Milk Price War - Woolworths and Coles - Case Study Example

Name Course Instructor Date Milk Price War Main Issue Presented Stiff competition between leading market forces takes different forms where market leaders try to outdo each other in terms of product quality and the added value that a company’s product offers its customers. These business duels sometimes revolve on product pricing in a single market segment. An example of the price war is apparent in the raging war between Australia’s leading supermarket chains Woolworths and Coles. In response to Coles decision to cut its milk prices in line with the ‘Down Down’ strategy, Woolworths followed suit citing compulsion. The decisions to offer their supermarket brand milk has adversely affected milk prices. This move is prompted by the fear of losing customers to Woolworths and Cole’s retail chains. These developments have elicited debate on the present and most importantly, the future impacts on consumers and major stakeholders in dairy farming. Additionally, the effects of the downturn in dairy farming due to the price wars has brought to the fore the level of the government’s commitment to protecting Australian industries. Market structures determine the business activities that competing companies operate within. It is apparent that the price wars are a result of the prevailing market structures. Coles and Woolworths are part of a large market that has different structures namely perfect competition, imperfect competition, monopoly and oligopoly. Markets with perfect competition have efficient production of goods and producers incur least costs making it unrealistic. Several factors influence the market in an imperfect competition. There are different structures under this namely monopoly where one firm controls the market and sets prices such as Woolworths and Coles. It is important to note that monopolistic competition as seen in the case of the two companies is most common for large companies. The competing firms are involved a similar business and provide similar products. Product differentiation makes the main players in such market structures strive to substitute their competitors’ products. The graph below shows a monopolistic market structure. Figure 1: Graphical representation of a monopolistic market structure. Source: Econport Laws of supply and demand determine goods availability and price. It is acknowledged that price and demand are elastic for every market. However, monopolistic competition does not apply the law. The elasticity of supply and demand defines a market response to changes in demand for a certain product in relation to its supply. Demand can be either perfectly elastic or inelastic. Figure 2: Graphical representation of demand and price elasticity. Source: SparkNotes Editors Key Stakeholders Impacted by the Outlined Issue Government involves itself in business for several reasons including creating level playing grounds, controlling quality and most importantly protecting domestic companies from the excesses of established foreign investors. Additionally, the government sets regulations to protect the consumers from unscrupulous businesses. The milk price wars noted in the Australian market are best analysed based on the market structures, elasticity of demand and supply and government’s role in business. It is important to note that the changes in milk price have extensive effects on both small milk traders and the larger Australian society. It is a fact that the price wars will ultimately lead to low milk production as witnessed in the last financial year. Analysts observe that milk production has gone down by 7.5% this year (Dollery 2). The price cuts also affect the local suppliers who get the product from farmers. The main challenge will be the source of milk to supply with farmers opting for beef farming. In their efforts to supply the supermarket chains, it is believed that they will heap the extra costs on farmers, therefore, threatening the suppliers. The fate of other milk brands in the market rests on Coles and Woolworths’ decisions; consumers seek quality and price in every product that they buy. Although milk suppliers and local brands face dire consequences of the price wars, it is true that dairy farmers are mostly affected by the changes in milk price. Dairy farmers are fast shifting to beef farming because of fear of incurring more losses presented by the present price cuts (Eckersley 1). Additionally, there are indications that dairy farming is not profitable now. For instance, one farmer states that one litre of milk fetches 38cents ten cents less than it did in 1999 (Dollery 2). Economic Theories drawn from the Report The present day market has different theories that explain the various developments and also uphold market practices that may negatively impact the society. In the Woolworths and Coles case, numerous economic theories are identifiable. The free markets ideology holds that neither the government nor organizations should set products’ prices. On the contrary, the ideology hinges on the market’s ability to take its course based on open and fair competition. These arguments sum the economic liberalism theory. It should be noted that the leading market forces can decide to cut the prices and stay afloat. It is upon competing firms to follow suit or seek other markets (Adams 20). It should be noted that Woolworths is a foreign owned company but competing in the Australian economy. The theory favours a market where competition is free and fair and the market regulates itself based on the normal factors and economic dynamism of each market. Government intervention strategies in business are in most cases castigated when companies feel a specific business is awarded leverage or exempted from necessary taxes thereby giving it a milestone ahead of others. However, there are instances where this intervention is warranted. It is observable that the protests against the price cuts emanate from a section of Australia’s leading investors and industry observers. From the reports, the main worry is the possible collapse of companies dependent on dairy farming. Dairy farmers are fast considering closing down their farms due to high costs of production and low returns. The grave impacts that continued price cuts have on the Australian economy are explored in Neil Wilson’s post. Citing Coopers Breweries boss, Wilson (5) observes that the government should reign in on the two leading supermarket chains and categorically reverse the obvious duopoly Woolworths and Coles continue to enjoy in Australian retail business especially foodstuff sales. This is a call for government’s regulatory intervention to protect local markets, jobs and enterprises as better explained by Keynesianism theory that emphasize that the local economic environment is paramount. The theory asserts the government’s role in creating, protecting, and perfecting the levels of locally manufactured or processed products. When countries suspect that their companies are threatened by unfair competition, they often impose measures that cushion the local companies. The opposing sides cite protectionism when the government adopts strategies aimed at protecting its market and economy. From the case, it is evident that regulatory measures should be in place. Coopers chairman quips that the United States gives its companies subsidies and is not considered protectionist and that Australia should adopt strict regulatory measures before imported milk flood its retail stores. Other Issues relevant in the articles The effects of the decisions of the two leading retail outlets on the economy are enormous but could be mitigated through the implementation of the right measures. First, it is important to analyse Coles’s motivation because Woolworths fail to consider the move as sustainable and of any consequential impacts on the customers were it not to announce price cuts. Therefore, the government should move fast and evaluate the viability of the company’s plan. In the press release, Coles states that it has taken into consideration the financial effects of the cuts and is willing to foot the extra costs. The company should therefore release an elaborate procedure and mode it intends to ensure the farmer is not hurt as a result of this move. The validity of Mr. Durkan’s claim should be evaluated and adequately quantified and action taken against the company if there is any signs of falsehoods in relation to the comment. Additionally, evaluation of the farmers’ possibility of keeping pace with the changing prices is very important. The solution in this case is increasing production and reducing costs of production. Inquiry reports note that the drop in production and the runaway prices are attributable to low season and recent flooding (Dollery 4). If this statement is valid, then it is important to evaluate the possibilities of improving production all year round. The future of an industry in every economy is vital and should be given the first priority. Outlets should understand that they have the responsibility of ensuring that they protect the primary producers and should reward them with the best value for their role in ensuring the success of such businesses. In Woolworths and Coles case, the primary producer is overlooked at the expense of the customer. The activities of these two companies are undeniably killing a number of sectors of the Australian economy. The farmers, suppliers and dairy products brands are at greater risk if this is not checked. The government should regulate milk prices and ensure that the farmer is protected from the wars. This is achievable by forcing the outlets to pay more to the suppliers and the suppliers to demonstrate their commitment to the prosperity of dairy farming. Given the dynamics of business and effects of globalization, farmers should receive subsidies in order to increase production and cut costs. Works Cited Adams, Ian. Political Ideology Today. Manchester: Manchester University Press, 2001. Print. Dollery, Rebecca. Milk Price Wars Driving Farmers Out. ABC News. March 9, 2012. Web. 2013 Eckersley, Nicole. Coles Leads Slash in Milk Prices; Farmers Fear. Ausi Food News. January 27, 2011. Econport. Graphical Representation of Monopoly. econport.org. n.d.Web. 2013 Ikenson, Daniel. A Protectionism Fling: Why Tariff Hikes and Other Trade Barriers Will Be Short-Lived. Cato Institute. 2009. Web. 2013 SparkNotes Editors. “SparkNote on Elasticity.” SparkNotes.com. SparkNotes LLC. n.d..Web. .... “SparkNote on Elasticity.” SparkNotes.com. SparkNotes LLC. n.d..Web. 2013 Wilson, Neil. Woolies and Coles Just Too Powerful, Says Coopers Brewery boss. Herald sun. March 28, 2012. Web. 2013 Read More