Oligopoly Market Structure And Coles: An Essay Analysis.

1) Analyse, individually and in teams, the role of fundamental micro- and macroeconomic principles in business decision-making.

2) Analyse the impact of industry competition on individual businesses.

3) Analyse, from an economic and ethical perspective, business behaviours in a national and global context.

4) Analyse the impact of monopolies and monopolistic competition within an industry.

5) Evaluate the impact on industry of manipulations of economic factors by the public sector.

6) Communicate complex economic concepts to business professionals.

Market Characteristics

Coles is Australian supermarket owned by Wesfarmers and was founded by GJ Coles in 1914. In the recent years, the company’s management has devoted efforts to delivering quality services and products with a view of winning more clients. For instance, this firm has invested in noteworthy changes such as rolling out new format stores, lowering price and employee training to enhance the experience of customers (Coles Supermarkets Australia Pty Ltd, 2017). The sector under which Coles operates can be categorized under oligopoly market structure. Aspects such as a few businesses with large ones holding a significant market portion with considerable hurdles to market entry are noticeable in Australia’s supermarket industry. In this sector, the supermarkets are constantly monitoring the actions and behaviors of rivals and hence stiff competition. Therefore, this paper explores the oligopoly market structure under which Coles operates.

Australia’s supermarket sector is made up of several businesses such as Woolworths, Coles, Aldi, IGA, among others. However, the domination of this industry by two companies results in a type of imperfect competition known as an oligopoly. Woolworths and Coles are the two largest plays in this sector. The market share of Woolworths is approximately 35.75% while that of Coles is 33.2% (Thomsen, 2017). Other businesses like Aldi and IGA are trailing in the market.

Due to a few sellers, an action by one seller under oligopoly immediately impacts the rivals. As a result, each firm is often vigilant and keeps a close watch over the behaviors competing companies to have a counter-action when the need arises (Case, Fair, & Oster, 2014). This feature is evident in Australia’s supermarket sector. There is a constant rivalry especially among the key players with the view to retaining and attracting new clients.  The fight for market share between Coles and Woolworths often leads to price cuts and eventually price wars. When Woolworths lowers its prices, Coles responds by reducing its prices and in some instances by larger margins (Pash, 2017). The competition is usually stiff to the extent that these firms are willing to forgo their profit growth to improve sales and protect their respective market share.

In this industry, it is relatively easier for the supermarkets to leave the market. However, when it comes to market entry, the new firms experience barriers. The actions and behaviors of Coles and Woolworths are partially responsible for the hurdles encountered by companies intending to enter the market. For instance, these two supermarkets enjoy substantial economies of scale, and hence they are in a position to lower the prices. As a result, it becomes difficult for new firms to get clients and penetrate the market. Furthermore, government licensing and regulations intensifies barriers to market entry.

Firms in the Industry

Interdependence among firms is an important feature in the oligopolistic competition. The market participants are always cautious to the actions of the rival companies. If a company introduce changes in its promotional or price schemes, all other businesses in the industry have to comply to remain in the competition and retain their clients (Deodhar, 2013). The interdependence feature is also evident in Australia’s supermarket industry. The enterprises in this sector respond asymmetrically to the changes in the prices of rivals. For example, if a company increases its price while other businesses fail to match the price increment, a significant substitution effect will take place resulting in a relative price elastic demand. The company will, therefore, lose its clients to other firms and experience a substantial drop in its total revenue. On the other hand, if a business cuts its price, the rival companies will respond in the same manner. The relative variation in the price will be minimal and thus an inelastic demand.

The reactions of companies to the actions of rivals in the oligopoly market results in the kinked demand curve. The kinked demand curve model assumes that the prices in the market will be relatively stable with little incentive to alter the price (McTaggart, Findlay, & Parkin, 2015).

On figure two above, if Coles increases its price (D1), other supermarkets like Woolworths and Aldi will not equal the addition. This situation will lead to a reduction in the sales of Coles due to customer losses. On the contrary, if Coles cuts its price (D2), the rival supermarkets will match the drop to avoid losing their market share. This scenario is present in Australia’s supermarket sector where Coles and Woolworths often engage in price wars with the aim of outsmarting each other. Coles, Woolworths, and other supermarkets maximize their revenues at quantity Q1 and price P1 where the marginal cost equals the marginal revenue. As a result, these businesses are unlikely to raise the prices of their products as long as their marginal costs range between MC1 and MC2.

Under oligopolistic competition, each firm advertises its products on a regular basis with the goal of reaching more customers and retaining the existing customer base. In fact, advertising is one of the factors that create an intense competition among oligopolistic companies. If a company under oligopoly fails to advertise, then such firm is likely to lose its clients to the competitors (Sloman, Wride, & Garratt, 2015). In Australia, supermarkets, especially Coles, Woolworths, and Aldi spent a significant amount of resources on massive advertising. These firms make use of magazines, regional television, metropolitan radio, direct mail among other channels to reach customers. In 2015/2016 financial year, the supermarkets in Australia spent approximately 200 million U.S Dollars on advertising with Woolworths, Coles, and Aldi being big spenders (Heffernan, 2016).

Australia’s Supermarket Industry Market Share

Allocative and Productive Inefficiencies

Price and

Cost

0Q = Profit Maximizing Output

0Y = allocative efficient output

0W = productively efficient output

Productive efficiency takes place if a business operates at the lowest point of the average cost curve. Productive efficiency signifies that there is no excess capacity and that the resources are well used for the benefit of the society. Under perfect competition, companies are in a position to achieve productive efficiency because they operate at the minimum point of the average cost curve. However, the firms in oligopoly market do not generate at the lowest point of the average cost curve. Thus such companies are said to be productive inefficient (Case, Fair, & Oster, 2014). On the figure above, Coles and other supermarkets generate quantity 0Q yet the productively efficient volume is 0W. This excess capacity shows that the resources are underused in Australian supermarket sector.

Moreover, allocative efficiency occurs if companies allocate resources to the generation of products and services in a way that leads to best outcomes to the society. For allocative efficiency to happen, the price must match the marginal costs (Deodhar, 2013). However, in oligopoly, the price surpasses the marginal cost and thus allocative inefficient.

In the short run, firms in oligopoly market structure may experience losses, break even or positive profits. However, in the long run, the companies may operate at break even or make positive profits. Barriers to market entry usually play a critical role in profits earned by oligopolistic businesses. If the enterprises manage to intensify barriers throughout, then they will make super normal profits in both short term and long term. If the obstacles lessen, new firms will enter the market and hence normal profits.

Conclusion

Australian supermarket industry falls under oligopoly market structure. This industry has a few firms with two companies, that is, Coles and Woolworths dominating the market. Woolworths takes the largest market share of 35.7% followed by Coles with 33.2% customer base. Therefore, other supermarkets like Aldi pay close attention to the actions and behaviors of Coles and Woolworths. If big players make changes in their promotional and price schemes, other firms are forced to respond to avoid or minimize loss of market share and diminishing of their sales. For example, if Coles reduces its prices, other supermarkets will do the same to retain their market portion.  Advertising is also another important feature evident in this particular sector. The supermarkets make use of magazines, regional television, metropolitan radio, direct mail among other channels to reach customers. Government regulation and licensing as well as economies of scale enjoyed by the two primary players intensifies barriers to market entry and thus barring other potential market entrants. Finally, the firms in this industry are allocative and productive inefficient.

Case, K. E., Fair, R. C., & Oster, S. M. (2014). Principles of economics. Harlow, England: Pearson.

Coles Supermarkets Australia Pty Ltd. (2017). Our History. Retrieved July 28th, 2017, from Coles: https://www.coles.com.au/about-coles/centenary

Deodhar, S. Y. (2013). Why I am paying more : price theory and market structures made simple. Noida, UP : Random House India.

Heffernan, M. (2016, October 9th). Woolworths, Coles slow advertising as Aldi ramps up . Retrieved July 27th, 2017, from The Sydney Morning Herald: https://www.smh.com.au/business/retail/wooworths-coles-slow-advertising-as-aldi-ramps-up-20161002-grt965.html

McTaggart, D., Findlay, C. C., & Parkin, M. (2015). Economics. Frenchs Forest, N.S.W: Pearson.

Pash, C. (2017, October 7th). The shelf price war threat between Coles and Woolworths appears to be easing. Retrieved July 28th, 2017, from Business Insider: https://www.businessinsider.com.au/the-shelf-price-war-threat-between-coles-and-woolworths-appears-to-be-easing-2015-10

Sloman, J., Wride, A., & Garratt, D. (2015). Economics (9th ed.). Harlow : Pearson.

Thomsen, S. (2017, May 17th). CHART: Here's how big Aldi now is in Australia. Retrieved July 27th, 2017, from Business Insider: https://www.businessinsider.com.au/chart-heres-how-big-aldi-now-is-in-australia-2017-5