Dueling Duopolists, or, who should we cheer for when bullies battle?

The Aussie news headlines have been buzzing in recent days with the competing cries of our embattled brewers and the ‘on the side of the consumer’ supermarket giants, over an alleged effort by the latter to sell the majors’ beers as ‘loss leaders’.  See here and here for a reasonable summary.

This is the latest staple product to get this sort of a run (after milk and petrol) as Woolworths and the revitalised Coles (as part of Wesfarmers) engage in some much-missed competition.  Of course, it isn’t competition via ‘across the board’ price cuts, but, rather, through trying to switch buying preferences from one chain to the other (utilising the grocer’s associated liquor chains).

And poor old Foster’s (and presumably the much quieter Lion Nathan) are worried that this (alleged) predatory pricing will hurt their margins, and those of independent liquor retailers.

The reality of all this is that we’re talking about two pairs of behemoths locking horns, and competition here is a very different beast to that envisaged in perfect markets.  Look at the numbers:

– Foster’s (48% market share) and Lion Nathan (44%) amount to 92 percent of the Aussie beer market

– Woolworths and Coles/Wesfarmers amount to roughly 50% of the Aussie liquor retailing market (with most other sales through small, independent retailers)

– Woolworths (around 40%) and Coles/Wesfarmers  (around 35%) amount to roughly 75% of the Aussie grocery market

Those are the sort of market shares we called oligopolistic, or indeed duopolistic, with competition often reaching a calm equilibrium through effective price signalling and/or maintenance of market share.

Foster’s are kicking and screaming, however, due to concerns about the buying power of the two retail giants. Now, if Foster’s had a significant retail arm it might be able to curb such a threat (and earn more of those nice rents from the duopoly power).

But back in 2003 the brewer sold off Australian Liquor and Hospitality Group (ALH), which operated 131 hotels and 109 bottle shops. ALH now runs 285 licensed venues and over 450 retail liquor outlets.  And guess who now owns 75% ALH… Woolworths.  It seems Foster’s handed Woolworths the stick it is now being beaten with.

There’s talk that this behaviour will all come under the scrutiny of some eagle-eyed politicians in Canberra in the coming weeks.  Now, we’d hope they know a lot about duopolies (i.e. systems with two powerful parties)…

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