Structure of the Industry
Discuss About The Promotional Alcohol Discounting In Australia.
Structure of the industry: Many small-size family-oriented businesses perform under this grain industry. Most of the business players are characterised as non-employing enterprises. Hence, they receive income from profit while the concept of traditional wage does not work.
Key features: The Grain Growing industry chiefly focuses to export crops like wheat and barley. A cyclical pattern operates within this industry, where decrease in production leads prices of grains to increase further ( IBISWorld AU”. 2018). The opposite situation also happens when production increases by large amount. Weather has great impact on the supply of grains.
The specified industry produces wheat and coarse grains like barley, soybean, chickpea, canola and peanut and other grains, pulses and oilseeds.
The level of barriers to entry in this grain growing industry is low, which means new firms can enter easily. Due to availability of all required inputs, firms can easily shift their agricultural activities. However, two possible barriers can restrict new firms to enter in industry and those are capital investment requirement along with securing financial accumulation for such investment.
Market share concentration in this concerned industry is low. In this Grain Growing industry, some large commercial operations can be seen. However, no firm alone holds significant market share for producing total output. Instead of this, small family-oriented firms dominate the entire industry. Hence, many firms have employed fewer amounts of workers while other firms operate as non-employment enterprises. However, this market share concentration in this specified industry has increased for the last five years due to competition and increasing pressures of costs. Consequently, some small firms have closed their operations while some large-scale industries have captured the significant market share. The concerned grain growing industry does not have any major players.
As many firms get their income profit, they intend to generate higher amount of profit and this in turn supports the industry to increase its profit margins by lowering wage costs. On the other side, revenue of this concerned industry has increased for the last five years as many firms have increased their investment in machinery to reduce number of employees. Consequently, revenues of those firms have increased significantly.
The grain industry of Australia has earned strong base of customers worldwide due to its standard quality of products. To compete in international market with other countries, this specified industry has increased its production along with quality through improving technology, logistic and infrastructure. As a result, the economy has become economically efficient and this in turn has helped customers to get higher quality products with comparatively lower prices.
Australian super market and grocery industry performs under oligopoly market structure. According to this market structure, Woolworths and Wesfarmers have captured significant market share of this industry compare to others (Wardle and Chang 2015). Moreover, each firm are selling almost same kind of products with small variation.
As some firms have controlled the entire market with strong power, other firms face difficulties to enter in to the market (Head and Spencer 2017). Hence, this market has barriers regarding entry of new firms.
Barriers to Entry
Non-price competition is a part of collusive oligopoly, where firms intend to collude with each other instead of doing any competition. Consequently, all firms together behave like a monopoly. This type of collusion is absent within this industry (Nocke and Schutz 2018). However, super markets follow some forms of non-price competition to increase their revenue, for instance, advertisement.
Figure 1: Kinked demand curve under oligopoly
Source: (created by author)
According to the kinked demand curve, a firm reduces its price expecting that its competitors may follow this trend through following price cut. As a result, demand increases in the market while shares of each firm remain same (Svoboda and Kopecka 2017). On the contrary, the firm can expect that its competitors may not follow its decision regarding price increase and consequently, this firm may lose a considerable part in market. Hence, above Pe price, he demand curve is elastic while below this price, the demand curve is inelastic. Due to this nature of the competitors in market, firms do not alter output and price by large amount.
Firstly, firms can easily compare prices of their competitors and based on which, they can set their own price level. Secondly, due to small numbers of firms, customers can easily compare product and services and consequently can choose the best one (Yaprak, Yosun and Cetindamar 2018). On the contrary, some limitations of this market are: some firms with significant market share dominate the entire industry and follow price cut technique for which other new firms cannot enter into the market. Moreover, due to small number of firms, consumers get fewer choices to purchase any product.
- a) Monopolistic market structure consists with the characteristics of both perfectly competitive and monopoly one. Large numbers of firms are seen within this specified market while the numbers of buyers are also very large (Bertoletti and Etro 2017). Hence, each firm captures small share of the entire market. Those characteristics are similar to the perfectly competitive one.
- b) Monopolistic competitive firms sale products, which are close substitute but not the perfect one (Impullitti and Licandro 2018). As a result, each firm operates like a monopolist and faces a demand curve with negative slope along with a marginal revue curve with same slope.
Figure 2: Short-run profit under monopolistic competition
Source: (created by author)
Under this monopolistic competition, a firm can make excess profit or can incur loss. The above figure has represented such condition, where a firm has earned extra profit. The demand curve or average revenue (AR) curve and marginal revenue (MR) curve are drawn with negative slope curves. Under short-run, the firm has achieved its equilibrium amount of output at Q while corresponding market price has remained at P. However, to produce Q amount of output, the concerned firm has incurred C amount of cost, which low compare to the P. Hence, at this situation, the seller can get excess amount of profit, which is represented by the shaded area in figure 2.
Figure 3: Short-run loss under monopolistic competition
Source: (created by author)
Figure 3 has represented the situation, where a firm has incurred loss in short-run. At this situation, cost of production has increased compare to the price of products. The shaded area has represented the situation of cost.
- c) Due to lack of barrier, any firm can enter into this monopolistically competitive market or any existing firm leave the one. Under short-run, firms can generate excess profit, which in turn can attract new firms to enter within the market (Bertoletti and Etro 2017). Due this process, share of each firm decreases more and they just earn normal profit in the long-run. On the contrary, when firms incur losses, some of them may leave the market. This phenomenon further increase market share of remaining firms and they have started to gain normal profit.
- d) Under monopolistically competitive market, a firm bears advertisement cost to attract customers (Chan, Narasimhan and Yoon 2017). This process of non-price competition is the chief characteristic of this market.
- e) Firms under this specified market structure sell differentiated products and consequently can charge higher price compare to fair price to their customers (Parenti, Ushchev and Thisse 2017). Moreover, firms incur higher costs for advertisement and this in turn forces firms to charge higher prices from their customers.
- a) Through consuming sugary drinks by excessive amount, the society gets negative externalities. People, who are obsessed with such drinks, do not pay the true costs regarding their actions. Instead of this, this cost affects a third party, which pays actual taxes (Pincus 2018). Those taxes are related with health care and other possible benefits to help this obsess consumer.
- b) The private costs of obesity refer the situation where people bear costs personally for their medical treatment. Moreover, due to excess weight, people cannot work properly and consequently loss their jobs. On the other side, third-party costs refer the situation where other people pay these costs, for instance, health insurance company (Le et al.2017). The company pays more amount for an obsess person compare to the amount the person pays.
Figure 4: Negative externality and imposition of tax
Source: (created by author)
In figure 4, marginal private benefit (MPB) curve or the demand curve has equated with supply curve or the marginal social cost (MSC) curve. This in turn has generated the amount of equilibrium price and output as P1 and Q1, respectively. Here, marginal social benefit (MSB) is lower compare to the MPB. At MPB, the amount of optimum price and output are P2 and Q*, respectively (Hagenaars, Jeurissen and Klazinga 2017). Hence, the market has experienced over supply of product. However, after imposition of tax, the price has increased by P2 P* amount. This excess price on same amount of output can force people to consumer less amount of sugary drinks.
The first type of market failure is bad choice of people for products due to their lack of knowledge (Hagenaars, Jeurissen and Klazinga 2017). Secondly, this type of obesity may spread other diseases like diabetes among people.
References:
Bertoletti, P. and Etro, F., 2017. Monopolistic competition when income matters. The Economic Journal, 127(603), pp.1217-1243.
Chan, T.Y., Narasimhan, C. and Yoon, Y., 2017. Advertising and price competition in a manufacturer-retailer channel. International Journal of Research in Marketing, 34(3), pp.694-716.
Hagenaars, L.L., Jeurissen, P.P.T. and Klazinga, N.S., 2017. The taxation of unhealthy energy-dense foods (EDFs) and sugar-sweetened beverages (SSBs): an overview of patterns observed in the policy content and policy context of 13 case studies. Health Policy, 121(8), pp.887-894.
Head, K. and Spencer, B.J., 2017. Oligopoly in international trade: Rise, fall and resurgence. Canadian Journal of Economics/Revue canadienne d’économique, 50(5), pp.1414-1444.
Impullitti, G. and Licandro, O., 2018. Trade, firm selection and innovation: The competition channel. The Economic Journal, 128(608), pp.189-229.
Le, L.K.D., Barendregt, J.J., Hay, P., Sawyer, S.M., Paxton, S.J. and Mihalopoulos, C., 2017. The modelled cost?effectiveness of cognitive dissonance for the prevention of anorexia nervosa and bulimia nervosa in adolescent girls in Australia. International Journal of Eating Disorders, 50(7), pp.834-841.
Market Research Reports & Analysis | IBISWorld AU. 2018. Clients1.ibisworld.com.au. Retrieved 2 May 2018, from https://clients1.ibisworld.com.au/reports/au/industry/default.aspx?entid=13
Nocke, V. and Schutz, N., 2018. Multiproduct?Firm Oligopoly: An Aggregative Games Approach. Econometrica, 86(2), pp.523-557.
Parenti, M., Ushchev, P. and Thisse, J.F., 2017. Toward a theory of monopolistic competition. Journal of Economic Theory, 167, pp.86-115.
Pincus, J., 2018. Grattan Institute’s Case for Sugar Tax Is Not Proven. Australian Economic Review, 51(1), pp.41-51.
Svoboda, R. and Kopecka, L., 2017. The Sweezy model of price competition among private labels of chain stores. Agricultural Economics (Zem?d?lská Ekonomika), 63(7), pp.299-307.
Wardle, J.L. and Chang, S., 2015. Cross?promotional alcohol discounting in Australia’s grocery sector: a barrier to initiatives to curb excessive alcohol consumption?. Australian and New Zealand journal of public health, 39(2), pp.124-128.
Yaprak, A., Yosun, T. and Cetindamar, D., 2018. The influence of firm-specific and country-specific advantages in the internationalization of emerging market firms: Evidence from Turkey. International Business Review, 27(1), pp.198-207.
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