An Oligopoly: the Australia Grocery Market - Essay Example

An Oligopoly: The Australia Grocery Market Executive summary A market is a place where buyers and sellers meet to get the best possible deals and subsequent prices, for goods bought and sold. In the context of the twenty first century, we can say that there two marketplaces available for the buyer and seller to operate. The first one is a physical marketplace, where the buyer and the seller can meet each other face to face. The second type is the virtual marketplace, where trade and commerce occurs through the Internet, and the buyer need not even move out of his house. One very essential feature of a stable market economy is the presence of competition, where a number of key players operate in the same marketing sector, offering the consumers a large variety of choices. Another very important feature of a successful economic structure is a decentralised market, where the government’s role is to regulate the quality and safety of the products offered, and also to monitor the behaviour of the business firms in respect to curbing various malpractices like undue price rise, or the manipulation of prices to gain the maximum profits. Market structure of a country is founded on the number of consumers and sellers that are available there, and the market price is related to the negotiating power of these consumers and the sellers in determining a price for the goods bought. According to the economists, there are four major types of market structures that are seen worldwide. These are: markets which show perfect competition e.g. an auction market, free software market, and the stock exchange; a market that shows monopolistic competition e.g. markets for toothpastes, soaps, shampoos and other similar products; oligopolistic market with few players within the same retail sector e.g., the grocery market in Australia; and the monopoly market e.g., The British East India Company and the De Beers diamond mining firm. In the present scenario, when globalisation has elevated the scope for competitions in the worldwide marketing arena to an unprecedented level, we are seeing more of government regulated oligopolistic markets within the industrialised nations, where only a handful of firms are being given licenses to operate in a particular sector. The Australian grocery market is a good example of an oligopolistic market, where there are only four major players, which consist of Woolworths, Coles, Davids, and Franklins. This study will examine the Australian oligopolistic market, with a focus on how it functions, its implications and the future trends. Introduction Oligopoly, in economics, refers to a market scenario where there are a small number of firms, generally less than ten, who are dominating a particular retail sector. The term is derived from two Greek words, ‘oligoi’ meaning few; and ‘polein’ which to means to sell. This market, owing to the small number of participating firms (oligopolists), makes it a highly competitive place. Here the firms sell goods of the same type and offer services that are remarkably similar to each other, thus being an easy substitution for each other, with a price sensitive economic set-up. Since the numbers of oligopolists are also less, this makes each firm aware of what its competitor is doing. The marketing strategy of each oligopolist, closely monitors the decisions of the other participating firms, and often their marketing plans are in direct response to the plans of their rival firms. A good example of the oligopolist market is the Australian grocery market. The four largest firms operating here are the Woolworths, Coles, Davids, and Franklins, of which Woolworths and Coles together, control the major part (nearly 80%) of the Australian grocery market, and nearly 50% of the fresh products market in Australia (Australian Competition and Consumer Commission, 2008). This article will explore the concept of oligopolist market, and will examine both its advantages and disadvantages. It will locate the type of game theory that operates within the Australian grocery market, and will analyze this theory in details. It will also examine the governmental policies that regulate this oligopolistic market and sees that the desired end is archived. At the end there will be recommendations on how the current business strategies of the major players within the Australian Grocery Market might be improved upon to produce even better results. Body of report As we start this research paper the first thing that must be made clear is the concept of marketing. In this context, the basic question would naturally be: what is marketing? Marketing can be best defined as “the process of building lasting relationships through planning, executing and controlling the conception, pricing, promotion and distribution of ideas, goods and services to create mutual exchange that satisfy individual and organisational needs and objectives” (Carter, 1988, 14). So, marketing is a tool which a corporation must use strategically in order to communicate with the customers, if it wishes to survive in the highly competitive market. Each business firm must necessarily have a well organised and wisely chalked out marketing strategy, whatever maybe the market type he operates in. “[A] marketing strategy is “the management’s game plan for growing the business, staking out a market position, attracting and pleasing customers, competing successfully, conducting operations, and achieving targeted objectives” (Thompson, Strickland & Gamble, 3, 2005). An important observation is made here, which tells us that the consumers form the core of all market types and of all marketing strategies. It is what Peter Drucker had envisioned more than 50 years back when he said “there is only one valid definition of business purpose: to create a customer. It is the customer who determines what a business is” (Drucker, 2006, 61). So comprehending the fact that the consumer is the most important aspect of any marketing strategy that a business firm may employ, we will now delve into the specialised marketing type that is known as the oligopolist market. General details of an oligopolist market: An oligopolist market, as we have seen earlier, is a common market form dominated by only a few players. Markets like that of steel, aircraft manufacturing, tobacco industry, generally form examples of the oligopolist market. “Economists define oligopolist as a market structure characterised by 1) few sellers, 2) either a homogenous or a differentiated product, and 3) difficult market entry” (Tucker, 178, 2008). Antoine Cournet defined this market to be “characterised by a few suppliers producing a heavily differentiated good (differentiated through advertising and marketing)” (Cournet, cited in Hussain, 207, 2010). The oligopolic market can be characterised by certain distinct features. These are 1. The participants in this market are few in number, though generally consisting of companies with substantial market shares, thus having a strong market control. This type of market also shows strong group behaviour, where one participant keeps a hawk’s eye on the rival firm’s business activities, and often its own marketing strategies are also a direct response to what the rival firm does to sell goods. 2. Oligopolistic markets produce either similar products or goods that are differentiated. Markets that produce similar goods belong to those tat are involved in producing raw materials like, steel or aluminium. Markets that produce differentiated goods consist of a wide range of consumer items. The Australian grocery market belongs to the second category. 3. Oligopolistic markets are difficult to enter, as the business firms already operating there create certain barriers to deter entry by other new firms. These barriers are of various kinds, like government franchisees, having a patent, creating a strong brand name, amongst many more. 4. Good deal of money is spent on publicity to attract consumers, both existent and potential, in the form of television, print, and other types of advertisements, by the business firms operating within this market type. The oligopolist market type operates under imperfect conditions in the demand graph (fig: 1), where owing to tough competitions amongst the small number of firms formed by the ‘sticky upward demand curve’, the corporations use ‘non-price competition’ so as to increase sales and market revenues. Fig: 1: Kinked Demand curve which is similar to traditional demand curve, (X-axis represents quality, while the Y-axis shows price). Here E is the kink point. Above this point the prices remain unchanged, owing the elastic demands. Below the kink point the inelastic demands result owing to the fact that all the involved corporations are ready to decrease their prices (price war). So as per theory (no conclusive evidence as such), the oligopolist market should operate at the point E or the kink point (Source: Hussain, 208, 2010). Keeping these features in mind, we will now examine the Australian grocery market from close quarters. As per the reports of the Australian Food and Grocery Council, “in 2006-07, the turnover of Australia’s grocery manufacturing sector was $14 billion and was the primary purpose for almost 2000 businesses” (Australian Food and Grocery Council, 11, 2009). Australia which has the largest number of grocery retailers in the world, however, has only two leading firms in the grocery business. The combination of Woolworths and Coles earn nearly 80% of the entire grocery business revenue shares, thus making them the controller, with the maximum power within this market. Such an absolute control over a retail sector by only two firms is not seen in any other developed countries worldwide. Thus, “two firms controlling such a significant share of Australia’s retail food sector indicates that the industry is a duopoly/oligopoly. Industry structures characterised as duopoly/oligopoly generally involve barriers to entry, which restricts new firms entering the industry”(Jacenko and Gunasekera, 2005, 3). Owing to their supreme market control, these two firms own the best retail outlets locations, and also owing to the massive scale of their presence, it allows them to fight off any new entrants in the same sector. When milk industry was deregulated by the Australian government in 2000, these two firms being the leading ones immediately took control of the situation and after forming contracts with various milk producers came up with National Foods, Dairy Farmers Cooperative and Parmalat, which soon started producing in-house generic brand milk at a lower price than the branded milk rates, which resulted in a shift of consumers to generic milk. It was a well thought out strategic plan, which set to reduce the national milk prices and in turn attracted more customers to their stores. So the main aim was to take people out to their shops and not to increase the sale of milk. This led to pressure on many small time retailers and the locality convenience stores, resulting in many of them going out of business. Thus, here we find that the leading firms playing with prices, as a marketing strategy. So the Australian market game theory is played on the Bertrand model where the strategic variable is price (Samuelson & Marks, 2003, 415). There are other instances, one of which has been cited in an article by Wardle and Baranovic in 2009, and published in the Australian and New Zealand journal of public health. According to Wardle and Baranovic this dominance of the grocery sector by Woolworths and Coles has helped in “effectively creating a combined duopsony and duopoly. This... result in both lower prices paid to producers and higher prices for consumers”( Wardle & Baranovic, 479, 2009). Here again we find that the duo Woolworths and Cole playing strategically, or in literal terms, bull dozing their way to play with prices in the Australian market. In the Bertrand model we find that there are certain criteria: In this model there must at least two firms producing the same homogenous items (here, in this case, we have Woolworths and Coles having same differentiated products); firms compete in price (here Woolworths and Coles, set the price in collusion knowing that the other will not respond to its price cuts); there is a strategic move made in each firm’s behaviour, which is very evident in Woolworths and Coles move, when in 2000 they colluded to bring down the national milk price in Australia in order to increase their own counter sales; both firms compete solely on price which is evident in this case, pertinent to the Australian grocery market scenario. So the Australian grocery market is actually a duopoly, functioning on the Bertrand model. So, if Woolworths fixes P1 as price for a certain item and Coles P2 for the same item, their outputs being complete substitutes, the sales can be then divided equally, P1==P2. The Nash equilibrium comes out to be P1=P2= MC (marginal cost), thus giving the companies no reason to change their strategy. A perfect set up where two firms are working in collusion, as we see in the case of Woolworths and Coles, to gain maximum profit. However by co-operating with each other, we find that these two firms are now successfully operating on the dominant firm model, where one firm takes the role of the leader whereas the other smaller ones simply follow the rules. This is leading to a perfect monopoly being slowly created by Woolworths and Coles, where the leader being dominant, creates the rules of the game, as per its own conveniences (a cartel). The ACCC though aware if this act of connivance is doing little to break the joint role of market monopoly (Collins & Durie, The Australian, 2008). Thus we find that an oligopoly is not an ideal market scenario, its main disadvantage being that too much power in the hands of a select few ends up creating a monopolist market which results in steep price rise and a fall in qualitative and quantitative aspects of consumer goods. Its only advantage is that it can restrict to some extent the entry of foreign retailers into the national market. Governmental policies to control monopolic or oligopolic market in the Australian retail sector: Unlike other countries, the Australia government does not have any regulatory control over the leading brands operating in the retail sector. Though there are some universally applicable anti-merger laws, “there is no equivalent in Australian legislation, for example, to the American Robertson-Patman Act [in USA], which prohibits price discrimination on the sale of goods to equally situated distributors... This act [strives to] cease discounting received due to purchasing power that would enable dominant retailers to drive all others out of business” (Wardle & Baranovic, 2009, 479). According to a news article in Business Day we find that “Supermarket giants Coles and Woolworths are being blamed for Australians paying the fastest growing prices for groceries in the world...food prices in Australia have increased 41.3 per cent since the start of 2000... University of NSW associate professor Frank Zumbo said..."Were clearly paying more for grocery prices because we have two players who can act as a cozy club, that can push up prices at will and they do that because they have a strangle hold over the sector” (Business Day, 2009). This has fuelled the demand that more competition should be allowed into the Australian food market retail industry by the government, to break this monopolist rule. In fact in 2009, we find another news report where we find that plans by Woolworths to enter the home improvement sector is being blocked by retailers in this market section. “The Retailers Association, which represents more than 5000 independently owned retail businesses, says the hardware market should not be allowed to become like the supermarket sector” (Speedy, The Wall Street Journal, 2009). Conclusion The Australian grocery sector is good example of an olygoplic market where there are only four (actually 2) major firms operating in the grocery sector, a market that sells similar, undifferentiated goods. The two major firms Woolworths and Coles own almost up to 80% of the food retail market share. However, this huge market share has resulted in the duo colluding with each other to from a monopoly market leading to a steep rise in food prices. The government is trying at present to break this combined force by bringing in more competition into the Australian food sector. Recommendations Government should bring in more competition, which would serve to lower the price and break the reign of the monopolist duo (Woolworths and Coles). Government should bring in legislations like the Robertson-Patman Act of US, which would serve to break the high purchasing powers of the ‘cozy duo’ and allow the entry of more retailing companies into the arena. The government should replicate the model of a perfect competition market as already showcased in the Adelaide central market, where the market is homogenous, thus making it ideal for the consumers. References Australian Competition and Consumer Commission. 2008. Report of the ACCC Inquiry into the Competitiveness of Retail Prices for Standard Groceries [report on the Internet]. Canberra (AUST): Commonwealth of Australia; Available from http://www.accc.gov.au/content/index.phtml?itemId=838251 Australian Food and Grocery Council. 2009. State of the Industry, Essential Information: Facts and Figures. [report on the Internet]. Accessed at http://www.afgc.org.au/our-industry/facts-stats.html Business Day. 2009 November 9. Supermarket duopoly blamed for soaring food Prices. [News article on the Internet]. Accessed from http://www.businessday.com.au/business/supermarket-duopoly-blamed-for-soaring-food-prices-20091109-i3zr.html Carter, S. Summer 1988. Multinational and International Marketing in Constraint Economies. The Quarterly Review of Marketing, pp 13-18. Collins, M., & Durie, J. 2008 August 6. Watchdog lets retail giants go. The Australian. [News article on the Internet]. Accessed from http://www.theaustralian.com.au/news/executive-lifestyle/no-smoking-gun-in-grocery-report/story-e6frgabf-1111117117528 Drucker, P., 1954. The Practice of Management. New York: Harper Collins Publishers, 61. Hussain, T. 2010. Engineering Economics. New Delhi: Laxmi Publications, Ltd., 207. Jacenko, A., and Gunasekera, D. 2005. Australian Bureau of Agricultural and Resource Economics. Australia’s retail food sector some preliminary observations. The Pacific Food System Outlook 2005-06 Kunming, China, 11–13 May 2005. Abare Conference Paper 05.11. ISSN 1447-3666. Samuelson, W., & Marks, S. 2003. Managerial Economics 4th ed. New Jersey: Wiley, 415. Speedy, B. 2009 October 20. Block Woolies hardware buyout, urge Independents. Business with The Wall Street Journal. [News article on the Internet]. Accessed from http://www.theaustralian.com.au/business/news/block-woolies-hardware-buyout-urge-independents/story-e6frg90f-1225788541670 Thompson, A., Strickland, J., & Gamble, J. 2005. Crafting and Executing Strategy: The Quest for Competitive Advantage. New York: McGraw-Hill, 3. Tucker, I. 2008. Survey of economics. Mason: Cengage Learning, 178. Wardle, J., & Baranovic, M. Is lack of retail competition in the grocery sector a public health issue? Australian and New Zealand journal of public health. Public Health Association of Australia. vol. 33, no. 5. [Wiley Online library] Accessed from http://onlinelibrary.wiley.com/doi/10.1111/j.1753-6405.2009.00433.x/pdf Read More