In the contemporary society, there are various forms of markets that individuals employ in the attempt of realizing their set goals and objectives. However, in order to put in operation any of the available forms of markets, various factors are considered. Among them includes the availability of the man power, capital, premises, knowledge, technological factors, legal issues among others. Moreover, after establishing any business, the viability, survival and expansion factors needs to be taken into consideration. Some these factors include customer relationship, quality of the produced goods or services, modes of competing with other competitors in the market, pricing of products, the availability and number of similar firms, market size among others. Some of firms in the market include monopoly, monopolistic competition, oligopoly, duopoly and perfect competition (Nooteboom, 2009). Monopoly firms are those which solely operate in the market. Monopolistic competitions are firms that have numerous competitors, but each markets slightly different products or services. Oligopolistic firms are those which decisions such as pricing are controlled by limited firms. This paper pays great attention to the discussion of market structure in Australia, which is dominated by two firms, Woolworths and Coles.
Woolworths and Coles compete in a duopoly market structure, a class of oligopoly market structure. An oligopoly market structure has a range of two to ten firms that influence decisions in the market. In this case, the structure is duopoly because two firms, Woolworths and Coles. Although the market has other small firms that compete with Woolworths and Coles firms, their market share is greatly reduced by these two firms which constantly expand due to their large market share (Cyert & March, 2009). In this market structure, an incentive of price collusion is an evident feature that aims at eliminating other possible competitors in the market. The elimination or reduction of competitors in the market has enabled the two firms to increase their sales, develop new innovative products and expand due to high profits that they realize.
Another feature that is duopoly market structure exhibit is the barrier to entry of other new firms into the market situation. Duopoly market creates these barriers in a number of ways. First, is the controlled price of products in the market. New firms would face difficulties in setting their initial costs since the two firms have already set stakes too high. Any competing firm that attempts to lower these set prices would only be willing to operate at a loss. Secondly, the firms have already established and well know business names and thus, new firms must incur elevated costs of advertisement and promotion in order to create public awareness of their existence (Weyland, 2002). Woolworths and Coles firms are already established large supermarkets that every Australian woman, child, man spends $100 per week on liquor, food, petrol or merchandise.
Interdependence is another feature that duopolistic market structures are characterized with. That is; the two firms must consult each other in making decisions such as setting the price of the goods and services. The firms are interdependent since there is a limited number of competition between them, and any change of product or price by either firm directly influences the fortune the competitors, who then retaliate by making changes on their prices and output (Weyland, 2002). An example is when Woolworths bought the rival safe way chain in 1985; Coles followed suit and bought Bi-Lo supermarkets two years later. They both turned to diversification in the same way. Similarly when Woolworths purchased BWS and Murphy’s liquor stores, Coles in a bid to keep pace went for First Choice and Vintage Cellars.
In duopolistic market structure, some traits of monopoly are evident. This is because, when the two firms collude on price determination, both enjoy profits the profits at the expense of eliminating the other small firms in the market. The small firms are forced either increase the quantity or quality of their products which in the long run increases their production costs (Weyland, 2002). The increased production costs would then make the make firms to operate at a loss thus squeezing them out of the market. This is illustrated in figure 1 below.
Figure 1 showing results of one firm increasing the price of its products in a duopoly market structure.
Woolworths and Coles adopted numerous tactics of pushing the price of milk down in the market. First was to refrain from buying new agricultural equipments and offering to repair and maintenance services to milk farmers. This means that the farmers would be forced to operate with the available equipments and finally resume to the outdated traditional ones since the maintenance services of the new ones is lifted. This would mean reduction in the quantity and quality of milk in Australian. This situation made Australia milk production to decrease from 12 to 9 billion litres during the last one decade.
Consecutively, Woolworths and Coles aimed to push down the prices of milk through reducing the number of employees. It is evident that, lack of new equipments and repair and maintenance services means some employees would be fired. For example, three decades ago, the number of milk firms in Australia reduced from 30,000 to 7,500, while that of employees reduced from 60,000 to 21,000 respectively.
Moreover, the two firms opted to downgrade the quality of their business through cutting down the fertilizer and animal feed costs. These reduced costs of milk production would mean that most farmers would produce milk at a lower cost, and this would in the long attract other farmers to the milk production business. Many farmers producing milk would mean that the supply of milk in the market would increase more compared to its demand, thereby reduction of the price of milk. This concurs with the demand and supply forces that when the supply goes higher than its demand, the cost of the item greatly reduces. This is clearly illustrated by the supply curve in figure 2 below. In the diagram, the initial supply of milk is represented by S0, and the price of milk was P0. However, after more milk is supplied in the market, (S1), the price of milk reduced to P1 (Weyland, 2002).
Figure 2: the supply curve showing price changes as a result of more milk is supplied in the market.
Woolworths and Coles wanted to achieve a number of objectives after employing these milk price cut downs. First they anticipated achieving and increase dominance in the agricultural sector. Achieving this was possible because, the reduction of milk prices would discourage most entrepreneurs from investing in milk industry. After this is achieved, the two firms intended to invest heavily in this milk opportunity, through starting to process their milk in large quantities and high quality. Moreover, the two firms longed to diversify their investments to banking, telephone and insurance industry, rather than relying on grocery and agricultural sectors. In addition, Woolworths and Coles firms hoped to combat the national competition policy which promotes competition among federal and retail dairy firms. The firms also anticipated gaining authority over the farmers. This is demonstrated by the manner in which they strived to treat farmers as medieval serfs, threatening them with non-compliance scripts among others (PERRY 2009).
Creative destruction refers to the process characterized by incessant process and product innovation mechanism where new production units replace the old and outdated ones. Joseph Schumpeter formulated the term to illustrate the industrial mutation revolutionizing the economic structure from inside destroying old and outdated ones while creating new ones. The restructuring procedure pervades the main elements of macroeconomic performance, like structural adjustment, long run growth, economic fluctuations and functioning of the factor markets. In the long run creative destruction process accounts for a major percentage in the productivity development. There are a number of obstacles to creative destruction process which can have significant short and long term macroeconomic results. At microeconomic level, it is characterized by many decisions to create and destroy production arrangements (Cowen 2002). The complex decisions often involve multiple parties and technological and strategic considerations. The process of creative destruction can be illustrated as shown below
Figure 3. Creative destruction process
The diagram above shows the process by which creation of new technology destroys existing similar but outdated technology.
Australian market is characterised by dominance by two firms in a duopoly arrangement. Creative destruction has the potential of causing temporary economic distress in Australia like layoffs of employees from Coles and Woolworths having obsolescent working skills as well as altering the existing market arrangements. Creative technology may take the form of supermarkets adopting more technology and reducing the number of employees. The fact that supermarkets employ a huge chunk of employees in Australia will cause widespread unemployment and distress to the economy. Another likely effect of the creative technology is likelihood of emergence of new industries that will replace the existing redundant technology. Coles and Woolworths may find themselves in the losing end if they don’t prepare in advance as there might have to compete for business with the emerging industries (Cowen 2002). On the other hand, the technology may find them prepared, and they may use it to enhance their dominance. Indeed they intend to undertake backward integration strategy whereby they move backward in the supply chain and take over the supply of raw materials.
Creative destruction is likely to have an impact on the customers and suppliers of Woolworths and Coles. To the customers creative destruction is likely to be good for them as they will now obtain commodities at a cheaper price (Owens 2002). This is because the use of technology will improve efficiency in production which will consequently lead to lowering of prices and improvement of quality. However, this is not likely to be instant as the firms may be forced to charge high prices in the short run to pay for the new technology. The suppliers are not likely to be happy with creative destruction. This is because Coles and Woolworths with advanced technology are likely to move backward in the supply chain and establish their own supply sources eliminating the need for suppliers. Additionally, the supermarkets will be diversifying their products and thus may need new suppliers as opposed to the existing ones. The suppliers may, therefore, be forced to diversify to new business or face the challenge of exiting the market.
The proposed break-up between Coles and Woolworths will have a great impact to the customers and suppliers. The break-up is essentially meant to break the dominance of the two supermarkets. The two have continually used their dominance ruthless without any concern to the customers and suppliers. The break-up will, therefore, be a reprieve. For customers, the break-up means there are now possibilities of competition in the market. Competition means better prices and better qualities of the commodities (Cyert & March 2013). The market barriers will be broken, and many firms will bring their offerings to the market. As competition for establishing and maintaining customer base intensifies better differentiated products will be offered as part of gaining competitive edge by the new and existing firms.
To the suppliers the proposed break up could not have come at a better time. The supermarkets have been known to bully the suppliers, and their payback will have come. The suppliers will now have a larger customer base and thus the supermarkets will not have to exert pressure on them. Suppliers will also have a chance of diversifying their products to exploit the market brought by new entrants.
Many competitive forms are likely to occur as a result of the proposed break-up. The most prominent of them is monopolistic competition. This is a market structure characterised by many sellers selling similar but differentiated products. The products are normally close substitutes which are differentiated in branding, packaging among other ways (Nooteboom 2009). The concentration ratio in this market is low as a result presence of many consumers and producers. The consumers will perceive that there would be non price differences among the products offered by various competitors in the market. They will, therefore, go for the differentiated products that meet their expectations.
Another feature of this kind of market is the relative independence of firms to set their prices. Due to the differentiation of the market offerings the producers gains some sense of monopoly powers over their products (Cyert & March 2013). They can, therefore, be able to set their prices. This makes them the price makers as opposed to price takers. In the short run, there will be brand loyalty and preferences of certain brands. Firms like Woolworths and Coles will, therefore, enjoy supernormal profits. Lack of barriers to entry will mean many firms will come to the industry to eat into the abnormal profits. Customer’s awareness or knowledge of the market will also increase thus brand preference and loyalty will no longer exist. Average Cost (AC) equates to the price. The firms will produce be producing at the level where marginal cost (MC) equals to the Average revenue. This will be the profit maximization output. As shown in the diagram below the firms will now be making normal profits.
Figure 5 price and output determination in the long run
In the diagram, the firm will be generating normal profits as price is equal to average Cost. This form of market will be a reprieve to the customers and suppliers in the Australian market.
It is, therefore, evident that numerous market structures can be formed. The market structure depends on the capacity of customers, market size, number of sellers, level of differentiation of product and extent of barriers to entry (Dietrich, 2012). The Australian supermarket industry is dominated by two major players, Coles and Woolworths. This has created uneasiness as the two operate without due regards to the welfare of customers, suppliers and the population at large. The situation is worsened by the supermarkets employing a vast number of employees. The supermarkets can use this as a threat as they can sack the employees. Creative destruction is expected to happen and the supermarkets are planning to be ahead in the game. Creative destruction destroys the existing structures and forms new ones. These inconveniences of the duopoly market have contributed to the proposal of a breakup of the two firms. The break up is expected to bring a new market structure which is more efficient. The break up will break the existing barriers to entry probably paving way for monopolistic competition. This is a more efficient market where no individual firm has the control of prices.
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