Market Structure: Telecommunications Answers | Assessment Answer

Characteristics of Australian Supermarket Industry Before Entry of Aldi

Prior to the entry of Aldi into the Australian Market, the supermarket industry was the most concentrated in the world, with Woolworths and Coles dominating at 70 to 80% of the market (Hubbard,Garnett, Lewis & O'Brien 2016).  The market leaders have competed and remained steady for a number of years. Their strength has made it almost impossible for smaller retailers to enter the market; they simply don’t have the buying power, funds or resources needed to financially compete against the Major supermarkets in a price war for market share. It is natural that the two leaders have led the industry and used each other as benchmarks for pricing and stock. They have almost mirrored each other with regard to loyalty programs and advertising.

A few number of firms dominated the market of the Australian supermarket industry before the entry of Aldi. There is interdependence among the existing firms and the firms are highly influenced by the activities of each other. The price level and the output level set by one firm affect the business structure of the other company. In the market, there is barrier to enter however; it is less than the monopolistic market. In the oligopolistic market, the advertising is a powerful instruments used by the organisations. There is a presence of high competition in the market due to which the sellers to keep a proper knowledge about the market. The strategies used by the rival companies in the oligopolistic market are also studied carefully. The companies operating in the market enjoyed economies of scale and had control over the essential and the specialised inputs. 

Furthermore as opined by Fudenberg & Tirole, (2013), there is a lack of uniformity in the firm size operating in the oligopolistic market of Australia before the entry of Aldi in the market. There is a huge difference in the sizes of the firms as some firms are too large while some are very small. This results in asymmetrical situation in the market of Australia. Since, the firms in the oligopolistic market are not price makers, it is important for them to stick to the price level set by the market demand and supply. In such a market, when a particular market tries to lower the price level, the other rival companies hit back by minimising their price level further down. Thus, there exists a price war between the firms in the market. On the other hand, if a firm decides to increase the price level with the intention to boost up the profit level, the other companies do not follow by increasing the price level of their products. In such a scenario, price rigidity takes place as neither of the firms tries to increase or decrease their price level (Horstmann, Kraemer & Schnurr, 2015).

The oligopolistic experiences a kinked-demand curve due to the presence of competition from the other firms of the market.

Figure 1: Demand and supply curve in the Australian market before the entry of Aldi

(Source: Horstmann, Kraemer & Schnurr, 2015)

The demand curve of the oligopolistic market becomes more elastic at a price level above the point P. At this point, the prices are high and consumers try to opt for products that are relatively of lower prices. Therefore, above the price level P, the output of the oligopolistic market falls at a faster pace. Thus, the demand for the output in the market becomes more elastic in nature.

Entry of Aldi Retailers in the Once Concentrated Market

As soon as Aldi, a world-renowned, resource rich and financially wealthy, Supermarket landed on Australian shores, Australia’s two major leaders found they weren’t in a position to squeeze out the competition as they had with previous contenders; Aldi had similar financial resources (Auerbach et al., 2013). As such, they were faced with a third competitor in the market for the same market share.  Aldi’s share of the market has been steadily increasing since their arrival. 

As such, consumers are seeing low prices as a result of the increased competition, which is, in turn, increasing spending in an economy currently in decline. The introduction is also seeing new employment opportunities. However, investors in the other major chains are seeing their dividends decrease as they compete for what was once their almost designated market share (Rios, McConnell & Brue, 2013). The chains are looking to decrease costs in order to compete and sometimes, as we saw with Dairy Farmers, the primary producers can be left bearing these burdens. All three dominant companies are known for sourcing products from other countries and all have overseas investors, which are seeing profits move outside of Australia. In this respect, they are much the same with regard to money being invested elsewhere. Overall, Aldi has had a positive impact on what was previously seen as a sluggish, complacent industry, through increased competition.

 Limited number of firms controlled the market of Australia after the entry of Aldi, the competitors of Aldi has been worried about the behaviour of Aldi. With the raise in the number of firm prevailing in the tomato soup market in Australia, there would be a raise in the supply of products in the market. This shows a rightwards shift of the supply curve in the tomato soup market of the company. This can be explained with the help of figure 2 , below.

Figure 2: Effect on price of the tomato soup with the entry of Aldi

(Source: As created by author)

From the above figure, it is seen that with the entry of Aldi, there is a raise in the supply of tomato soup in the market. This increase in the supply, creates a rightward shift of the supply curve from S1 to S2. Corresponding to the shift of the supply curve, there is a fall in the price from P1 to P2, and an increase in quantity from Q1 to Q2. There is a fall in the equilibrium level (Walras, L. (2013). The suppliers, who were there earlier in the market, now receive a lower price, than they received earlier. Hence, there is a reduction in the profit margin of the producers.

Thus, the entry of Aldi in the market of Australia causes the oligopolistic market to become more competitive in nature. The increase in the competition causes the spending level of the customers to decrease (Pearce, Barbier & Markandya, 2013). This causes the overall GDP of the economy to decline as the companies in the market earns lower income.

Conclusion

The introduction of Aldi into the Australian market has not only increased competition, but also forced the industry to become more efficient within their own market share, even niche market specialists. The result is larger choice for consumers, more competitive pricing, greater job opportunities and more efficient industry overall. Whilst industry leaders will continue to fight for their share of the Australian market, the market will find its new equilibrium for both consumers, producers and investors. 

After the introduction of Aldi in the market of Australia, not only was the business of Aldi was affected but also the market and the business of the rival companies. The increased in the market competition due to the entry of Aldi caused the price level of the products in the market to fall.  However, the increased competition caused the overall GDP of the income to fall due to the lower spending of consumers.

References

Auerbach, A. J., Chetty, R., Feldstein, M., & Saez, E. (Eds.). (2013).Handbook of public economics (Vol. 5). Newnes.

Fudenberg, D., & Tirole, J. (2013). Dynamic models of oligopoly. Taylor & Francis.

Horstmann, N., Kraemer, J., & Schnurr, D. (2015). Oligopoly competition in continuous time. Available at SSRN 2630664.

Hubbard, G., Garnett, A., Lewis, P., & O'Brien, T. (2016). essentials of economics (3rd ed.). Melbourne: Pearson.

Okuguchi, K., & Szidarovszky, F. (2012). The theory of oligopoly with multi-product firms. Springer Science & Business Media.

Pearce, D., Barbier, E., & Markandya, A. (2013). Sustainable development: economics and environment in the Third World. Routledge.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.

Walras, L. (2013). Elements of pure economics. Routledge.