Economic Analysis of Oligopoly Essay

This has been retireed and they be straight off spirit to expand their hold on the Australian market by touching into the hard liquor diligence. Julian Lee (2008) highlights Coles and Woolworths move into the intentness, by trying to defecate on their previous acquisitions of liquor discover(p)lets to challenge the major brands for a region of the $6 billion per year Australian beer market.The clause reveals that Coles and Woolworths plan to bestow more space to their own beers and promote the beers in their hotels. The beer market has so far been resistant and has retained a strong brand loyalty. Coles and Woolworths atomic number 18 competing against each other and relying heavily on price discounting and forming supplier contracts to chance on exclusive supply. The article questions whether or non these oligopolies forget be as successful as previously in attaining their complete dominance because kinfolk or exclusive brands are currently only a abject compone nt of the market. b Justification of the topic Supermarkets brew up a crate full of profits is an article that clearly describes the workings on an oligopolistic market. The fact that the market is governed by cardinal powerful firms that have the great power to influence price shows that the market more closely resembles a duopolistic structure.The beer and liquor industry comprises a differentiated oligopoly of which Woolworths and Coles are the main controllers. Woolworths and Coles control amid 78 and 80. per cent of the national grocery market according to two 2008 retail surveys (Lenaghan, 2008), indicating a very high seller concentration ratio, and this work start points out the two giants destiny of the supermarket industry, including their diversification into liquor. It is clear that the competitors hope to extend this duopoly in the beer market where they have been less successful. Coles and Woolworths bunghole be warrant as a competitive duopoly as they are int erdependent. They rely on each other o judge pricing of products and it has been suggested (Moynihan, 2007) that the two powers complot to maximize their profits. Signifi do-nothingt barriers to entry for independent competitors have been created including prodigious receive up costs. The sheer size of their companies allows them to influence legislation, the fact that they encompass blown-up economies of home base, and their control of raw materials helps these two firms to retain the staggering market share to an extent unparalleled in other countries. (Jones, 2005) 2. Economic AnalysisIt is kind of evident that Coles and Woolworths began their crusade of the Australian liquor industry early. Estimates of the take out gross revenue figure would be somewhat over $9 billion of a nub liquor market of about $17 billon (Jones, 2005). everywhere the years the rises in productivity and efficiency have en sufficientd the companies to sell at a discounted price. Woolworths has long been engaged in a project to overcome costs through improvements in supply chain logistics (Jones 2005). Coles and Woolworths are comfortably aware that this efficiency leads to increasing returns to scale.They hold economies of scale and scope that their closest rivals cannot compete with and therefore their long fulfil average costs stay fresh to decline whist their output quantities are more than doubling. The long run average cost curve (1) is produced when economies of scale are many and diseconomies of scale are few. 1. 2. It is very clear that Coles and Woolworths association of groceries and liquor retailing is a classic example of oligopolistic firms trying to further enhance their market. In the mid 80s Coles bought the Liquorland group signalling its entry into liquor retailing.Coles bought Vintage Cellars in 1992, the Australian Liquor Group in 2001, and the sizeable Theos business in 2003. Woolworths bought Victorias Dan Murphy in 1999, Tooheys Bros in Sydney in 2000, the freedom Liquor group (including Harrys Liquor) in 2001, the Booze Brothers ambit in South Australia in 2000, the Super Cellar group in South Australia in 2003, Bailey & Bailey in South Australia in 2003, and ALH in recent 2004. Woolworths in addition acquired 18 licenses from the purchase of Franklins grocery chain in 2001. (Jones 2005) This shows the industry power that the duopoly own, although as Lee rites they have found that beer has remained resistant to the coup detat of private home brand sound outs. Home brand labels have relied on a discounted price to capture the markets attention, a dodge that ordain have little success with beer. The beer industry is already henpecked by premium, boutique, imported and Aussie favourite beers that the chance of finding a large market share is un presumable. At the moment the in-house brands make up adept 2% of the beer market, most of which is taken up by Sol, a Woolworths brand.The beer industry is unlike the grocery i ndustry where a discounted price is favourable. The Australian create from raw material duopoly of Fosters and Lion Nathan both believe that branded beer will win out and are not worried that the products being forced into the market by Coles and Woolworths will eat into (their) market share. Coles and Woolworths envisions that the low priced private label brands will improver their demanded quantity from Q1 to Q2 (2) and this in turn will increase their market share and their profits.In the long run they will also be able to force more teensy independent brewers and sellers out of business because these retailers do not encompass the specialisation skills or fatigue to be able to price lower than the oligopolists or even check off their prices. Although matching any price reduction for the oligopolist who retains significant economies of scale can be treated with simplicity. This can be shown by a downward movement in the bare(a) cost curve. (3) The prices for the consumer w ould decrease and the average total cost for the producer also decreases.The local liquor retailer could more often than not, have no success in moving their marginal cost curve to match that of the oligopolists. These independents market share and profitability will in effect reduce dramatically. This can then cause come-at-able reductions in the industry shifting the supply curve to the left. For the consumer this is ultimately a negative scenario as the oligopolists who charge a cheaper price at present, will be able to increase their prices once the other contender has been eliminated (4). (3)(4)The article gives light onto the fact that the two giants are creating exclusive contracts for (their) retail way outs and this restricts competitors change their brands. Woolworths already distributes Bitburger, Lowenbrau and Amsterdam Mariner, while Coles sells Hollandia, Cantina Cerveza, Bavaria, Estrella Damm, Harviestoun, La Trappe and Konig Pilsner. It also contracts Boags now owned by Lion Nathan to make Tasman Bitter, Tasman Gold and Hammer n Tongs for the chain. It is clear that already Coles and Woolworths dominates much of the beer market by owning the outlets and the contracts to sell the beer itself.They anticipate that loyal customers will have to come to their outlet when shopping for their regular branded beer. It is also highlighted that imported premium beer sales have grown by 20% from January 2007, a figure which is likely to increase. Coles and Woolworths are furthermore using their oligopolist power to create barriers and retaliate at competitors. In 2002 Fosters had no choice but to decide against branching into the retailer market as Coles had began to reduce the stocking of Fosters lines in its outlets (Jones, 2005).It had become clear that Coles and Woolworths were not going to let their market be penetrated by other competitors and that judgment of collusion seems to be a regular and probable occurrence. Although oligopolists frequ ently collude, within the beer industry collusion is not yet possible as they are still trying to dominate the existing market. If the two firms were to succeed in their strategy to dominate the market and collude to set higher prices for the consumer their profit margins would be very high and the industry would resemble that of a nice monopoly (5). . Conclusion The $6 billion Australian beer market has proved to be resilient to attempts by the two giants to capture the industry. Ultimately the oligopolists plan to attempt to take hold of the beer market as they have done with groceries and petrol. In the short run, the economies of scale and the continuous logistics improvements provides the consumer with cheaper prices that the independents may not be able to provide and consequently when the independents are run out of the market the competition and prices of the industry may increase dramatically.Coles and Woolworths are aiming to target the value shopper, and thats where pri vate label and control labels are playing. The potential success of this is questioned in the article, as within the beer industry the value shopper makes up a small component of the market. Only time will tell if Coles and Woolworths can continue to extend their previous successes.