducing the prices of other staples such as tea, bread and toilet papers in a bid to continue attracting more customers and outdo the other stores. Supermarkets including ALDI and Franklins have been in favour of the price cuts by asserting that the cuts are not anti-competitive and are meant to attract customers but not to drive the small stores out of the market. 3.0. Impact on Key stakeholders 3.1. Impacts on the suppliers/Milk processors These are the people who take unprocessed milk from the dairy farmers, process it to a finished product and finally supplies to the supermarkets and other stores. The prices imposed by the supermarkets due to their influence in the market have been passed on to the consumers who sometimes pay higher for milk. According to (Dollery, 2012), the milk suppliers also stand to gain from this price cuts since the contract prices have been increased by the supermarkets if the gate prices are increased. 3.2. Impacts on the dairy farmers The reduced prices have literally caused dissatisfaction among the farmers. This implies that the farmers make meagre profits on the milk they sell out to the processes while the cost of dairy production has since increased substantially. In addition, the dairy farmers are on the receiving end since the cost is always passed to them. 3.3. Impacts on the consumers Consumers are the major beneficiaries of the down-down campaign which reduced the prices of milk and other related products. This price reduction has allowed consumers to save a lot on basic goods from the price cuts. As a result, they are able to buy more so as to meet their families’ needs. 4.0. Impacts on the retailers and supermarkets Supermarkets have beatable milk prices to the customers in comparison to all other stores in Australia. As a result they are suffering by receiving much less milk supply by exposing the farmers on the negative receiving end. The majority of the retailers and supermarkets have been compelled by the duopoly supermarkets to engage in price bargaining hence becoming prone to the supply problem (Australian Food News, 2011). 5.0. Economic Theories 5.1. Law of Demand It states that provided all factors are constant, when the prices of commodities are high, the demand will fall. This implies that the price of goods and services and demand are negatively related. In this case study, lowering prices by the supermarkets led to increase in demand. If prices of a firm are increased from P1 to P2, the demand curve shifts from D1 to D2 which decrease the quantity demanded. In the case study, increase in price of milk decreased the customers’ demand (William et al., 2000). 5.2. Law of supply It states that provided all other factors are constant, when the prices of goods and services are higher producers will increase their supply. This implies that prices of goods and services and supply are positively related. In the milk war case study, lowering prices of milk by the supermarket led to decrease in supply by the dairy farmers. Increase in price of milk from P1 to P2 also shifts the supply curve from S2 to S1.This consequently increases the quantity supplied from Q1to Q2 and vice versa. In the case study, decreasing the price led to decrease in supply. 5.3. Market structure-Duopoly Cournot Duopoly focuses on the output level of firms which do not cooperate but produce homogeneous products. In Cournot Duopoly the firms are assumed to be producing the same products. Bertrand Duopoly is concerned with the interactions of firms competing on the best price. The two firms do not cooperate when setting maximising profits prices in regards to what other firms charge. When the price set by firm 2(P2) is less than marginal cost (MC), then firm 1 price equals the marginal cost. Alternatively, when firm 2 prices above monopoly price (PM), then firm 1 price is at monopoly level (Hal, 2006). 6.0. Solutions 6.1. Increasing the prices of other goods In an attempt to lower prices in order to attract more customers, the interests of both the customers and suppliers should be protected as well. In an effort to boost the morale of customers the duopoly supermarkets should also reduce the prices of other goods. 6.2. Government strategy As a customer protection sole agency, the Australian government should introduce price protection to ensure that prices are not exaggerated by the supermarkets and other stores (William et al., 2000). To reduce monopoly the Australian Competition and Consumer Commission (ACCC) has tried to reduce the Woolworths monopoly. 6.3. Giving charity from excess profits Majority of supermarkets has resorted to helping the less fortunate by giving back to the society. This has been possible during calamities such as floods, landslides, drought and earthquakes. 7.0. References Australian Food News (2011). 'Pauls milk donates $750,000 in profits to floods', 25 March. Coles Media Release (2012) 'Coles to keep milk prices down for Aussie families', 25 January. Dairy Australia (2012) 'Milk price', September, viewed 6 December 2013 Dollery, R. (2012) 'Milk price war driving dairy farmers out', 14 March. Eckersley, N. (2011) 'Coles leads slash in milk prices; farmers fear', 27 January. Hal, R. (2006).Intermediate Microeconomics: A Modern Approach (7th Edition), W.Norton and Company press. William, L and Gregory, F (2000).Principles of Money, Banking and Financial Markets (10th Edition). Addison-Wesley. Wilson, N. (2012) 'Woolies and Coles just too powerful, says Coopers Brewery boss', Herald Sun, 28 March. Woolworths regrets milk price war (2011). Radio program, ABC Radio, Sydney, 28 February. Read More