Changes in the Market for Groceries - Assignment Example

Running header: Economics Economics Course Name Professor’s Name Institutional Affiliation City and State Where Institution is Located Date The economic benefits and losses brought about by changes in the market for groceries over the last 15 years and the future role for market forces and government intervention in the market Introduction Coles and Woolworths have together long accounted for nearly 80% of the retail grocery sector in Australia, but these market shares have gradually eroded from 2001 onwards, with a new entrant Aldi, now commanding a market share of 11%, largely gained at the expense of Coles’ and Woolworth’s. Although the two supermarkets still continue to dominate the market with a 68.8 percent control of the market, the market has in no doubt become more competitive and innovative and this has had its benefits as well as losses for various players. This essay closely looks at the economic benefits and losses brought about by changes in the market for groceries over the last 15 years and the future role for market forces and government intervention in the market. The type of market structure that underpinned the retail grocery market in Australia before entry of Aldi Hansen & Hoenen (2016) describe an oligopoly market as one where only two markets dominate the market. This is to be differentiated from a duopoly which although it is a type of oligopoly, it is a market where only two firms exist. Thus, though Coles and Woolworths have been termed as a duopoly, they are actually an oligopoly. Before the entry of Aldi, Coles and Woolworth’s controlled a market share of nearly 80% which is a very large market share. However, there were other smaller firms that controlled the remaining 20% share of the market. As such, the market structure then was an oligopoly (Samuelson and Marks, 2003). However, this has changed with the entry of Aldi making the market more competitive and the two supermarkets now control a lesser market share estimated at 68.8%. The source of market power for Coles and Woolworths Noel (2016) views barriers to entry as the source of market power in an oligopoly market. This is the type of market where Coles and Woolworths used to exist. The retailers’ main source of market power was barriers to entry which made it difficult to enter the market. This arose from the fact that the two firms were very large and established and hence they were able to take advantage of economies of scale. Thus, they were able to price their products in such a way that they restricted competition in the market. They have also been accused of harassing their suppliers so that they supply their products at very low prices and hence enable the two retailers to sell their products at distortionary prices making it hard for the smaller competitors to realize any profit or even meet their production costs thus making it hard for them to grow and expand (Nunzio, 2016). A good example is the two supermarkets cooperating to sell milk at $1. Such behaviors make it hard for the smaller firms to grow and enlarge their market share and hence the two retailers have remained the dominant players in the market. Another source of market power for the two retailers is the high cost of entry into the market. Though there are not many legal barriers of entering into the market, it is worth noting that in order to have a significant share of the market in Australia, one needs a huge capital outlay. Woolworth’s and Coles are very big firms which are able to afford the capital to expand each year by opening hundreds of branches. This is not the case for the smaller supermarkets who cannot be able to expand at the same rate. This has ensured that these two players continue to be the dominant players in the market. This can be seen due to the fact that the entry of Aldi has greatly altered their market share (Knox, 2016). This is because Aldi has the required capital to compete with the two giants. Another source of power for the two retailers is customer loyalty. Owing to their having existed as the dominant players for a long time and their ability to do aggressive marketing and push the costs to the suppliers, the supermarkets have been able to offer their products to customers at very competitive prices. This also results from the fact that the supermarkets’ parent companies such as West farmers control the production of most of the products that such a supermarket as Coles sell. Thus, the supermarkets are able to sell their products at very competitive prices. Thus, they have gained farmers loyalty which makes it hard for other players to capture any meaningful market share. Main policy issues Foster and McChesney view the role of government in an oligopoly market as that of improving efficiency. Thus the main policy issue concerning government regulators such as the ACCC concerned market power abuse and unfair pricing. As stated above, the dominant firms are likely to abuse their market power through such acts as forcing suppliers to supply their products at very low prices and hence they were guilty of unconscionable conduct. This would enable them sell their products at very low prices to the detriment of the smaller firms (Australiancompetitionlaw.org, 2016). Thus, they used their dominant position to ensure that no competitor would rise to their level. Thus, the regulators’ main policy concern would be ensuring that the two retailers do not abuse their market power while they priced their products reasonably. This would prevent them from either exploiting the suppliers or exploiting their suppliers owing to their dominant position. This is because both consumers and suppliers would not have a choice as to where to buy or sell their products since the two markets were the dominant ones. The grocery market is now more efficient Ulrich and Smuda (2015) state that for consumer to obtain full utility from a firms offerings, then the market needs to both allocatively and productively efficient. Before the entry of Aldi, the two supermarkets were the ones determining the prevailing prices in the market as well as what to offer to customers since customers did not have much of a choice. This means that the supermarkets offerings did not represent consumer preferences and the marginal benefit to the consumers were not equal to the marginal cost of the offerings. However, with the entry of Aldi, customers have now started having a choice. The competition is increasing and hence each retailer is now more sensitive to consumers’ preferences (economicsonline.co.uk, 2016). Although it cannot be concluded that the market has become allocatively efficient, the entry of Aldi is a great step towards getting there since efficiency has increased. The market is also now increasingly productively efficient. With the entry of Aldi, cases of supplier exploitation will decline as the suppliers have increased choices of where to supply. It can thus be concluded that the entry of Aldi has brought about increased efficiency since the retailers are now more increasingly sensitive to consumers preferences as well as the welfare of suppliers. It means that consumers’ preferences are now increasingly being met owing to the increasing competition brought about by the entry of Aldi into the Australian grocery market. This is because the industry has now increasingly moved from being an oligopoly to being a more competitive market. Beneficiaries and losers As stated above, the market has become more efficient since the entry of Aldi. This means that consumer preferences are increasingly being met owing to increasing competition and hence the need to attract as many customers as possible. As such, it is clear that customers have benefited the most with the entry of Aldi since they now have a wider choice while the quality of offerings has increased. The suppliers have also benefited with the entry of Aldi. This is because they now have a wider market for their produce and hence Cole and Woolworths now have to be more careful in their dealing with suppliers rest they supply their rivals (news.com.au, 2016). It is also clear that the government has benefited from increased employment opportunities and revenue as well. However, Cole and Woolworth’s have been the greatest losers as a result of Aldi’s entry into the market. This is because they now have to be more careful in their dealing with suppliers and customers rest they lose them to rivals. Customers preferences now have to be met while suppliers have to be given reasonable terms. The entry of Aldi has seen the two retailers lose their market share by close to 12% to 68.8%. This is the market that has been gained by Aldi. Thus, it can be concluded that Coles and Woolworth’s are the losers as a result of Aldi entering the market. Conclusion This essay has looked at the impact of Aldi’s entry into Australia’s grocery market. The sources of market power for the retailers have been discussed. In conclusion, it is clear that Aldi’s entry into the industry has resulted in more efficiency in the market and hence the customers are now more satisfied. However, it has been observed that while the customers have benefited from the increased efficiency in the market, Coles and Woolworth’s have lost as a result of the increased competition. References: Ferrer, E2013, Oligopsony-Oligopoly: The perfect imperfect competition, International Conference on Applied Economics, Procedia Economics and Finance, vol.5, pp. 269-278. Nunzio, J2016, Market power in the Australian food system, Retrieved on 10th October 2016, from; http://www.futuredirections.org.au/publication/market-power-in-the-australian-food- system/ Knox, M2016, Supermarket monsters: Coles, Woolworths and the price we pay for their domination, Retrieved on 10th October 2016, from; https://www.themonthly.com.au/issue/2014/august/1406815200/malcolm- knox/supermarket-monsters Samuelson, W&, Marks, S2003, Managerial economics, New York, John Willey & Sons. Australiancompetitionlaw.org, 2016, Grocery inquiry 2008, Retrieved on 10th October 2016, from; http://www.australiancompetitionlaw.org/reports/2008grocery.html economicsonline.co.uk, 2016, The efficiency of firms, Retrieved on 10th October 2016, from; http://www.economicsonline.co.uk/Business_economics/Efficiency.html news.com.au, 2016, Why do Australians love Aldi? The secrets to the supermarket’s phenomenal success? Retrieved on 10th October 2016, from; http://www.news.com.au/lifestyle/food/why-do-australians-love-aldi-the-secrets-to-the- supermarkets-phenomenal-success/news-story/fb4c5e30228f5f23b720f7b0caee3018 Ulrich, L&, Smuda, F2015, Estimating consumer damages in cartel cases, Journal of Competition Law and Economics, vol. 11, no. 4, pp. 955-973. Noel, M2016, Pricing strategies and litigation risks: An economic analysis of the downstream petroleum industry, Journal of Competition Law and Economics, vol. 12, no. 2, pp. 287- 311. Bellamy, J&, McChesney, 2011, Monopoly and competition in twenty first century capitalism, vol, 62, no. 11, pp. 62-75. Read More