Economic Analysis of an Oligopoly Market Structure

Topics: Oligopoly, Monopoly, Predatory pricing Pages: 6 (1699 words) Published: October 21, 2008
1a. Article Summary
In this article Michael Baker discusses the livelihood of small retailers in a market subjugated by the financially dominant oligopolies, Woolworths and Coles. While the small independent retailers in direct competition with Woolworths and Coles provide some competitive respite for consumers, as they encourage competitive pricing, albeit predatory pricing, it is clear that Woolworths and Coles control the supermarket industry in Australia, in the formation of a duopoly. It is evident that Woolworths and Coles engage in predatory pricing in an attempt to eliminate independent retailers from the market. This article discusses recent efforts made by the Australian government and the Australian Competition and Consumer Commission to reduce predatory pricing and, thus, encourage competition in the marketplace in an attempt to relieve the financial strain that would undoubtedly be felt by consumers if the Woolworths/Coles duopoly ruled the marketplace without the presence of independent retailers.

It is clear that these strategies enforced by the government and the ACCC to aid small retailers are not working, as predatory pricing still exists. What is also evident is that several strategies enforced are in contradiction of each other, as some are enforced to protect small retailers, while others increase foreign competition in the supermarket industry, which is certain to negatively impact small retailers and encourage the formation of an oligopoly, or future monopoly market structure.

An example of this is the government initiative to allow foreign entrants into the retail market five years, instead of 12 months as is currently standard, to develop land purchased in Australia. This provides an opening for international retail chains, such as Walmart, to enter the market, allowing them more time to establish multiple locations across Australia.

This is destined to have a negative impact on shopping centre retailers, in particular small independent retailers, as international retail chains, such as Walmart, have freestanding locations, encouraging consumers to destination shop where they can purchase everything in the one store. In the age of convenience, this is a very appealing concept to consumers, and is certain to detract from the business of shopping centers and, thus, small retailers. In addition, large retailers, such as Woolworths and Coles, will also be affected by the introduction of international retail chains into the Australian market, as this will detract from their market share.

1b. Justification of topic
Woolworths and Coles duopolistic structure is evidenced through their dominant presence in the industry, relating to the characteristic synonymous with an oligopoly market structure, having few firms in the industry. The fact that there are only two main firms indicates that this is a duopoly. Woolworths and Coles are present in almost every Westfield shopping centre across Australia, as well as independently, close to access to public transport. The National Association of Retail Grocers of Australia reported that Woolworths and Coles comprised a 79% share of the market (AAP, 2007).

High barriers to entry, in particular financial barriers, including set up costs, distribution and advertising, are also evidence that this is an oligopoly market structure. In addition to this, mutual interdependence, whereby Woolworths and Coles are constrained in their competitive activity, and the use of heavy advertising as a means of attracting more market share in avoidance of price competition, also indicate the oligopolistic nature of this industry, as do large economies of scale.

1.Economic Analysis
*For the purpose of the discussion Walmart has been used as an example throughout. Duopolies occur largely because of the existence of barriers to entry in an industry. In this instance, the major barrier to entry is financial. Large set up costs, distribution and...

References: AAP, 2007, Independent grocers seek stricter rules to limit big chains, The Age, 3 July
McKenzie, 2002, Green giants are gobbling up the little growers, 8 July, Sydney Morning Herald (online)
Baker, Michael, 2008, Reality check for retailers, 3 May, The Sydney Morning Herald (online)
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