Economic Structure and Performance

Introduction

Market structure in retail industry refers to the number of firms selling close or similar products in a given market or geographical area (Hamilton, 2018). Coles and Woolworths are Australian retail firms and are a part of retail industry of Australia. The industry has giant super-market firms providing all sorts of products to the consumers. Coles and Woolworths rule the market and face competition at various levels. The market structure helps them to analyse their strategies and policies.

Market structure in any market can be of two types, perfect competition and imperfect competition. Imperfect competition includes monopoly, oligopoly (includes duopoly) and monopolistic competition. Perfect competition has large number of sellers selling homogeneous products at a market determined price (Bernell, 2015). On the other hand, monopoly has single seller and sells a unique product. Oligopoly has few competing sellers with differentiated goods. Duopoly is a type of oligopoly with two sellers and differentiated products. Monopolistic competition has many sellers with slightly differentiated good.

Market structure influences the outcomes in the market by impacting the opportunities, motivations and decisions of the actor present in the market. The main objective is to predict the market outcomes and minimising the other effects. Market structure is important from the point of view of both rational consumers and producers. A consumer is interested in the structure to analyse the price he has to pay for the commodities and the product quality. When a firm enters a market, its main objective is to earn profits. It chooses to enter the market form which provides it maximum opportunities, easy entry and exit. A producer prefers lesser competition while a consumer prefers more competition.

Economic Analysis

The structure of retail industry in Australia, of which Coles and Woolworths are a part, contains many small and large sellers and firms. Perfect competition does not exist in the current world because of lack of homogeneity of products and no super-normal profits. The structure of retail industry can be studied as follows:

Monopoly market structure in retail will involve only one seller. Monopoly can be attained on the basis of unique product with no close substitutes. Monopoly can also be because of ownership of natural goods and government protection and when there is restricted entry in the market. The monopoly practices price differentiation with different customers. Monopolist is the price maker in the industry and has low or no selling cost. Monopolist charges price well above his marginal cost of the commodities. Consumers are at a loss because of no close substitutes and high prices (Simpson, 2010).

Coles and Woolworths are the large duopoly firms in the domestic retail market of Australia (The Conversation, 2015). Duopoly differs from monopoly on the basis of number of sellers. Duopoly in retail industry will exist when there are two independent sellers who have the market share and sell differentiated commodities. It can also be referred to as a form of oligopoly. This market structure is better for consumers compared to the monopoly. Sellers are price makers.

Oligopoly in the industry where Coles and Woolworths operate will have few sellers who dominate the market (Severova et al., 2011). In Australia there are Coles, Woolworths, Walmart, Tesco, ALDI and many others giant firms. They are often a result of collusion of firms which tends to reduce the competition. Consumers have to pay a higher cost in oligopoly market structure where firms set the price for the commodity. They have differentiated goods and there is high level of inter-dependence among the sellers and non-price competition. There is product differentiation and specialisation. There is high selling cost. There are super-normal profits in the long-run.

In the real world, Coles and Woolworths operate in the retail industry where there is monopolistic competition. There exist many sellers with slightly differentiated good. They are easily substitutable. In Australia there are department stores, e-tailers, high-street stores, small and medium firms, local sellers and many others (Australian Government, 2011). In case of super market chains (retail industry); there are big Australian players like Coles and Woolworths. There are other big MNC super market chains like Tesco, ALDI and Walmart (Plane, 2018). Also, there are many small players in the market. All these firms contribute the high competition in the market. They provide slightly differentiated goods and services. The consumers have a wide range of options which are easily accessible to them. There are close substitutes available. Due to the competition, the prices are not very high. For the producers, there is free entry and exit. Price is determined where the marginal revenue of the firm is equal to the marginal cost.

Recommendations

Given the level of competition, the Australian firms like Coles and Woolworths need to differentiate its product and services. Advertisement will play an important role in attracting the customers. It will help the firms to differentiate the commodities from its competitors. Coles and Woolworths can adopt policies and schemes which appeal and cater to the growing customer needs. In the absence of price war, the customers can be attracted with the product differentiation. Investment can be made in the product innovation. Various offers and schemes during festive days can help increase the client base.

They can adopt strategy to have cost leadership. They can provide low prices to the customers and gain from the increased market share. Since firms cannot reduce prices after a certain point, they can to differentiate themselves on the basis of services. Customer services and ancillary services; can be improved by the firms to gain the trust of the customers  (Productivity Commission, 2011).  They can engage in direct marketing in provide offers and discount schemes to the customers through mails and messages. The firms can increase its customers by providing wide range of brands and products which might not be available at nearby stores.

Customers can benefit from the monopolistic competition in the retail industry. Customers have a wide range of options with moderate prices. They can get high quality goods at low prices when there are schemes and offers. Cost leadership or service differentiation. They can evaluate and analyse the services of different retail stores and the cost associated with option to them and choose the best alternative. Customers can provide their feedbacks for the improvement in services and products. Often the stores provide return policies in cause of some fault. They can get replacement or refund without going through the hassle of posting the article.

Conclusion

In the retail industry where Coles and Woolworths operate, there is heavy competition from various competitors. There are big Australian brands as well as giant MNCs. Also, there are small firms having multiple chains in the city and numerous small individual sellers providing the same commodities. Thus, the retail sector attracts a lot of new entrants because of free entry and the scope for profits. The market to be supplied is ginormous which is the reason behind the high level of competition. In the monopolistic market, advertisements and event sponsoring can attract new clients. Offers and discount attract the customers the most. They prefer super markets because of the range of products and services provided by them. The firms operate in the world of very low product differentiation. They can increase their sales with product and service innovation. The firms can also benefit from the first mover advantage.

References

Australian Government, 2011. The Economic Structure and Performance of the Australian Retail Industry. Australian Government.

Bernell, 2015. Perfect Competition and other Market Structures. In Bernell Health Economics: Core Concepts and Essential Tools. pp.112-35.

Hamilton, C., 2018. Oligopoly in Retail Market Structures. [Online] Available at: http://smallbusiness.chron.com/oligopoly-retail-market-structures-33437.html [Accessed 09 April 2018].

Plane, J.J., 2018. Top Ten Best Australian Supermarkets. [Online] Available at: https://www.thetoptens.com/australian-supermarkets/ [Accessed 09 April 2018].

Productivity Commission, 2011. Economic Structure and Performance of the Australian Retail Industry. Canberra: Productivity Commission Australian Government.

Severova, L., Kopecka, L., Svoboda, R. & Brcak, J., 2011. Oligopoly competition in the market with food. Agricultural Economics, 12, pp.580-88. Available at: https://www.agriculturejournals.cz/publicFiles/53983.pdf [Accessed 08 April 2018].

Simpson, B.P., 2010. Two Theories of Monopoly and Competition: Implications and Applications. Journal of Applied Business and Economics, 11(02), p.139. Available at: http://digitalcommons.www.na-businesspress.com/JABE/Jabe112/SimpsonWeb.pdf [Accessed 10 April 2018].

The Conversation, 2015. Supermarket monsters can be agents of change. [Online] Available at: https://theconversation.com/supermarket-monsters-can-be-agents-of-change-44303 [Accessed 09 April 2018].