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Economic analysis of oligopoly composition

This has been extended and they are right now looking to expand their hang on the Australian market by simply moving into the liquor industry. Julian Shelter (2008) illustrates Coles and Woolworths move into the sector, by trying to build on their very own previous purchases of alcohol outlets to challenge difficulties brands to get a share in the $6 billion per year Australian beer market.

The article reveals that Coles and Woolworths plan to ‘give more space with their own beers and encourage the drinks in their hotels’.

The dark beer market features so far been resistant and has retained a strong manufacturer loyalty. Coles and Woolworths are contending against the other person and relying heavily on price discounting and building supplier deals to attain distinctive supply. The content questions whether these oligopolies will be while successful as previously in attaining their very own complete dominance because ‘home or unique brands’ are only a little component of the industry. b Approval of the matter ‘Supermarkets make up a crate full of profits’ can be an article that clearly describes the functions on an oligopolistic market.

The fact the market is governed by two powerful businesses that have the ability to influence selling price shows that the market more carefully resembles a duopolistic composition.

The beer and alcohol industry includes a differentiated oligopoly that Woolworths and Coles are definitely the main remotes. Woolworths and Coles control between 80 and 70. per cent from the national food market according to two 2008 retail online surveys (Lenaghan, 2008), indicating a very high seller concentration ratio, and this figure points out the two giants’ share with the supermarket sector, including all their diversification into liquor. It really is clear the fact that competitors aspire to extend this duopoly inside the beer industry where they have been less good. Coles and Woolworths could be justified like a competitive duopoly as they are interdependent. They count on each other to judge prices of products and it has been recommended (Moynihan, 2007) that the two powers collude to maximize their particular profits. Significant barriers to entry intended for independent rivals have been made including huge start up costs. The pure size of all their companies permits them to influence legislation, the truth that they involve large economies of range, and their power over raw materials assists these two companies to retain the staggering market share ‘to an extent unrivaled in other countries. ‘(Jones, 2005) 2 . Economic Examination

It is quite noticeable that Coles and Woolworths began their very own crusade with the Australian liquor industry early. Estimates from the ‘take out sales figure would be relatively over $9 billion of a total liquor market of approximately $17 billon’ (Jones, 2005). Over the years the rises in productivity and efficiency have got enabled the firms to sell by a discounted selling price. ‘Woolworths is certainly engaged in a project to reduce costs through improvements in supply chain logistics’ (Jones 2005). Coles and Woolworths are well aware that this kind of efficiency leads to increasing earnings to scale.

They carry economies of scale and scope that their local rivals simply cannot compete with and so their long run average costs continue to fall whist all their output volumes are more than doubling. The future average price curve (1) is created when financial systems of level are many and diseconomies of scale are few. 1 . 2 . It is very clear that Coles and Woolworths connection of food stores and alcohol retailing can be described as classic sort of oligopolistic businesses attempting to even more enhance their market. ‘In the mid 80’s Coles bought the Liquorland group whistling its access into liquor retailing.

Coles bought Classic Cellars in 1992, the Australian Alcohol Group in 2001, plus the sizeable Theo’s business in 2003. Woolworths bought Victoria’s Dan Murphy in 1999, Tooheys Bros in Sydney in 2000, the Liberty Liquor group (including Harry’s Liquor) in 2001, the Booze Brothers Chain in South Sydney in 2150, the Very Cellar group in South Australia in 2003, Cromwell & Cromwell in Southern region Australia in 2003, and ALH in late 2004. Woolworths also attained 18 licenses from the purchase of Franklins’ grocery store chain in 2001′. (Jones 2005) This kind of shows the industry power that the duopoly own, though as Shelter rites they may have found that ‘beer has remained resistant’ for the takeover of personal home company labels. Home brand labels have counted on a low price to capture the market’s focus, a strategy that could have little success with beer. The beer market is already completely outclassed by superior, boutique, imported and Foreign favourite drinks that the possibility of finding a huge market share can be unlikely. At the moment the in one facility brands makeup ‘just 2%’ of the beer market, most of which is adopted by Terrain, a Woolworths brand.

The beer industry is as opposed to the food industry in which a discounted price is favourable. The Australian producing duopoly of Fosters and Lion Nathan both think that ‘branded dark beer will earn out’ and are not anxious that the items being forced into the market by Coles and Woolworths ‘will eat into (their) industry share’. Coles and Woolworths envisions the fact that low priced white label brands will increase their required quantity from Q1 to Q2 (2) and this in turn will increase all their market share and the profits.

In the long term they will also be able to force more small self-employed brewers and sellers bankrupt because these kinds of retailers tend not to encompass the specialisation expertise or labour to be able to selling price lower than the oligopolists or perhaps match their prices. Although matching any kind of price reduction for the oligopolist who have retains significant economies of scale can be treated with ease. This can be proven by a downwards movement inside the marginal expense curve. (3) The prices for the consumer could decrease and the average total cost intended for the manufacturer also diminishes.

The local liquor retailer could more often than not, have zero success in moving their particular marginal price curve to complement that of the oligopolists. These independents’ business and success will essentially reduce drastically. This can then simply cause possible reductions in the marketplace shifting the provision curve left. For the buyer this is ultimately an adverse scenario because the oligopolists who fee a cheaper price presently, will be able to increase their prices as soon as the other competition has been eradicated (4). (3)(4)

The article gives light on to the fact the two giants’ are ‘creating exclusive contracts for (their) retail outlets’ and this restricts competitors providing their brands. ‘Woolworths previously distributes Bitburger, Lowenbrau and Amsterdam Mariner, while Coles sells Hollandia, Cantina Cerveza, Bavaria, Divo Damm, Harviestoun, La Trappe and Konig Pilsner. Additionally, it contracts Boag’s ” now owned by simply Lion Nathan ” to make Tasman Bitter, Tasman Platinum and Sludge hammer ‘n’ Tongs for the chain’. It is clear that already Coles and Woolworths dominates most of the beer marketplace by buying the stores and the contracts to sell the beer alone.

They assume that dedicated customers will need to come to their outlet when picking their standard branded ale. It is also highlighted that ‘imported premium ale sales have become by 20%’ from January 2007, a figure which can be likely to enhance. Coles and Woolworths are furthermore using their oligopolist power to create obstacles and retaliate at competition. In 2002 Fosters had no choice but to decide against branching into the store market since Coles acquired began to decrease the stocking of Fosters’ lines in its stores (Jones, 2005).

It had turn into clear that Coles and Woolworths weren’t going to allow their industry be permeated by different competitors which notion of collusion seems to be a regular and probable event. Although oligopolists frequently collude, within the ale industry entente is not possible as they are still looking to dominate the current market. If the two businesses were to achieve their strategy to dominate the market and collude to set higher prices for the consumer their particular profit margins would be very high and the industry would resemble regarding a natural monopoly (5).. Conclusion The $6 billion dollars Australian ale market has proved to be resilient to attempts by the two titans to capture the industry. Eventually the oligopolists plan to make an attempt to take hold of the beer market as they did with groceries and gas. In the short run, the economies of level and the continuous logistics improvements provides the customer with less expensive prices the fact that independents is probably not able to offer and consequently when the independents are run out from the market your competitors and prices in the industry might increase considerably.

Coles and Woolworths are aiming to ‘target the value client, and that’s exactly where private label and control brands are playing. ‘ The potential success on this is inhibited in the document, as inside the beer sector the value client makes up a ‘small component of the market’. Only time will inform if Coles and Woolworths can continue to extend their past successes.


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Category: Essay,

Topic: Increase their, Market share, Selling price,

Words: 1522

Published: 01.20.20

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