Australia and the Federal Government

Australian Federal Government

Should the Australian Federal Government intervene in the groceries market? Discuss the reasons for and against government intervention strategies that could be used.

In the Australian groceries market, there exist factors that affect the allocation of resources. These factors in turn affect the preferences and decisions made by businesses and consumers that come together and determine equilibrium prices of grocery products. This is called the price mechanism. In the groceries market the factors that determine prices are the demand of a product which in turn affects the supply of a product. So if a demand is high a company will expand their output to meet the high demand of the consumers. This is how the grocery markets work, through price signals. However, there is a power that exists that can intervene in the price mechanism on the basis of achieving what they perceive to be an improvement in economic welfare. This power is known as market intervention. There are three cases/objectives as to when a government would intervene, and they are: Respond to market failure, to improve economic efficiency, or equitable distribution of income and wealth. The type of market failure that has occurred in the Australian groceries market is the abuse of market power by the duopoly of Coles and Woolies. Given that the condition of a market intervention is of three cases listed above and that the Australian grocery market is facing a market failure. There should definitely be some sort of market intervention. Further on we will be discussing the strategies used by the government to counteract market failure and will also be discussing the advantages and disadvantages of these strategies in order to ascertain whether an intervention would be beneficial or effective for the Australian grocery market.

The market competition that exists in the Australian grocery market is that of a duopoly, more specifically a duopoly consisting of Coles and Woolies. To understand the reality of market power in the Australian grocery market we first have to understand what a duopoly really is. A duopoly is a type of oligopoly where two producers exist in one market, but the reality of the Australian grocery markets is not that there are only two producers in one market rather that there are two main dominant forces/producers in the market. A duopoly has its fair share of advantages and disadvantages. Advantages include; close competition, competition in prices help lower average price of goods, and disadvantages include; duopolies reach nash equilibrium and prices don’t drop, two dominant forces in one market will make it difficult for smaller businesses to gain market share which result in many new and old businesses being unable to keep up and are forced to close shop.

The behavior of Coles and Woolies could be perceived as a benefit to consumers, the groceries market and the Australian