Price wars are common for oligopolistic firms. Price wars in the short run can be argued to be beneficial to the consumers. Since the price wars are often done by lowering prices, consumers surplus rise because they are buying at a lower price than the price which they would be willing to pay. However, lower price always have a negative impacts on the producers of goods; the firms cannot buy at a high price and then sell at a lower price which would mean selling at a loss (Linda, 2017). Thus, the firms offer lower prices to the producers of the commodities; producers are therefore the primary losers (Smith, 2015). There are various theories that govern the market; the theories holds that the market should be competitive and free from all unfair business practices that would result in charge of higher prices beyond the market prices. The oligopoly market to be discussed in this paper however does not follow the ethical theories; they misuse their market power to employ unfair practices that prevents the market from being competitive. These unethical issues will be discussed in detail and the main sources of the ability of this market to engage in price wars identified. The ACCC body has been noted to intervene in the markets to improve competition (Dimech, 2014); this paper shall identify the roles of the ACCC and discuss how they operate to achieve their goals.
The ethical theory presented in the literatures is that the market should operate in a competitive market; this is where efficiency in the market is high. This is where the social welfare is maximized because the sellers do not have any power to influence the price. The price is given by the demand and supply forces. Here, the sellers compete for selling a higher level of quantity at the given price. There are unethical issue when a market operates in an oligopoly market structure. One of the unethical issue is that of price fixation; here the players’ market power if great since the number of sellers on this market is low. Thus, they have the power to either raise or lower the price. In this market however, they rarely compete by raising their prices because every time a single firm makes such a decision it ends up making losses. Since the products are close substitutes, the consumers cannot accept to buy at a higher price whereas there is another seller selling a similar product at a lower price. Therefore, a price rise only results in a loss of market share.
On the other hand, a price cut strategy by one firm is welcomed and quickly implemented by every other firm. This is because, a lower price attracts many customers; the other firms cannot stand to see their customers flow away to buy from the firm that is selling at low price; this explains why they follow a price cut. According to Riley (2015), the demand curve for an oligopoly market is kinked because a price change by a firm may result in two types of demand for its products.
Fig: The kinked demand curve
Source: Johnston (2015)
If an oligopoly firm is producing at point X where quantity produced is Q1 and sold at price P1, there is a need to determine how the consumers demand will be affected by its pricing decision since it has no intention to lose some of its customers to the other firms. If it raises the price above P1, the demand is relatively elastic for substitute goods, thus the firm expects to lose many customers and thus avoids this strategy. At the same point X, the firm finds the demand relatively inelastic to reduce price. It expects to gain many customers; however other firms follow and thus the demand curve kinks downwards at point X and the firm makes less revenue. So both a price raise and cut results in a cut in revenue.
There are several characteristics that enables the oligopolistic firms to engage in price wars. One is that the firms sell products that are slightly differentiated such that if one firm cuts the price, its market share will rise since consumers’ utility is maximized when they buy at a lower price (Piros and Pinto, 2013). The products have close substitutes; raising the price by one firm makes it to lose its customers to the other firms selling at a lower price. The other characteristic is the presence of increased barriers to entry; new competitors are completely discourage from entering the industry, and when they enter they are forced out of the market. If there were many players in the market, the players would lose the market power for initiating price wars. This barriers to entry also gives another characteristic of few sellers and many buyers.
The role of the ACCC is to ensure that there is the promotion of competition on the markets. It does this by identifying and punishing all the firms caught employing unfair business practices. The ACCC holds that the welfare and prosperity of Australian consumers is raised in the competitive market (Holley and Chasser, 2012). The primary role is to strengthen, supplement and protect the working of competition in the Australian market with an aim of promoting an increased efficiency in the economy and consumers’ welfare (Accc.gov.au, 2017). By this it means that action will only be taken where the consumers’ welfare is to be improved, competition is to be protected and where harmful anti-competitive conduct is employed. The main priorities of the ACCC is to remedy market failure by promoting and maintaining competition, supporting fair trading practices by protecting the consumers’ interest and safety, and promoting efficiency.
The ACCC should ensure that it improves on its strategy to monitor all the competing firms and set various regulations to be observed by the firms failure to which they will be held accountable. Some business owners are not aware of the various unfair business practices; the setting of the regulation will help them in differentiating between the right and the wrong practices. The ACCC should also ensure that there is a raised awareness of the unfair practices to the consumers since they are the easiest group to detect them whenever employed by a firm. Serious action should be taken to any firm held accountable so as to be a lesson to the other firms. The ACCC should determine when a firm like the supermarkets is trying to lower the prices so as to discourage competitors and may set a price floor for that commodity beyond which the firm could be held accountable.
Conclusion
The Australian supermarket industry is operating under an oligopoly structure. This has given it power to influence the consumer prices. The presence of low commodity prices resulting from price wars is beneficial to the consumers in the short run, however, it hurts the producers. In the long run, the producers may be discouraged from producing sufficient supply and the prices will be forced to rise; producers may decide to leave the supply of the products and venture in other businesses that could generate more revenue. The ACCC is important in promoting competition and should ensure that the prices offered in the market maximizes both the producers and maximizes consumers’ welfare. Efficiency in the Australian market could only be raised by the government supporting the full operation of the ACCC and making it stronger and more efficient in identifying the rule breakers. With a reduction in barriers to entry on the oligopolistic market, new entrants will flock the market and it will become competitive.
References
Accc.gov.au. (2017). About the ACCC. [Online] Available at: https://www.accc.gov.au/about-us/australian-competition-consumer-commission/about-the-accc [Accessed 7 Oct. 2017].
Dimech, A. (2014). Australian Oligopolies. [Online] Blog.adonline.id.au. Available at: https://blog.adonline.id.au/oligopolies/ [Accessed 6 Oct. 2017].
Holley, G. and Chasser, M. (2012). The role of the ACCC in financial services. [Online] Moneymanagement.com.au. Available at: https://www.moneymanagement.com.au/features/editorial/role-accc-financial-services [Accessed 7 Oct. 2017].
Johnston, M. (2015). Oligopoly and the kinked demand curve. [Online] Econfix.wordpress.com. Available at: https://econfix.wordpress.com/tag/kinked-demand-curve/ [Accessed 6 Oct. 2017].
Linda (2017). Oligopoly Markets in Australia. [Online] Essay.uk.com. Available at: https://www.essay.uk.com/coursework/oligopoly-markets-in-australia.php [Accessed 6 Oct. 2017].
McTaggart, D., Findlay, C. & Parkin, M. (2012). Macroeconomics. AU. Pearson Higher Education.
Riley, G. (2015). Oligopoly – Kinked Demand Curve. [Online] tutor2u. Available at: https://www.tutor2u.net/economics/reference/oligopoly-kinked-demand-curve [Accessed 6 Oct. 2017].
Piros, D. and Pinto, E. (2013). Economics for investment decision makers: micro, macro, and international economics. Hoboken, N.J: Wiley.
Smith, M. (2015). The death of the oligopoly: Australia’s incumbents face new rivals. [Online] Financial Review. Available at: https://www.afr.com/brand/chanticleer/the-death-of-the-oligopoly-australias-incumbents-face-new-rivals-20150421-1mq11b [Accessed 6 Oct. 2017].
Stackelberg, V., Bazin, D., Urch, L., and Hill, R. (2011). Market structure and equilibrium. Berlin, Springer.
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