Oligopoly, Monopoly, And Duopoly In Australia - Essay.

Discuss about the Oligopoly, Monopoly and Duopoly in Australia.

Free market is a situation where buyers and sellers compete freely in the market. However, pure form of competition does not exist in the real world. Oligopoly, monopoly and monopolistic competition are different forms of imperfectly competitive markets. In today’s world, concentration of markets in the hands of few large retailers is becoming a major problem. In the paper article based on this kind of problem is reviewed. The article focuses on market on market concentration problem in Australia.  Woolworths and Coles appear as two large retail giants and hence largely affect economic health of the nation.

Generally, oligopolistic structure prevails in Australian supermarkets. With high concentration of market power, oligopoly structure is now reduced to a specific form namely duopoly. Chief executive of Small Business council in Australia strongly acknowledges this fact and links this issue with largest trade union in Australia. In Australia thee are mainly three large organizations affecting the economic environment. Because of increasing penalty rate there is possibility that small business may shut down, giving a clear economic ground for the duopoly players. Their market share will further increase with elimination of competition through actions of Shop Distributive and Allied Employees Association (SDA)[1]. This indicates that increasing market share of Coles and Woolworths is not solely resulted from better quality product or offering products at a low price but by their ability to eliminate other competitor due to their hold over increasing cost.

The duopoly structure can turn to a monopoly one if any one of the big players entirely captures the whole market share. Between Woolworth and Coles products belong to Woolworth group usually, capture larger share in the market[2]. In a monopoly market, control of prices is entirely in the hand of monopolist. Sufferings of the buyers will increase if this happens.

Oligopoly

Oligopoly is a market structure where number of buyers exceeds the number of sellers. Strategic dependence is a major feature of oligopolistic market. Strategic interdependence means marketing strategy of one firm influence the strategies of other sellers as well[3]. High market concentration is observed in this kind of markets. In order to increase market share the sellers engage in price war. The market demand curve has a kink because of existence of difference price elasticity

Figure 1: Oligopoly market and kinked demand curve

(Source: as created by Author)

Economic theories

Equilibrium condition in oligopoly market is described in the above figure. Average Revenue curve or demand curve is named as abc. Equilibrium price is P₁ as determined by the intersection of marginal revenue and marginal cost curve. Above P1 demand curve is flatter indicating elastic demand whereas below P1 demand curve is steeper that is inelastic. Price war occurs in the inelastic portion of demand curve where strategy of price reduction by one firm is followed by other rival firms[4].

Duopoly

In the price war, large firms win because of their ability to sell the good even at a very low price. They use cost efficient technologies that enable them to maintain a minimum profit margin and sustain in the market. Duopoly is the most basic form of oligopoly where only two sellers enjoy most of the market share. In the duopoly market, sellers differentiated their products to enjoy a monopoly power in the market[5]. Because of high concentration of market shares, the two firms have the power to restrict production quantity, to segment the market and devise other controls in the market. The collusion between duopoly sellers has a monopoly like impacts.

Woolworths and Coles in Australia form duopoly structure in Australian supermarket. In the price war, they win over other sellers because of a low cost production capacity. Attrition of competitors allows the two large retailers to dominate over others.

Monopoly

In the monopoly market, there is a single seller enjoys all the market power.  The monopolists set its price according to demand in the market. The monopolists alone grab all the surpluses in the market as the monopolist act as a price taker instead of a price maker. As a result, economic profit can be seen even in the long-run[6]. Woolworth-Coles duopoly structure is likely to be turn into a monopoly structure. Monopoly power can be realized either due to cartel formation between them or due to dominance of one of them on other[7]. The monopoly market structure with economic profit is explained in the following diagram.

Figure 2: Monopoly market structure and economic profit

(Source: as created by Author)

In the figure, the shaded region shows the economic profit enjoyed by the monopolist. Equilibrium is obtained by equating marginal revenue and marginal cost same like oligopoly market. However, the price is much higher in monopoly market allowing the monopoly seller to enjoy an economic profit.

In a concentrated market, buyers are always at a disadvantageous position. Once large sellers capture the entire market, they start increasing their profit margin by increasing price in the market[8]. Exclusivity clause in lease agreement leads to market concentration by preventing establishment of rival shops in nearby region. Policymakers should revise such lease agreement. Assistance should be given to small retailer to compete with the large retailers. They should encourage competition among the supermarket retailers. Campaign should be made to promote products of other retailers. The state should take initiatives to look into this matter and break the market concentration.

Conclusion

Market with imperfect competition takes different forms. Among them oligopoly is a common type of market. The paper analyzes the oligopoly structure of supermarkets in Australia. The structure recently turns to a duopoly one with increasing concentration of Woolworth and Coles. Australian buyers largely suffer from the market power of the giants firms. If this continues, there is possibility that the supermarket structure will become a monopoly structure. Policy makers should design policies to reduce concentration in the market.

References

Business Leader Savages Supermarkets (2017) NewsComAu <https://www.news.com.au/finance/business/retail/small-business-chief-savages-coles-and-woolies-and-their-trade-union-ally/news-story/313cad799dc9df6c4b51dcfa36de2bb3>

Competition, Squeezing, Market Monopolies In Australia (2017) CHOICE https://www.choice.com.au/shopping/everyday-shopping/supermarkets/articles/market-concentration

Dunne, Timothy et al, "Entry, Exit, And The Determinants Of Market Structure" (2013) 44 The RAND Journal of Economics.

Gottliebsen, Robert and Robert Gottliebsen, Supermarket Shake-Up Looms (2017) Theaustralian.com.au <https://www.theaustralian.com.au/business/opinion/robert-gottliebsen/the-coming-shakeup-of-australian-supermarkets/news-story/dbb9a3dbddbe42f730a760e10488a357>

Mankiw, N. Gregory and Mark P Taylor, Microeconomics (Cengage Learning EMEA, 2014)

"Mixed Market Competition In A Quality Differentiated Duopoly Model—An Approach To Banking Sector" (2014) 13 Chinese Business Review

Oligopoly And Dynamic Competition (Palgrave Macmillan, 2014).

Pindyck, Robert S and Daniel L Rubinfeld, Microeconomics (Pearson Education, 2013

Business Leader Savages Supermarkets (2017) NewsComAu <https://www.news.com.au/finance/business/retail/small-business-chief-savages-coles-and-woolies-and-their-trade-union-ally/news-story/313cad799dc9df6c4b51dcfa36de2bb3>.

Squeezing competition, Market Monopolies In Australia (2017) CHOICE <https://www.choice.com.au/shopping/everyday-shopping/supermarkets/articles/market-concentration>.

N. Gregory Mankiw and Mark P Taylor, Microeconomics (Cengage Learning EMEA, 2014).

Oligopoly And Dynamic Competition (Palgrave Macmillan, 2014).

"Mixed Market Competition In A Quality Differentiated Duopoly Model—An Approach To Banking Sector" (2014) 13 Chinese Business Review.

Timothy Dunne et al, "Entry, Exit, And The Determinants Of Market Structure" (2013) 44 The RAND Journal of Economics.

Robert Gottliebsen and Robert Gottliebsen, Supermarket Shake-Up Looms (2017) Theaustralian.com.au <https://www.theaustralian.com.au/business/opinion/robert-gottliebsen/the-coming-shakeup-of-australian-supermarkets/news-story/dbb9a3dbddbe42f730a760e10488a357>.

Robert S Pindyck and Daniel L Rubinfeld, Microeconomics (Pearson Education, 2013