Price Discrimination In Australias Leading Supermarkets Economics Essay

Abstract.

In this Essay I will research Two of Australia ‘s major supermarkets ; Woolworths and Coles and to happen out if there any connexions between the two supermarkets that would take to an oligopolistic scheme or competition between the two. If any Oligopolistic behavior is identified, it is possible that the Major Supermarkets are bear downing different monetary values around Australia at certain consumer groups. So if this behavior is happening ; I have conducted studies and probes of monetary values on chosen merchandises in different Woolworths and Coles Supermarkets around Australia to see if there is any monetary value favoritism due to the location of the Supermarkets and depending in which metropolis bound they are runing in.

These Supermarkets operate in three different bounds which are: Urban, suburbs and Rural, depending on the metropolis bound and consumer profile, the probe should demo monetary values are different in each bound. Thus the Supermarkets are Price discriminating.

In decision what limitations faced in the garnering the grounds for the essay to endorse up the inquiry and researching whether the rubric is supported by the grounds in turn outing if the Two Major Supermarkets in Australia are monetary value discriminating.

Besides researching a possible new country for research that can be conducted in order to assist back up the statement of the rubric and assist place cardinal features of ruling house ( s ) in a peculiar market. .

Word count: 223

Introduction.

The nutrient and food market industry provides the Australian economic system with a scope of nutrient and food market merchandises such as, fresh green goods, dairy merchandises, flour and cereal merchandise, bakeshop merchandises, confectionary etc.

The industry produces a $ 50 billion turnover per annum ; doing it Australia ‘s largest fabrication sector. Supermarkets are the chief tool for this industry to let their consumers entree the huge scope of merchandises available on the markets. Major Supermarket ironss are drastically increasing their scope of services far beyond customary nutrient distribution by adding nutrient services, such as food shop, bakeshop sections and restaurants that capitalizes on the growing of nutrient off from place every bit good as nonfood services such as pharmaceuticss and Bankss that combine one-stop shopping convenience and time-saving characteristics. The latter is besides a strategic response to increasing competition from a group of merchants and big-box retail merchants that are ramifying out into the food market concern. Supermarket service degrees can impact demand, costs, market power and, hence, monetary values[ 1 ]. Therefore there are some chances for the nutrient trade to supply competition among houses to come in the industry. ( Supermarket pricing policy, Lopez ) .

In economic footings, it has been established that Australian supermarkets can be considered as an oligopoly. This is where a little figure of houses control that market, nevertheless much like a monopoly where one company controls the market and in an oligopoly there are at least two chief companies that control the market. In the Australian Food industry, the market leaders are without a uncertainty Cole ‘s group and Woolworth ltd. When there are, merely a few Sellerss viing with each other in the Market topographic point the actions of each one will hold a greater impact on the net incomes of the others. There is no individual theoretical account of oligopoly because there is no alone solution to the job of strategic interaction ; nevertheless, game theory more normally known as captive ‘s quandary can be used to capture the assorted results of the supermarket pricing policy. The captive ‘s quandary is a cardinal job in game theory that demonstrates why two people might non collaborate even if it is in both their best involvements to make so. It was originally framed by Merrill Flood and Melvin Dresher.[ 2 ]

Player 1

Do n’t diminish Price

The remunerators are the houses: Cole ‘s group and Woolworths.

The moves are the actions the two houses can take: they can either diminish the monetary value of their merchandises or do n’t diminish.

The ‘payoffs ‘ are the net incomes that each house will gain.

Decrease monetary value

A

$ 15

A

$ 20

Do n’t diminish monetary value

A

A

A

$ 15

A

$ 10

A

A

$ 10

A

$ 12

Decrease monetary value

A

A

A

$ 20

A

$ 12

A

The equilibrium result of the game is that both companies will diminish their monetary values even though both would be better off if they keep their monetary values as they are. Such an result is unstable since each house would hold an inducement to publicize if its rival did non. The Result that is most likely is called Nash equilibrium or the result at which neither house has anything to derive by altering merely its ain scheme one-sidedly.

Using this theory, would bespeak any possible grounds against the Supermarkets if either one were monetary value know aparting against consumers in a given country.

This paper will look into ‘ to what extent is the monetary value of merchandises in Australian supermarkets the finding factor in consumer ‘s pick to shop at a peculiar supermarket, and how can this cognition be used to increase consumer Numberss and gross.

Recommendations will besides be suggested after analysing such information. For the intent of this probe, this paper will take an in depth expression at local supermarkets in different communities with variable environmental factors.

Woolworth ‘s as A Company

Woolworths is an spread outing company that has 1000s of shops nation-wide, it is the 2nd largest private employer in Australia. It has efficaciously removed the mediator in the supply of merchandises to its shops. It grows and produces its merchandises and goods giving Woolworths complete economic systems of graduated table. Economies of graduated table are the cost advantages that a concern obtains due to enlargement. They are factors that cause a manufacturer ‘s mean cost per unit to fall as graduated table is increased. Economies of graduated table are a long tally construct and refer to decreases in unit cost as the size of a installation, or graduated table, additions.

I have collected a series of informations of certain merchandises inside the shop Woolworths from three major metropoliss in Australia. Choosing nine merchandises indiscriminately, observing down their monetary values and detecting each merchandise in three Woolworth ‘s supermarkets in the country of that metropolis. My hypothesis is Woolworth ‘s monetary values should systematically remain the same throughout all retail shops because of competition competition Cole ‘s and its advertisement say it has the lowest monetary values every twenty-four hours.

I besides conducted a Survey outside of the Woolworths Stores to consumers who were go throughing by and come ining the shop in each location, I was roll uping my consequences for ; the ground for this was to acquire an thought, why the consumers were shopping at this Supermarket. To acquire an Idea of what the distribution of Income was between the different countries. This was besides to see if Income distribution had any consequence on monetary value favoritism.

I foremost collected my consequences in Sydney, I chose three Woolworths locations ; Kellyville, which is a really high-suburbanized country, Surrey Hills, is located near the bosom of Sydney, which is a really urbanised metropolis country, and Penrith near the rural country, which is considered a lower income country.

Kellyville is by and large considered to dwell of chiefly in-between category income households, who can besides be characterised as either upper, mid or lower in-between category income earners harmonizing to the study consequences. Surrey hills is the interior metropolis is considered to be a higher income country with 42 % of families gaining AU $ 2000 or more a hebdomad. With an addition of monetary value within supermarkets the figure of consumers still willing to shop at these supermarkets does diminish but the per centum lessening is a batch lower than the hills territory. Penrith the western suburbs are considered a lower income gaining country with an mean hebdomadal income of around AU $ 1,087. However while this is the same for all three locations the difference is the per centum alteration in the figure of consumers willing to maintain shopping at these supermarkets lessenings by a higher rate when the monetary value is increased somewhat.

To warrant this, a simple supply and demand diagram can demo the consequence if the supermarkets were cut downing their monetary values.

For grounds why the supermarket monetary values will drop ; is because on an addition of supply which leads to an outwards displacement take downing the monetary value caused by the Lower costs of production significance that Woolworths can provide more at each monetary value. Cost nest eggs, can so be passed through the supply concatenation to jobbers and retail merchants and may ensue in lower market monetary values for consumers.A

On the other manus, if the costs of production additions, for illustration a rise in the monetary value of natural stuffs or if a company is holding to pay higher rewards to its workers, so concerns are unable to provide every bit much at the same monetary value and therefore this will do an inward displacement on the supply curve.

Changes in production of engineering and houses increasing their capital can alter rapidly and in other industries where technological alteration is fleet, we will see greater additions in supply and lower monetary values for the consumer. The impact this has upon FMCG ( Fast Moving Consumer Goods ) which are the merchandises that are sold rapidly at comparatively low cost. Is that they are produced fast and more expeditiously doing an addition in supply of the FMCG ‘s.

This Diagram, supply has an outward displacement S1 moves to S2, Price bead

3From P1 to P2 this cause an addition in demand Q1 to Q2, grounds for this displacement are as listed.

In add-on, the figure of manufacturers in the market and their purposes in an industry will impact the market supply. So when new concerns enter the market, supply additions doing downward motion on monetary value. Coles is one of the other major supermarkets in Australia, which is viing with Woolworths for monetary value control.

Where of all time there is a Woolworths there is a Coles ; in all the countries where the consequences were gathered, either right following door or merely across the street, even down the route. Right following to every Woolworths was a Cole ‘s supermarket. Positions of houses are non placed or built indiscriminately ; they built strategically to acquire the most clients for maximal net income. This is monopolistic behaviour, the market state of affairs in which there may be many independent purchasers and many independent Sellerss but competition is imperfect because of merchandise distinction, geographical atomization of the market, or some similar status.[ 4 ]

These two houses are viing for clients ; supermarkets sell similar or the same merchandises in each shop, depending on the consumer their penchants would find on the quality and value of the good being sold. Supermarkets together such as Cole ‘s and Woolworths offer specials or publicities on goods they are selling ; for illustration Holiday occasions such as Christmas or Easter. Besides store trueness cards are offered to consumers to promote disbursement to derive hard currency points, so consumers can gain these points to derive particular wagess or gifts if the appropriate points are gathered. But Cole ‘s monetary values on merchandises are much more expensive than what Woolworths has to offer, so why do consumers shop at that place?

Cole ‘s as A Company

Kales shop monetary values compared with Woolworths shop monetary values that merchandises are of similar or same group of green goods are more expensive. So why do people shop at that place? Probably the ground why some consumers shop at Cole ‘s instead than Frank winfield woolworths could be due to the fact of simple Advertising. Traveling back to Australia Cole ‘s advertisement was more exhaustively expressed through public medians. Offering low monetary values and specials on most merchandises they were selling. This influence of advertisement was aimed at the lower category society and in-between category because of person ‘s income net incomes are non every bit high as most, they would be inclined to shop at a topographic point that offers lower monetary values. But as the single stores at Cole ‘s supermarket they are really paying more instead than less.

Cole ‘s can bear down these high monetary values because of the monetary value favoritism ; it can bear down different monetary values for different groups, which are the lower and in-between category societies.

The information analysis recorded from the merchandise monetary values research graphs in Data Analysis conducted through the Cole ‘s shops and what it showed was that monetary values were systematically higher throughout each Coles shop over the three identified provinces and even though the shops where merely a suburb off from each other, monetary values of the recorded merchandises were still high even though competition was present in some of the countries such as Kellyville, Kelvin Grove, Spring hill and Victoria Park.

In the other countries that did n’t hold competition nowadays were able to majorly ‘cheat out ‘ the clients due to monetary value favoritism, therefore there was no other shop in the nearby suburb or local country to shop other than Cole ‘s ; so Cole ‘s supermarket could bear down whatever monetary value they wanted for the merchandises they were selling.

Comparing the consequences with Woolworths and Cole ‘s, Coles had a high monetary value charge on similar merchandises to Woolworths. Even in country of competition it seems that even with Woolworths lower monetary values on similar goods ; had no consequence on Coles merchandises.

Data Analysis between the Two Supermarkets.

Through the information analysis, it clearly shows that merchandise monetary values of the two supermarkets in the different parts have been changing their shop monetary values, to efficaciously know apart consumers. Looking at the graphs for Woolworths in appendices figures 1 to3.

Figure 1 is demoing Woolworth shops based through Sydney in at that place distinguished metropolis bound. Surrey hills being the more expensive country ( closer towards the metropolis instead than suburban countries ) where higher income earners live, on figure one we can clearly see on the chart that monetary values compared to Kellyville ( in-between category earners ) and Penrith ( lower category earners ) that they are being charged high monetary values for the same merchandises in Surrey hills. With this information, it clearly shows that Woolworths is monetary value know aparting due to the degree of income earners in a specific country. Associating with the rubric ; non merely is Woolworth ‘s monetary value discriminating by the degree of incomes of the consumers but with the geographical location of the specific groups of consumers. Surrey hills is in the country of the metropolis, where monetary values of goods and services are comparatively more expensive, hence Woolworths taking advantage of its economic capablenesss to bear down higher monetary values in this peculiar country, irrespective of competition. Throughout the other provinces of Australia such as Perth and Brisbane, the same state of affairs is happening. Under the charts are the tabular arraies demoing the monetary values of the goods that were noted. Obviously it shows the difference in monetary values in the countries of the information gathered, the significance of this was once more to raise the grounds, demoing by how much Woolworths was monetary value know aparting on the merchandises.

Kales is in the same state of affairs as Woolworths, as the grounds shows that Coles is besides monetary value know aparting due to the consumer incomes and geographical location of shops. But for Coles the monetary values are higher and closely similar as for Woolworths there was a distinguishable monetary value difference. Looking at figures 5 to 6 in appendices ( Coles merchandise monetary values ) there is no important alteration in the monetary values they are know aparting on.

Comparing the information ‘s of Woolworths and Coles, we see a monolithic monetary value difference of the two shops. Calculating the mean monetary values of all three provinces, it was discovered on Figures 7 and 8 in appendices that Woolworths had a high difference in their shop monetary values than Coles did, but Woolworth ‘s monetary values were lower than that of Cole ‘s shop monetary values. Reason for this could be that since consumers have other picks of shopping at other supermarkets sooner little 1s. Woolworths has lower monetary values to maintain out smaller rivals whom try to come in the market but can non because fiting the lower monetary values of Frank winfield woolworths agencies they are paying higher production costs for small net income, they can non prolong this so they generate loss instead than derive net income.

The ground for the high monetary values for Coles could be due to the fact, that the country the shop is located deficiencies other supermarket competition so therefore consumers are forced to shop at Coles if in that territory.

This type of Price discriminating of what Woolworths and Coles are utilizing is referred to as 3rd degree monetary value favoritism. This signifier of monetary value favoritism is the most often used among houses with economical power in the market. The key for 3rd degree monetary value favoritism is associated straight to the consumer ‘s willingness and ability to pay for the good or service. It means that the monetary values that are charged by the house may bear small or no relation to the cost of production.

This graph is an illustration of 3rd monetary value discriminating

5

Assume that a house has divided a market by clip into a peak market with inelastic demand, and an off-peak market with elastic demand. The demand and fringy gross curves for the extremum market and off extremum markets are labeled A and B correspondingly. This is show in the diagram on the old page. Assuming a changeless marginal cost for providing to each group of consumers, the company aims to bear down a net income maximising monetary value to each group. In the extremum market the house will bring forth where MRa = MC and charge monetary value Pa, and in the off-peak market the house will bring forth where MRb = MC and charge monetary value Pb. Consumers with an inelastic demand for the merchandise will pay a higher monetary value ( Pa ) than those with an elastic demand who will be charged Pb.[ 6 ]

With this designation of the two supermarkets, Woolworths and Cole ‘s monetary value discriminating. This raises an interesting fact that, are the two major supermarkets in Australia really conspiring with each other in the same contestable market? ?

Frank winfield woolworths and Coles, Duopoly? ?

Probes have come excessively light, Australian authorities is examining ; if the two major supermarkets are conspiring together, to maintain monetary values high in the supermarket industry.

Here is an infusion from an Australian new web site:

Harmonizing to new OECD monetary value informations, monetary values for nutrient in Australia have increased by 41.2 per centum since the beginning of 2000[ 7 ]. Supermarket giants Woolworths and Coles are being hold responsible for Australians paying the fastest turning monetary values for food markets in the developed universe. To cut down the rapid addition in monetary values at that place should hold a greater competition in the supermarket industry where other rivals can cut down the duopolies monetary values, but if Woolworths and Coles are together working on maintaining monetary values high, so they are presenting or implementing barriers to entry into the market.

In most states houses that are conspiring together is extremely illegal. With two duopolies present, they can coerce barriers to entry into a peculiar market e.g. Woolworths and Coles, forestalling any other competition from come ining. Meaning the monetary values are higher in the duopoly market. The ground they put up these barriers is because if competition were to come in the market, the mean cost of goods and services provided by the Monopoly or duopoly house ( s ) will drop, to vie with each other for consumers, therefore monetary value favoritism is n’t a factor when this occurs. Examples for Barriers to Entry could be Advertising ; Cole ‘s in Australia has a monolithic advertisement run which dominates all other supermarkets even Woolworths. With this advantage Cole ‘s country able to spread out and make consumers throughout Australia converting them to shop at Cole ‘s.

Another illustration of Barriers to Entry is Vertical Integration which is The procedure in which several stairss in the production and/or distribution of a merchandise or service are controlled by a individual company or entity, in order to increase that company ‘s or entity ‘s power in the market place[ 8 ]. Which Woolworths has ; Woolworths does n’t merely sell or bring forth its ain merchandises, it besides has third degree shops, for illustration Woolworths has its ain Liquor shops and Petrol Stationss.[ 9 ]With this advantage Woolworths can forestall multiple rivals from different markets from come ining, therefore monetary values for the goods and services will stay high. There are many other signifiers of Barriers to Entry e.g. control of resources: If one house has control of a peculiar resource that is required for a certain industry, so other houses can non vie in the same industry. Cost advantages independent of graduated table: Patented engineering, know-how, favourable entree to raw stuffs, favourable geographic locations, and larning curve cost advantages.

10

The Price Inelastic of demand graph on the left shows the monetary values of goods or services altering. As you can see if the current monetary value was to diminish by a batch from P1 to P3, the lessening would be loss in net income borders and the measure would merely increase by a small spot, shown by the shaded bluish country. If the monetary values were to increase from P1 to P2 so there would be a monolithic addition in net incomes but small bead in measure Q1 to Q2 shown by the shaded green country.

Short tally effects of this, merchandise efficiency is at a high in the industry of bring forthing nutrient, the PPF diagram is demoing the merchandise efficiency between nutrient and computing machines, Woolworths and Coles will be bring forthing at point A for maximal nutrient production because they specialise in this country non in computing machines.

11

The long tally consequence on this will be the consumers a batch ; with the duopoly in consequence market monetary values are n’t able to cut down therefore doing monetary value inelastic of demand on certain goods and services because consumers have no other pick to shop at cheaper retail merchants because there is no competition in the market. Using a Price inelastic of demand graph as a theoretical account to demo what could go on if the Duopolies Woolworths and/or Coles were to increase or diminish monetary values in their controlled market

So overall it is more effectual for the Supermarkets to increase their monetary values to derive the big sum of net income possible.

Decision

With the probe of the rubric to hold proven correct that Supermarkets in Australia are monetary value know aparting due to geographical location. With farther in-depth probe it has besides come about that the geographical location of the shop is tied with the consumer ‘s income degree in the general country of the shop location. The consumer ‘s income which contributes to the finding of the monetary values of the goods and services that the consumer can afford and what the shop provides.

I would wish to add that Woolworths and Coles may turn out to be perceptively rivals in the eyes of consumers but following information that followed after the initial research of monetary value favoritism of consumers, that the possible fact that Woolworths and Coles possibly be a Duopoly, conspiring together of shop monetary values in the market.

There is some grounds that shows that Woolworths and Coles are a duopoly but this is unsure. With the deficiency of grounds to back up this, my personal contemplation is that Woolworths and Coles are a duopoly.

With the deficiency of more sustainable primary research grounds, such as questioning shop directors to notice on the state of affairs, which was one of the restrictions I faced because it prevented a more elaborate account of if the Supermarkets were monetary value know aparting consumers which would assist back up the claim. So the chief beginning of grounds was the probe of the merchandise monetary values of certain goods.

This essay could spread out more into the country of Coles and Woolworths being a duopoly. So it suggests a new country of look intoing and research for future essays and it would be interesting to happen out if they were, in order to strongly support that Woolworths and Coles were monetary values know aparting.