The Retail Grocery Market Structure in Australia Essay

The Market Structure of Retail Grocery Market in Australia

There are a number of market structures that can be adopted in an industry, depending on the type of products and services offered. The market structure that is in place is shaped by how many and what types of firms make the industry. There are four major market structures: perfect competition, oligopoly, monopoly, and monopolistic competition. A perfectly competitive market structure is one whereby there are many players in the market, as well as many customers (Stackelberg et al., 2011).

The barriers for entering the market are not there, or they are minimal if they are present. In this kind of market structure that is also referred to as pure competition, there are no players who are large such that they dominate and control the market. In other words, there are no organizations that are powerful such that they can set or influence the prices of goods and services.

Some of the characteristics of a perfectly competitive market include unlimited number of buyers and sellers and no barriers for entry or exit to and from the market respectively. In addition, there is perfect information regarding prices, quality as well as production of goods and services. Products are usually homogeneous, there are no transaction costs, and each organization tries to maximize its profitability by incurring the minimum costs possible (Stackelberg et al., 2011).

In an oligopoly market, there are a few firms that are usually strong and tend to influence the market. These firms have the majority share of the market. The organizations tend to compete against each other, while they dominate the rest of the market. These dominant organizations make it difficult for new organizations to join the market by putting barriers. The other major market structure is monopoly. This is a structure whereby there is only one firm that offers certain goods or services.

The firm does not have a competitor. In a monopolistic market structure, the provider organizations have the freedom to control and influence prices since there is no other organization to compete with. Buyers might suffer out of exploitation in such a structure. Finally, there is the monopolistic competition market structure, which is also referred to as a competitive market.

In such a structure, there are a large number of organizations that produce similar goods but the goods are differentiated slightly (Etro, 2009). Each organization tries to differentiate its products a bit to outdo its competitors.

Reasons why the market is not perfectly competitive

Retail grocery market in Australia may not be regarded as a perfectly competitive market because the market is seemingly dominated by two major competitor organizations. The two dominant grocery firms in the Australian market are Coles and Woolworths (Food System Research Group, 2009). It is, however, notable that there are other hundreds of grocery firms that operate in the Australian market.

However, the small firms control 20-30% of the grocery market since Coles and Woolworths are said to dominate and control over 70% of the total Australian grocery market. To be precise, Stuart Alexander & Co Pty Ltd (2013) state that Coles and Woolworths dominate about 80% of the market. However, there are many other retailers in the Australian grocery market, with the number of supermarkets growing increasingly high.

The Australian retail grocery market is comprised of more than 10,000 small retailers. Australia is regarded as one of the countries with most grocery retailers in the world. Having a population of approximately 22.7 million, which is much smaller compared to the United States and the United Kingdom populations respectively, Australia is said to have about three times as many supermarkets as those in the UK and more per capita supermarkets than the U.S. (Stuart Alexander & Co Pty Ltd, 2013).

Despite this large number of retailers, the major chain stores have continued to dominate the market as they increase their market share. This makes the grocery market in the country an oligopoly market structure. Another reason why the market is not a perfectly competitive structure is the fact that the small organizations have no influence on the prices of goods (ACCC, 2008).

The small firms are forced to adopt prices that are implemented by the large organizations. Finally, entry to the market is not without barriers because the large organizations are trying to defend their competitive advantages. The large firms might, therefore, make it hard for new entries that might be rivals to the two.

Implications to customers

The influence that organizations in an oligopoly market structure have is very similar to the influence of a monopoly organization because the few organizations in oligopoly have full influence on prices. The only difference is that there is only one organization in a monopoly structure, while there is more than one organization in an oligopoly structure. There is a big margin between the buyers available versus sellers, with buyers being excessively many compared to sellers. As a result, customers do not have many choices and are forced to buy whatever is being offered by the few sellers (Tucker, 2008). Customers may get products that are of low quality since the organizations are aiming to maximize their profits. Firms may, therefore, produce low quality goods in order to minimize production costs.

Another implication is that customers spend more on products because the oligopoly organizations can collude to inflate prices to maximize their revenue. They might exploit customers the same way a monopoly organization would do. Finally, there is no availability of perfect information in an oligopoly market. Therefore, customers do not have sufficient information regarding the goods being offered by organizations. This is a factor that is likely to affect buying behaviour in that customers might buy sub-standard good innocently (Tucker, 2008).

Workable competition

The issue of workable competition came into being in the year 1940, courtesy of an industrial economist by the name Professor Clark (Khemani and Shapiro, 2002). In a monopolistic market structure, customers are usually abused and oppressed by the organizations since there is no competition. Moreover, customers do not have alternatives to the products being offered. Such organizations offer sub- standard goods and services at a high price in order to maximize profits.

In an oligopoly market structure, the influence of firms is similar to that of monopolies. The few players in the market may collude to inflate prices to maximize their revenue. In addition, these organizations may also bar the entry of new players in order to protect their advantages. It is important to note that the major factors that influence competition in any market are mainly the number of sellers, as well as their sizes (Hennig-Thurau, 2000).

The barriers from entry or exit in the market, as well as the level of differentiation of products being offered may also have an influence on competition. An oligopolistic market is dominated by a few large firms that have the capacity to determine direction of the market.

‘Workable competition’ in an oligopoly market structure exists where there is sufficient competition between firms such that buyers are protected from abuse and exploitation. ‘Workable competition’ is relevant in any market set up. It is especially relevant where quality is needed. As mentioned earlier in this article, low quality production is highly likely in monopolistic and oligopoly market structures since organizations’ main objective is to maximize profits.

To do this, they need to minimize their production costs. In this bid, the firms are likely to produce low quality goods since the production costs will be significantly low. Firms will be almost certain that their products will be bought since customers do not have better options due to lack of competition. Therefore, the concept of workable competition may be applied to ensure that quality products are produced in an oligopoly market (Zarnowitz, 2007).

Another reason why workable competition might be relevant in a market is to prevent consumers from being exploited. Firms might increase prices of goods unreasonably to maximize their profits. Finally, economic growth is more likely when there is healthy competition in a market. It is also more likely that technological development will be embraced by organizations. Barriers to entry or exit are limited, or they do not exist when a market is competitive.

Therefore, more organizations are likely to join and create employment opportunities (Zarnowitz, 2007). This is important for the growth of national economy. In addition, technological development is another factor that is likely to improve the rate of employment since organizations will hire people who have the technical knowledge and skills to innovate and handle IT systems.

The concept of ‘workable competition’ may be relevant in the Australian grocery market to protect customers from being exploited by the two dominant grocery stores. In addition, ‘workable competition’ will encourage innovation and customers will get quality services. One needs to identify the number of firms that sell grocery in the country to justify whether ‘workable competition’ exists in the grocery retail market.

The number of firms needs to be enough to allow economies of scales. Expenses by firms need not to be excessive. Competition is not workable if expenses are excessive. Finally, informative advertisement should be embraced. Lack of information is one factor that leads to customers being abused. Therefore, customers should be fed with information during advertising (Khemani and Shapiro, 2002).

Vertical Integration

In a competitive business environment, all organizations are always striving to achieve competitive advantage that will enable them maximize their profits. Firms try to come up with strategies that are aimed at overcoming their rivals. It is for this reason that the issue of competition has gained a lot of popularity in the global market over the last two decades. Vertical integration has been a central concern when talking about competition in business.

Economists, as well as policy makers and lawyers have been mostly concerned about the effects that vertical integration has on the welfare of consumers. Competition is usually imperfect in an economy where the number of sellers is small (Wu, 2000).

This means that there are barriers to entry, imperfect information, and poor or sub- standard goods, among other features. Vertical integration could either be backward or forward in an oligopoly market structure. In addition, vertical competition is said to lead to pro-competitiveness in the market.

The term vertical integration in micro- economics is used to describe a form of management control. This is where firms in a certain market are united in some way. In most cases, such firms are united in that they share a common owner (Hubbard et al., 2013). What happens in such a market is that each of the various firms produces different products or offers different services. These products then combine in the market to satisfy the demands of customers.

This is likely to lead to a monopolistic vertical integration. However, the concept of vertical integration in an oligopoly market structure arises when upstream firms merge with downstream firms. The upstream market is made up of a few organizations competing against each other. These organizations are usually big and tend to dominate the market.

The integration realized when an organization in the upstream market merges with an organization in the downstream market can be described as a vertical (Stroux, 2004).

It is important to note that the exact meaning of this concept is yet to be understood because the term can take different dimensions depending on the context in which it is used. Study and research regarding the term ‘vertical integration’ has been a challenge to academics and economists at the policy, as well as theoretical analysis levels.

Some business people and academics have been known to make the conclusion that vertical integration is aimed at enabling firms obtain supply of inputs that is more certain. This is despite the fact that inputs are available in a competitive market. For instance, other firms can form a merger in order to edge out a certain organization that has a competitive advantage by cutting its supply (Lewis et al., 2010).

Implications of vertical integration for competitors in an industry

Vertical integration has either direct or indirect implications on organizations in an industry. For instance, organizations may benefit from reduced cost of production if they form a vertical merge in that they are able to produce goods in a manner that is more integrated compared to production when they were not merged. Most organizations in the downstream market in an oligopolistic market structure may merge in order to have market power when buying goods.

This is more effective when the organizations are buying intermediate goods (Lachmann & Lavoie, 2004). Further, integration helps firms to increase their capacity, and their production costs are lowered. This helps them in maximization of profit, thereby strengthening their competitive advantage. The firms are in a position to sell their products at significantly lower prices than their competitors, thereby making them command a large share of the market.

‘Strategy for Successful Entry of a New Competitor’

New firms always find it challenging to gain entry and establish in an oligopolistic market since there are a lot of barriers placed by the few dominant firms present. In Australia, the two dominant organizations in retail grocery market make it difficult for new entrants. New firms will have to devise a strong strategy to be able to join the market.

A potential entrant into the Australian grocery market should think of merging with existing firms to boost its chances of success in this market. This will make it easy for the new grocery firm to join and succeed in the market. The organization may retain its name and may even break from the merger later once it has been completely established.

Pay off Matrix.

Recommendation and Conclusion

It is difficult for an organization to join an oligopoly market. Therefore, it is important that the organization devises a strategy that will enable it enter the market successfully. According to the matrix above, an organization will have 70% chances of succeeding if it forms a merger with an existing organization.

Failure to form a merger will reduce chances of success to 30%. Therefore, I would recommend that a new entrant should form a merger with already existing organizations in order to succeed. ‘Workable competition’ should be exercised in the Australian grocery retail market to avoid abuse of customers by dominant organizations. This will also ensure quality products and services to customers.

Reference List

ACCC 2008, Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries.

Etro, F 2009, Endogenous market structures and the macroeconomy, Springer, Dordrecht.

Food System Research Group 2009, Structural changes in food retailing. Web.

Hennig-Thurau, T 2000, Relationship marketing: Gaining competitive advantage through customer satisfaction and customer retention: with 24 tables, Springer, Berlin.

Hubbard, G, Garnett, A, Lewis, P & O’Brien, A 2013, Essentials of economics 2nd edition, Pearson Education, NSW.

Khemani, RS & Shapiro, DM 2002, ‘Glossary of industrial organisation economics and competition Law’, OECD. Web.

Lachmann, LM & Lavoie, DC 2004, Expectations and the meaning of institutions: Essays in economics, Routledge, London.

Lewis, P, Garnett, A, Treadgold, M & Hawtrey, K 2010, The Australian economy: Your guide, Pearson Educational, NSW.

Stackelberg, H, Bazin, D, Urch, L & Hill, R 2011, Market structure and equilibrium, Springer, Berlin.

Stroux, S 2004, US and EC oligopoly control, Kluwer Law International, The Hague Stuart Alexander & Co Pty Ltd 2013, ‘Australia market’, Stuart Alexander. Web.

Tucker, IB 2008, Microeconomics for today, Thomson South-Western, Mason, OH.

Wu, C 2000, Strategic aspects of oligopolistic vertical integration, North-Holland, Amsterdam.

Zarnowitz, V 2007, Business cycles: Theory, history, indicators, and forecasting, University of Chicago Press, Chicago, IL.