“Market” being one of the primary concepts in the economic theory, the notion and relevance of the term with the real world have developed considerably with the development of the global economic dynamics over the years. The term “market”, however, in terms of economics, refers to the open forum for interaction and decision-making of the buyers and the sellers of different commodities as well as services, where after mutual interaction and agreement decisions regarding the quantity and output of the commodities or services are decided (Kagel and Roth 2016).
There are different types of markets in the conceptual framework of economics, varying in the aspects of number of buyers or sellers in the market, the nature of the product the market deals with, the distribution and distortions of market power, the dissemination of knowledge in the market as well as the entry and exist barriers and their magnitude in the concerned market (Baumol and Blinder 2015). Several types of markets in the theoretical framework of economics, which have considerable relevance in the real-world scenarios are that of perfect competition, monopoly, oligopoly, monopolistic competition markets.
Keeping these differences of different forms of markets and their relevance with the global economic scenario into consideration, the concerned report tries to analyse the market structure which has been visibly existing in the supermarket industry of one of the most eminent and influential economies in the global economic scenario, Australia. To analyse the dynamics in the supermarket of the country and its market structure, the report takes reference of the article, “Supermarket wars: Are they just a repeat of the battle between Qantas and Virgin?” (Abc.net.au 2018).
As discussed above, the article taken into consideration by the concerned report, tries to compare the situation of the supermarket industry of the country with that of the traits of the airline industry of Australia, which existed previously. In doing so, the article highlights the ongoing price war which has been existing for a prolonged period in the supermarket industry of the country, especially between the two dominant companies in these industries, namely the Coles and the Woolworths (Keith 2012). Asserting that the quality of food products sold by both these companies being more or less same, the article argues that the strategy which both the companies have taken in order to gain greater share of clientele in the country is that of competing with respect to price cuts and discounts. Both the companies, having immense market power and enjoying economies of scale, can indulge in such a price war. The reason for the price war is also attributed to the presence of budget competitors like Aldi and Lidl (Phillipov 2016).
However, the article points out the fact that although this price war is expected to benefit the customers in the country, it can be detrimental to both the supermarkets, Woolworths as well as Coles. To assert this point, the article also draws the comparison of the phenomenon of price war which happened between two of the country’s prominent passenger airlines, the Virgin and the Qantas, who involved themselves in an acute price war in order to gain a greater share of clientele. The results were devastating in the long run for both the companies in terms of profits, which resulted in a truce between the companies in the airline industry.
The same can be seen to be happening with Coles and Woolworths, as can be seen from the decline in both of their pre-tax earnings, which in turn, according to the article, highlights the negative implications of price war in the market.
Interpretation of the assertions of the article
From the above assertions put forward by the concerned article, the two big supermarket companies in the country have been engaging themselves in an acute price war situation, which is one of the primary characteristics of the Oligopolistic market structure in terms of the conceptual frameworks of economics (Richards et al. 2013). This in turn indicates towards the presence of an oligopolistic market structure in the supermarket industry, which in turn can be asserted from the following empirical evidence:
Figure 1: Share of total expenditures at Supermarkets of Australia (2017)
(Source: Roymorgan.com 2018)
From the above figure, it can be seen that there exists a prominent oligopolistic trend in the supermarket industry of Australia, with Coles and Woolworths enjoying lions’ share in the market and Aldi catching up fast with them.
Price War in Oligopoly
The oligopoly market, in economics, is characterized by the presence of many buyers and a few sellers, with each of the sellers enjoying considerable share of market and market power as well. However, the products can be similar and differentiated and the decisions as well as the profit levels of each of sellers in this type of market depend on the decisions and pay offs the competing players. Due to high entry barriers, there exists imperfect competition in the oligopolistic market structure (Nicholson and Snyder 2014).
Thus, in order to maximise their profit, oligopolistic firms often engage in price war with each other, attributed to their capabilities and the presence of economies of scale and cost efficiencies. However, this price war gives rise to a kinked demand curve in the oligopoly market, as can be seem from the following figure:
Figure 2: Kinked demand curve in Oligopoly
(Source: As created by the author)
In the presence of kinked demand curve and price war in oligopolistic market structure, a price cut by one of the firms is followed by a price cut by others but not vice versa, which in turn decreases the profit of each of the firms after a certain point of time, thereby proving to be an inefficient strategy in the oligopolistic market, as can be seen to be happening in the supermarket industry of Australia and previously in the airline industry of the country (Sushko 2013).
In this situation, a better strategy for the supermarket companies in the country, in the oligopolistic structure, is to enter into a collusion or cartel with one another. Cartels in oligopoly refers to the situation where the sellers in the market operate with mutual agreements and collectively, thereby maximizing collective as well as individual profit (Waldman and Jensen 2016). The situation of profit generation of the cartel resembles that of a monopolistic situation:
Figure 3: Profit generation in Collusive Oligopoly
(Source: As created by the author)
Thus, from the above discussion, it can be asserted that the businesses in the supermarket industry of Australia, in the contemporary period, have been operating in an oligopolistic market condition and have been indulging in price war, which in the long run can be detrimental to the companies, as had previously happened with the companies in the airline industry of the country. In such a situation, the possible and more efficient way out for the companies in the supermarket industry of the country will be to form a collusive oligopoly or a cartel and operate together, thereby maximizing collective as well as individual profits.
Abc.net.au (2018). Supermarket wars: Are they just a repeat of the battle between Qantas and Virgin?. [online] ABC News. Available at: https://www.abc.net.au/news/2017-02-23/supermarket-price-wars-shaping-up-as-a-repeat-of-airlines/8298012 [Accessed 2 May 2018].
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.
Kagel, J.H. and Roth, A.E. eds., 2016. The Handbook of Experimental Economics, Volume 2: The Handbook of Experimental Economics. Princeton university press.
Keith, S., 2012. Coles, Woolworths and the local. Locale: The Australasian-Pacific Journal of Regional Food Studies, 2, pp.47-81.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application. Cengage Learning.
Phillipov, M., 2016. ‘Helping Australia Grow’: supermarkets, television cooking shows, and the strategic manufacture of consumer trust. Agriculture and human values, 33(3), pp.587-596.
Richards, C., Bjørkhaug, H., Lawrence, G. and Hickman, E., 2013. Retailer-driven agricultural restructuring—Australia, the UK and Norway in comparison. Agriculture and Human Values, 30(2), pp.235-245.
Roymorgan.com (2018). Aldi hits new high in supermarket wars. [online] Roy Morgan. Available at: https://www.roymorgan.com/findings/7234-woolworths-coles-aldi-iga-supermarket-market-shares-australia-march-2017-201705171406 [Accessed 2 May 2018].
Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business Media.
Waldman, D. and Jensen, E., 2016. Industrial organization: theory and practice. Routledge.