The current value of annual home improvement market is about $833 billion, and there are four major competitors in the market: Wesfarmers Limited, Woolworths Limited, Metcash Limited, and others (IBISWorld 2013). According to Fisher’s lecture (2013), the market structure of the Australian home improvement retail industry is most likely to be oligopoly. The definition of Oligopoly is that limited independent firms dominate a home improvement industry, which has high concentration of market power and high barriers of entry. The top four players accounts for about 30% of industry revenue in 2012-13, therefore the concentration in this industry is medium (IBISWorld 2013). Wesfarmers Ltd-owned Bunnings is the current market leader in the Australian home improvement market that has 21% market share (IBISWorld 2013). Behind them are the Masters that is a new entrant and will go head to head against Bunnings in the market. As Masters stores are opened, Bunnings could potentially lose customers in the market, but significant earnings would be buttressed by limited price competition (‘Room for Woolies and Bunnings’ 2011). The fact that Bunnings is the current leading retailer in the market implies that the main seller would maximize profit as shown in the figure 1 below. As a result, Masters may follow the price leadership of Bunnings, which is rising and lowering their price when the leader makes a change to compete in the market, which is tacit collusion (Rittenberg and Tregarthen 2011, p. 429). In the long run, it is expected to see the price of all firms to be perfect competitive moving together in response to the changes in demand or production cost (Rittenberg and Tregarthen 2011, p. 429). Further more, the interaction of the two firms is difficult to analysis as it is complex. As Bunnings is currently strong financially, well positioned, and offer a huge range of brands, products and services in the Australian home improvement industry (Ogden-Barnes 2011). With this strong and famous brand, this is a barrier for Masters to enter into the market. Therefore, the new entrants must compete with the ‘big mac’ with large capital. Woolworths and Lowe’s is the second largest home improvement retailer in the world and acquired Australian hardware distributor Danks Holding Ltd in 2009 (‘Woolies bets Masters will knock off Bunnings’ 2011). This will increase the pressure of Masters in joining the market, however their capital and strength is their ability of entry. Masters is a significant external force to Bunnings for potential market entry. Firms continue to improve their service and reduce the cost of their products to grant more profit in the market. However, the regulation and policy is quiet light. As a result, oligopoly in the long run is due to higher barriers to entry and higher cost to compete.
(Figure 1 – Oligopoly Price setting)
Woolworths prepares to open a new Masters in Hobart, but there is already a strong retailer, Bunnings, and few other retail stores across Hobart. As the new entry into the Hobart home improvement market, Bunnings, which is dominant players in the industry, would definitely respond to Masters. In an effort to introduce Masters in the market and gain the trust that had already been significantly won by the local Bunnings, the new Masters would be forced to strongly enter into advertisement and marketing ventures. Coupled with its large size and more capital base, the new Masters store would successfully win over a significant section of the market. This would trigger a direct reaction by Bunnings. In order to ensure that they try to retain a significant market share, Bunnings would also jump into vigorous marketing activities. As Master is advertising in the market, Bunnings may react by advertising in the market as well, which is called game theory. It is better to understand behaviour between oligopoly firms (Fisher 2013). Both firms have a dominant strategy; each…