Comparison Of Oligopoly, Monopoly, And Perfect Competition: An Essay On Market Structures.

Overview of Oligopoly Market Structure

(a) . Brief Comparison of Oligopoly, Monopoly and Perfect Competition Market Structures in the perspective of the allocation of resources:

Oligopoly is the market structure in an economy where there are a small number of sellers offering similar or identical items in the economy of many buyers (Dabara et. al 2018). A real life example can be a tennis ball market (Mankiw 2020). If one goes to buy a tennis ball from a market the person returns buying any of the items from the four brands - Dunlop, Wilson, Spalding and Penn, as these brands make the similar or identical balls of more or less same quality. Another oligopoly criteria that these four brands comply with is that they operate in the economy together and jointly they determine the production quantity and on the basis of the market demand schedule, the prices of the items are determined. Additionally, since there are few sellers operating in the oligopoly market, the actions of any one seller will impact the revenues and profits of the other sellers on a comparatively larger scale. Another key feature of the oligopoly market structure is the collusion and cartel among the small number of producers prioritising their self interest. Theoretically, oligopolists are better off when they all act jointly and produce a small amount of items to be sold and keep the price above the marginal cost of the production. All these above features show that the firms in this market structure are interdependent, unlike the competitive market scenario.

Monopoly is the market structure where there is only one firm as the sole seller of an item in an economy of no close substitutes. The main feature of this market structure is that one firm dominates the market and creates a barrier to every other firm to enter the market and compete with it. Given this market scenario, certainly the firm will have the power to influence the price of its products in the market and so the firm is called the price maker, unlike a competitive firm which is known as a price taker. Therefore, the monopolist will charge the price of its products well above the marginal cost of the product, unlike the competitive market where the firms determine the price level on the basis of the demand and supply schedules in the market, eventually the on a competitive market scenario, market price equals to the average revenue (AR) and marginal revenue (MR) and eventually to marginal cost (MC) as the profit maximisation condition over a competitive market scenario is MR=MC. In contrast, over the presence of monopoly in an economy, the market price tends to exceed marginal revenue and marginal cost by a significant magnitude (Mankiw 2020). A real life example can be the case when Microsoft first designed and propagated its exclusive product Windows. There were rarely any close substitute for Windows at that time. Additionally, Microsoft was given the copyright of its exclusive invention, on the basis of which Microsoft could decide upon the scale of production depending on the demand for Windows in the economy given the time period and could set the price as per its need for profit maximisation (Nuccio & Guerzoni 2019). Often these monopoly operations are called intellectual monopoly in an economy (Durand & Milberg 2020).

Overview of Monopoly Market Structure

As said earlier, the competitive market or perfect competition market structure is when there are many sellers producing identical sets of items and many buyers in the market and the market price is determined by the movements of demand and supply curves in the economy. All the firms’ motive is to maximise their own profit given the market-set price at a given time period. Often the perfect competition market is called a zero profit market scenario, since the market price is set at P=MR=MC that all the firms sell their products at (Azevedo & Gottlieb 2017). The actions of any firm do not influence the revenue and profit of other firms nor do they influence the market price and that is why the firms in this market structure are called the price takers not price makers. Moreover, in this market structure there is no barrier for the firms to enter or exit the market, which means there is free entry and exit in a perfect competitive market structure whilst market price and product information are fairly uniform. For example, any farm-produced good market can be considered as a perfect competition market as there are plenty of sellers of the homogeneous items to sell to the wide range of buyers (Sheldon 2017).

(b) . A discussion on a chosen oligopoly industry from Australia that was affected by the current Covid-19 pandemic, using real data from the relevant sources the key features of the specific market structure is identified in the chosen industry :

In Australia, the retail industry has taken a significantly large portion in the growth of the economy of Australia. Following the most recent data and statistics of the retail industry of Australia reveals how important the retail industry and its growth in Australia is. Some of the most important growth data in the past years is mentioned as, 24 million dollars of average monthly retail sales in 2018, from November 2018 to November 2019, in one year the growth in the retail sales in Australia was 2.9%, the retail industry in Australia had seen an average year over year increase of 5.7% in overall revenue between the years of 1983 and 2019 and sharp hike in sales and reaches at 9.1% in February 2022 of a year over year increase (Cole 2022). Nevertheless, the total number of jobs in the retail industry accounted for about 1.3 million as of 2018, about 10.4% of the overall employed population of Australia is working in the Australian retail industry (Retail Trade, Australia 2022).

Moreover, the retail industry in Australia operates under oligopoly market structure as the markets in the retail industry in Australia are dominated by a few numbers of producers or sellers or firms, called the oligopolists. Australia comprises an oligopoly retail market with two vital players in the economy of retail which are Woolworths and Coles that are owned by a conglomerate company Wesfarmers. A market structure with two giants can be also called a duopoly, which is a specific form of oligopoly market structure.

Overview of Perfect Competition Market Structure

Data shows that about 40% of the overall consumer spending of every dollar of the consumers in Australia goes to the retail markets in Australia. The fact is that, the general population is aware of how much they spend on groceries when shopping with these two firms but may not keep a track of the spending on the other products of these companies’ household retail brand stores. Moreover, these two have expanded their portfolio investment by buying various renowned and prosperous Australian businesses to offer larger diversified products to the consumers in Australia and to enhance the growth of their company in the Australian economy. These two giants operate over grocery stores and supermarkets, department stores, home and office space furnishing products to liquor shops addressing the needs of multiple buyers. Nevertheless, the above talked about two companies are the largest retailers in Australia of the supermarkets and grocery retailers, for which they are chosen to be the point of discussion.

This discussion chooses the Supermarkets and Grocery Retail Industry in Australia as the focus of the oligopoly industry to be discussed. Since groceries, food and beverages industries add up to almost more than one third of the manufacturing sector of Australia. Data shows that the supermarkets and grocery stores had seen a revenue of about 135 billion dollars in 2018, which was around 13.7% of overall growth since 2014, of which 38% of the share was of Woolworths (Retail Trade, Australia 2022).

Briefing the above characteristics of the supermarket and grocery retail industry in Australia, it can be deduced that the retail industry in Australia is dominated by four major retailers, which are Woolworths, Coles, Aldi and Metcash (Kaye & Kaye, 2020), producing and selling differentiated products to many buyers; of which Woolworths and Coles are the two giants in the industry, therefore entry of new firms are not easy, which means there is entry barrier in their presence in the Australian market; the sellers among themselves cooperate and cartel regarding the quantity of production and follow the price set by the market demand and supply schedule and are called the price takers and tend to follow up with jointly getting better off from the cartel and collusion among themselves. Also given the expansion strategy of Woolworths, it can be said that the research and development and innovation path of the industry is strong enough, which is an additional characteristic of growing in an oligopoly market structure.   

Source : Bolst Global (Kaye & Kaye, 2020) 

Clearly, Woolworths dominates the supermarket and grocery industry in Australia, with about 37% of overall market share. After which comes Coles at the second place, holding around 28% of the market share. After which Aldi comes in third place with about 11% market share and has been rapidly growing. Metcash, IGA take the fourth place with 7% market share (Kaye & Kaye, 2020).

(c). Discussion on the effect of pandemic on the supermarket and grocery retail industry in Australia using Economic Theories, relevant data and diagrams :

Oligopoly Market Structure in the Retail Industry of Australia

The analysis below is the case study this discussion will carry out that captures the effect of Covid-19 pandemic on the market outcomes, that is the revenues and retail turnovers of the supermarkets and grocery retail industry in Australia with the help of relevant data from relevant sources and illustration of the same with appropriate diagrams.

According to the data presented by the Australian Bureau of Statistics, Australians made the expenses of about 10.8 billion dollars, which is about 508 dollars per individual at the supermarkets and groceries during September 2021 that is during the pandemic phase. To look at the effect of Covid-19, it can be seen that in February 2020 and March 2020 the total grocery spending by the Aussies was about 12 to 14 billion dollars, which is around 570 dollars per person. This abrupt rise in the expenses on groceries and supermarket items can be explained by the fact that households across Australia were prepping for the outbreak of the virus and so were stocking up the daily necessary items especially the food and other daily grocery necessities. The diagram below is a graphical illustration of the data and explanation said above ("Retail Trade, Australia, July 2020", 2020).

Total Revenue on Perishable, Non-Perishable and Other Products (in points) from 2019 to Mid 2020 to see the effect of the outbreak of the pandemic (Source - Australian Bureau of Statistics) : 

Following the data presentation of the Australian Bureau of Statistics in the regards of perishable and non-perishable food and grocery items, it can be said that both perishable and non-perishable goods along with all other goods of  supermarkets and grocery retails stores had seen a sudden significant growth in corresponding revenues during February 2020 and March 2020 as compared to the previous months. The range of the increase was from 95-100 points in February and March 2019 to 120-140 points in March 2020. Note that, the range of increase is substantially high in case of non-perishable goods showing a rise of about 40 points, from 106 points in March 2019 to 146 points in March 2020, which is just before the outbreak of the pandemic. The diagram below is an illustration of the same.

This is another clear evidence of how Aussies tended to stock up the food and necessary grocery items for future use. To back these findings from the data this analysis refers to important news articles of Australia which portray that hand sanitizers, toilet papers among the necessary toiletry items and pasta among the non-perishable food items were most demanded when the pandemic outbreak was on the verge on the fear of getting them run out later (Collett 2020). The top giants Woolworths and Coles during the sudden overwhelming demand and thereby overnight supply shock of specific items announced “two-item limits” on food items such as meats, food items packed in cans, toilet papers, rice, milk, pasta and so on along with the obvious masks and hand sanitizers (Dexter & Sakkal 2020).

Precisely, the economic theory behind the above discussion is that due to the announcement of pandemic outbreak and overall lockdown, the supply of those specific food items, especially the non-perishable ones could not be increased immediately after like the demand did. The demand for those items on the other hand increased substantially overnight. Consequently, at the given price level, there existed a supply shock in the food market for these specific items in Australia at the verge of the pandemic lockdown. To cope up with this supply shock, theoretically, that particular food market will have to increase the price level of that item, to reach the new equilibrium point. An illustration of this economic concept is drawn below.

Impact of COVID-19 on the Oligopoly Retail Industry in Australia

(d). Discussion on if the Government of Australia took any action to support the supermarkets and grocery retail industry and how did that come up to be as betterment of the industry during the pandemic scenario :

On the verge of the Covid-19 pandemic and lockdown and restrictions announced by the Government  in consequence led to major shifts in the demand schedule of some specific items as the population was expecting a longer time to be stuck at home. Data shows the shifts in consumer demands were most prominent for the other cereal items which include pastas, cereals, rice and flour (Australian Bureau of Statistics 2021). The following is an illustration of the same.

In the perspective of food items, it is important to mention that Woolsworths, Coles and Metcash are the members of the Government led Healthy food partnership, the motto of which is towards the betterment of the health of the Australians, however this initiative is yet to form the fuller structure and development. There is a lack of supermarket corporate social responsibilities (CSR) policies that are required for dietary modification among the general population as per the policy approaches, in particular the policy action taken up by the Australian government to enhance the diets of the population has been limited throughout the entire time since 2010 (Pulker et. al 2019).

Moreover, during this pandemic scenario, the department of Home Affairs of the Government of Australia had convened a “Supermarket Taskforce” aiming to resolve the issues that have been impacting the supermarkets and grocery retail industry in Australia especially at the crucial economic phases or shocks. The task force comprises representatives from the Australian Government, grocery supply chains and supermarkets and the ACCC (The Australian Competition and Consumer Commission), who jointly decide upon the interim authorization on the basis of the joint recommendations by the task force. (ACCC 2020)

Though there are regulations in the food supply chain in Australia, where the Government has a role to play, however, the pandemic situation barely saw any specific action taken up by the Australian Government to target any specific issues. Government seems to reject most of the recommendations.

This discussion in this regard will suggest some recommendations that the government could take up at the pandemic phase, especially when just before the outbreak of the pandemic, the overall market demand for specific items, especially some of the non-perishable food and grocery items were experiencing a partial supply shock, Firstly, the Government could have supported the production of these targeted items by subsiding the raw materials of the production of those items at the first place to pace the supply of these products in the market in the upcoming days and weeks just before the overall lockdown, also later when the overall production process would deem low due to the upcoming peak phase of pandemic. As the economic concept of supply shock and the rise in price to cope up with the shock is discussed in the earlier question, now at this phase, if government intervene to help pace the supply of the item in the economy by subsidising the raw materials, then the overall supply in the economy improves, as a result of which the supply shock is able to be managed and the rise in price can also be recuperated and the consumers’ demand for the item can also be fulfilled. The illustration of the above recommendation can be drawn as, 

Secondly, the Government could have taken initiatives to monitor how the supermarkets and grocery shops of the necessary food items can be kept open following all the pandemic safety measures, especially avoiding the crowding inside the stores, and make the announcement of the same accordingly so that Aussies fear less about the running out of the necessary items later on and stop or at least reduce stocking up the necessary items and eventually the distribution of these items would be uniform throughout the entire period of time. 

References : 

ACCC (2020). Supermarkets to work together to ensure grocery supply. Retrieved 21 April 2022, from https://www.accc.gov.au/media-release/supermarkets-to-work-together-to-ensure-grocery-suppl   

Australian Bureau of Statistics. (2021). Recent applications of supermarket scanner data in the National Accounts. Retrieved 21 April 2022, from https://www.abs.gov.au/statistics/research/recent-applications-supermarket-scanner-data-national-accounts  

Azevedo, E. M., & Gottlieb, D. (2017). Perfect competition in markets with adverse selection. Econometrica, 85(1), 67-105. 

Cole, W. (2022). Australian retail sales jump in Feb, augur well for Q1 growth. Retrieved 24 April 2022, from https://www.reuters.com/world/asia-pacific/australian-retail-sales-jump-feb-augur-well-q1-growth-2022-03-29/  

Collett, M. (2020). Have you thought about what a coronavirus outbreak in Australia would mean for you? Retrieved 24 April 2022, from https://www.abc.net.au/news/2020-03-03/how-our-readers-have-prepared-for-coronavirus/12017646  

Dabara, D. I., Omotehinshe, O. J., Chiwuzie, A., Asa, O. A., & Soladoye, J. O. (2018, December). The market structure of real estate investment trusts in Nigeria. In Conference of the International Journal of Arts & Sciences (Vol. 11, No. 03, pp. 101-112). 

Dexter, R., & Sakkal, P. (2020). Coronavirus Australia: South Australia COVID-19 lockdown sparks panic buying in supermarkets. (2020) Retrieved 24 April 2022, from https://www.smh.com.au/national/chaos-south-australia-lockdown-sparks-panic-buying-with-toilet-paper-stripped-from-shelves-20201118-p56fqg.html 

Durand, C., & Milberg, W. (2020). Intellectual monopoly in global value chains. Review of International Political Economy, 27(2), 404-429. 

Kaye, A., & Kaye, A. (2020). Australia Retail Market Report - Bolst Global. Retrieved 21 April 2022, from https://bolstglobal.com/portfolio-items/australia-retail-market-report/ 

Mankiw, N. G. (2020). Principles of economics. Cengage Learning. 

Nuccio, M., & Guerzoni, M. (2019). Big data: Hell or heaven? Digital platforms and market power in the data-driven economy. Competition & Change, 23(3), 312-328. 

Pulker, C. E., Trapp, G. S., Scott, J. A., & Pollard, C. M. (2019). The nature and quality of Australian supermarkets’ policies that can impact public health nutrition, and evidence of their practical application: A cross-sectional study. Nutrients, 11(4), 853. 

Retail Trade, Australia. (2020). Retrieved 21 April 2022, from https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/jul-2020  

Retail Trade, Australia. (2022). Retrieved 24 April 2022, from https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/latest-release  

Sheldon, I. M. (2017). The competitiveness of agricultural product and input markets: A review and synthesis of recent research. Journal of agricultural and applied economics, 49(1), 1-44.