The economic benefits and losses brought about by changes in the market for groceries over the last 15 years and the future role for market forces and government intervention in the marketIntroductionColes and Woolworths have together long accounted for nearly 80% of the retail grocery sector in Australia, but these market shares have gradually eroded from 2001 onwards, with a new entrant Aldi, now commanding a market share of 11%, largely gained at the expense of Coles’ and Woolworth’s. Although the two supermarkets still continue to dominate the market with a 68.8 percent control of the market, the market has in no doubt become more competitive and innovative and this has had its benefits as well as losses for various players.
This essay closely looks at the economic benefits and losses brought about by changes in the market for groceries over the last 15 years and the future role for market forces and government intervention in the market. The type of market structure that underpinned the retail grocery market in Australia before entry of AldiHansen & Hoenen (2016) describe an oligopoly market as one where only two markets dominate the market.
This is to be differentiated from a duopoly which although it is a type of oligopoly, it is a market where only two firms exist. Thus, though Coles and Woolworths have been termed as a duopoly, they are actually an oligopoly. Before the entry of Aldi, Coles and Woolworth’s controlled a market share of nearly 80% which is a very large market share. However, there were other smaller firms that controlled the remaining 20% share of the market. As such, the market structure then was an oligopoly (Samuelson and Marks, 2003).
However, this has changed with the entry of Aldi making the market more competitive and the two supermarkets now control a lesser market share estimated at 68.8%. The source of market power for Coles and WoolworthsNoel (2016) views barriers to entry as the source of market power in an oligopoly market. This is the type of market where Coles and Woolworths used to exist. The retailers’ main source of market power was barriers to entry which made it difficult to enter the market.
This arose from the fact that the two firms were very large and established and hence they were able to take advantage of economies of scale. Thus, they were able to price their products in such a way that they restricted competition in the market. They have also been accused of harassing their suppliers so that they supply their products at very low prices and hence enable the two retailers to sell their products at distortionary prices making it hard for the smaller competitors to realize any profit or even meet their production costs thus making it hard for them to grow and expand (Nunzio, 2016).
A good example is the two supermarkets cooperating to sell milk at $1. Such behaviors make it hard for the smaller firms to grow and enlarge their market share and hence the two retailers have remained the dominant players in the market. Another source of market power for the two retailers is the high cost of entry into the market.