Economics Essay: Impact of COVID-19 on Australian Retail Industry

Question

Task: Write a detailed economics essay addressing the following points:
a) Briefly compare and contrast four market structures regarding the allocation of resources.

Identify the key factors that distinguish four market structures and explain the differences in market outcomes (i.e. price and quantity) among these market structures.

While your textbook is your first point of reference, you should consult other references in order to receive full marks. Use real life examples (with references) to support your discussion.

b) Choose an industry from your home country that was affected by the current pandemic. Using real data from your case study identify its key characteristics in relation to the factors used to differentiate among the market structures.

Describe your case study in sufficient details. Use features of each market structure such as number of sellers, type of product, entry conditions, profits and losses in the short and long run, advertising, research and development and appropriate diagrams to answer this question.

c) Explain the effect of pandemic on the industry using economic theory, real life data and illustrate it on a diagram.

This is the analysis of your case study where you need to analyze the effect of pandemic on market outcomes (i.e. price and quantity), provide relevant information, use tables, diagrams where appropriate. You should use real data as much as possible.

d) What actions did government take to support your chosen industry and why? How government measures changed the market outcome (i.e. price and quantity) for this industry? Use real data from your case study and explain using economic theory and diagrams.

This is the analysis of your case study where you need to analyze the effect of government intervention using the theory and real data from your case study.

Answer

Introduction
The outbreak of COVID-19 has created enormous turmoil for the economies across the globe, and it has created several challenges and issues for all the industries in the economy. The economics essay will discuss the impact of the COVID-19 pandemic on one of the industries of Australia, and the chosen industry is the Retail Industry. Firstly, the essay will discuss the different market structures and will try to compare and contrast them on the basis of their resource allocation capabilities. Then the essay will discuss the industry that has been chosen (retail industry), and with the help of different data, the key characteristic of the industry will be identified. The factors that will be used for the identification of the characteristics are sellers, products, profit, and research and development. Furthermore, the impact of the pandemic on the retail industry will also be discussed using appropriate economic theory. This will be done with regard to the quantity and price of different products sold by these retailers. Lastly, the essay will identify and recognize the support system introduced by the government so that they can change the market outcome of the industry.

Market Structures Regarding Allocation of Resources
Market structure is the differentiation of different industries that are categorized on the basis of their nature and degree of competition in the market. The factors that determine the market structure are price, buyers, sellers, concentration degree, types of products, entry and exit restriction, and negotiation abilities. Based on these factors, there are four types of market structure, and they are perfectcompetition, monopolistic competition, oligopoly, and monopoly. Eachof these market structures have their own characteristics and degree of competition and there as significant differences between these markets structures. The first market structure is a perfect competition market, and this structure is considered to be the most efficient structure because it can appropriately allocate resources. This s because in a perfectly competitive market, there is a free development if the competitive market and the seller have freedom of deciding what to produce and what to sell, and the consumers have the freedom to decide what to buy(Uzonwanne & Ezenekwe, 2018). There is rationality in the market structurebecause consumers in this structure spend to maximize their satisfaction, and producers allocate their resources to maximize their profits.

Furthermore, in this market structure, both the buyers and sellers have perfect knowledge that ensures optimum allocation of resources.The outcome of this market structure is that the demand elasticity is perfectly elastic because the sellersproduce as much as they can sell. The real life example of a perfect competition market structure is ebay because there are many buyers and sellers and both the buyers and sellers have perfect knowledge(Pettinger, 2017).

On the other hand, the allocation of resources is not efficient in monopolistic competition because of the inequality in the price and marginal cost of the sellers. The major and primary reason for its inefficiency is its market control and negatively sloped demand curve.The demand curve is negatively sloped in the monopolistic market because the prices set by the firms in this market structure aregreater than their marginal revenue. Compared to perfect competition, monopolistic competition produces less output and these results in inefficiency in resource allocation. Along with that, the prices charged in the monopolistic competition are higher than the prices charged in the perfect competition. The production of firms is not optimal, and they produce lower than what they are capable of, and this underutilization of capacity results in the misallocation of resources in this market structure.McDonalds and Burger King are the real life example of monopolisticcompetition (Thakur, 2021).

In the oligopoly market structure as well, there is a misallocation of resources. This is because, in the different forms of oligopoly structure, the firms are indulged in non-price completion, and this leads to the wastage of resources. In an oligopoly, there are few sellers who sell identical products, and the increase or decrease in production ultimately affects the market price of the firm operating in this market structure. The real life example of grocery sector of Australia can be given where there are few sellers who sell identical products(Yun, 2021).The firm is highly interdependent on each other regarding the prices changes and policies. Comparatively, in the case of a monopoly market structure, there is an under-allocation of resources because the firms have excess capacity. This is because of the presence of a monopoly market structure, the welfare of the consumers is reduced because the smaller the monopoly, the higher is the prices of the products. In a monopoly, the seller can set any price they want to, and the consumers have bought it at that price because there is no alternative. This is because in a monopoly, there is a barrier to entry, and not firm can freely enter the monopoly market.

Case Study: Retail Industry of Australia
The Australian industry that has been massively affected by the current pandemic is the retail industry of Australia.There are thousands of retailers operating in the market of Australia, and they have been severely affected by the outbreak of a global pandemic. The retail industry of Australia is one of the major contributorsto the country’s GDP. In this industry, there are two major companies that dominate the market, and they are Coles and Woolworths. The retail industry of Australia cannot be considered as a perfectly competitive market because of the presence of these two dominant players in the market.

Figure 3: Retail Sector of Australia
Source: (Mortimer, 2019)

In the Australian retail industry, there are almost 140,000 sellers in the market, and they contribute 4.1% of GDP and 10.7% of employment in the country. This makes it evident that the retail industry is widespread in Australia, and it forms a major portion of the country’s economy. There is diversity in the retail sector of Australia as there is a difference in the size of business, geographical region, and format of the retailers, type of competition, and the nature of goods sold by the companies in this sector. There is also an emergence of online retailing in the sector with the development in technology(Reinartz et al., 2019). The retail industry of Australia can be segregated as per the products sold by different companies. Many sellers sell homogenous products while others sell differentiated products. The major types of products sold in the retail industry of Australia are food and beverages, household products, appliances, footwear, apparel, accessories, furniture, electronics, and so on. This diversification in the products sold by the retail industry of Australia makes it a significantly large industry of the country. Along with that, the availability of a large range of products makes it one of the vital contributors to the country's economy, and it has seen significant growth between the years 2004-2019.

Figure 4: Market Trend of Retail Industry
Source: (Carter, 2019)

The entry into the retail industry of Australia is easy, and there are no restrictions on the entry of new companies in the retail industry of Australia.However, this does not ensure sustainability to the companies entering into the industry this is because there are several retail giants operating in the industry for the past many years. Due to the free entry into the industry, the retail industry has seen significant growth and expansion. Furthermore, there has been an exponential growth in online retailing as people are more dependent on technology for their purchase activities.

Figure 5: Growth in Retail Profit
Source: (Goyal et al., 2020)

The long-run and the short-run profit of this industry have been fluctuating because of the frequent price reviews in the industry.With the increase in the price of several inputs, there has been a rising cost pressure on the retailers, and this resulted in the price of labor and the price of retail outputs. However, even in such an adverse situation, the retail industry of Australia has managed to keep its profits stable(Hockey, 2014). In the retail industry of Australia, research and development have been focused on the management of the cost. This is because there is no uniform method of disclosing costs in the retail industry, and this has created significant challenges for the retailers regarding the pricing of their products. With no unified compulsory disclosure of the cost, in-depth research and development are required by the companies inthe retail industry(Luki? et al., 2018). In the Australian retail industry, the company spends a major portion on online marketing and advertising due to the technological development.

Effect of Pandemic on Retail Industry
The retail industry in Australia has cut-throat competition, and with the outbreak of the pandemic, the competition has only intensified. This is because due to the recent pandemic, all the retailers have suffered a significant loss, and many companies have shut down since then. The pandemic has forced the retailer to rethink and reinvent the methods and techniques through which they used to trade. This is because due to the pandemic, there has been a swift change in the buying behavior of the consumers, and they have shifted to values and essentials. The consumers have also shifted towards digital shopping and omnichannel, their loyal is in shock, and they are focused on the homebody economy(Kelly & Kohli, 2020). In the retail industry of Australia, environmental concerns have been deemed secondary in the current market situation, and health and hygiene have become the primary concern of the retailers across Australia due to the pandemic. The retailers are focusing on following the safety precautions and how they can gain back the loyalty of the consumers.

Several retailers have shifted their focus towards online retailing because of the movement restriction for the people. This shift has helped them to sell their products online, and they are able to sustain their business in the time of adversities. The real life data that can be used is the report of OCED which states that due to the pandemic, the retail industry that used to be a heavyweight in the economy has become a hard-hit sector of the country and there has been many disturbances and disruptions (OECD, 2020).

Figure 6: Growth in Online Retail
Source: (Scutt, 2018)

The theory of Varieties of Capitalism can be used to evaluate the impact of the pandemic on the retail industry of Australia. This is because; this theory suggests that the economy needs capitalist arrangements so that it can recover from the aftereffect of the pandemic. This theory suggests that there needs to be a coordinated and liberal market so that the retailers can revive their business and start contributing to the country’s economy(Shang et al., 2021). Through this theory, the retail industry in Australia can assure flexibility in their economy and the arrangement of their business institutions. This theory suggests that the retailer has the liberty to set the prices of their commodity so they sustain their business and they can operate for a long time even in an adverse market situation. If the retailers are not given the liberty to set the prices of their products higher than they cost, then they will suffer a loss, and a sustained loss can cause them to shut down their business in the long run. There has been significantly lesser production of goods in the retail industry because of the rise in the price of different inputs. This has ultimately affected the product prices that are being sold in the market. The consumer prices of retail products have grown by 3.8% due to the impact of the pandemic on the retail industry (Janda & Pupazzoni, 2021). With the rise in the price, the consumers are facing difficulties in purchasing the goods, and this has been taken into consideration by the government, and they have introduced policies and schemes to support the retail industry.

Government Support to the Retail Industry
The outbreak of pandemics on a global scale has caused significant turmoil in the business operation of the retail sector. This has caused a considerable amount of loss to the industry, and the government has intervened so that they can provide support to the retail industry and help it to revive its operations. The government has introduced the Liquidity Assistance Schemes for the retailers despite the size of the business; every retailer can access this scheme. This scheme has been introduced because, due to the pandemic, many retailers have faced acute liquidity constraints, and this can cause them to become insolvent andmaterialized(OECD, 2020). Considering this fact, the government has introduced theLiquidity Assistance Schemes so that retailers can gain financial assistance to carry on with their business and survive in the market. Furthermore, the government has also introduced the Structured Finance Support Fund so that the credit and liquidity can be supported through providing loans to the retailers. This scheme provides the retailers the liberty to access loans so that they can re-establish or re-structure their business in such as manner that they can respond to the challenges and issues caused by the pandemic. This major cause of the disruption in the retail industry is due to the demand factors in the market and the position of the value chains in the market that has been deviated due to the pandemic.

The pandemic has also affected the retail industry due to the increased cost of inputs and increased public expenditures, increase in the rate of labor due to supply and demand differences (McKibbin &Fernando, 2020). All these issues have caused the retail industry to face economic difficulties in the market, and in response to these issues, the government has introduced Corona Aid Fund. This program by the government of Australia has been introduced so that the economic survival of the retail industry could ensue, and this program provides support in the form of a guarantee. This is the only program that has been introduced by the government that ensures the economic survival of the companies in the retail industry. This has been introduced due to the concept of the Economic Theory- Survival of the Fittest which means only the potential and strong companies can survive in the economy. Considering this theory, the government needs to provide assistance to the companies in the retail industry so that they can be economically strong and stable and survive in the economy for a longer time. The Political Theory can also be applied in this context which suggests that there is a strong relationship between survival and power. If the companies are not powerful enough, then they cannot survive in the market, and then they will shut down. These measures by the government have been significantly effective in providing appropriate assistance to the retail industry because in the current time, the retail companies in Australia are growing rapidly(Cohen et al., 2020).The data presented by KGPM shows that retail industry of Australia has been able to zoom in and they are reiving from the impact of the COVID-19 with the help of the assistance from the government.

Figure 7: Improvement in the Retail Industry
Source: (KPMG, 2021)

Conclusion
In conclusion, it can be stated that the economics essaygives a clear idea about different market structures that can occur in an economy, and each structure has its own different characteristics. The analysis has shown that only a perfectly competitive market structure can efficiently allocate resources in the economy. The Australian retail industry is not a perfect competition because there are two dominant companies in the retail industry. Furthermore, it has been analyzed that the industry has focused on managing the cost because there are not structured policies for the disclosure of such information. The essay has identified several impacts of the pandemic on the industry, such as the rising of price, and this has been discussed using the Varieties of Capitalism Theory. Considering these impacts, the government of Australia has come up with different programs and schemes so that they can financially aid the industry.

References
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