Economies of Scale

Tucker (2009,178) believes that the most significant barrier to entry in an oligopoly is economies of scale. Economies of scale generally refer to the cost advantages that will be associated with large organizations. Margaretta (2012,26) suggests that companies pursue economies of scale in the belief that this will be decisive in determining a competitive advantage and increased profitability. Woolworths enjoys significant economies of scale in relation to its competitors. In the supermarket industry, benefits of economies of scale is usually achieved by buying products in bulk and reducing the average costs. As the largest player in the industry, Woolworth's can negotiate significantly lower costs with suppliers due to the large quantities they purchase in relation to their smaller competitors.In an effort to secure market share Woolworth's have engaged in an ongoing price war with its biggest rival, Coles(Whalley and Lemay,2012). In the process, this price war is squeezing out the smaller competitors who can not negotiate the same discounts as these industry giants so can not pass the same benefits onto consumers, thus reducing their competitiveness and giving industry giants such as Woolworth's a clear competitive advantage. However, to maintain this competitive advantage, Woolworth's must regularly price monitor its supermarket rivals and other retailers selling grocery products and respond through price matching.Millar and Fyfe,(2012) report that Woolworth's have been accused of using its retails power to open oversized, unprofitable stores in growth areas and rural centres in a bid to kill off its smaller competitors and also local small businesses and suggest that these oversized stores are being cross-subsidized by the supermarkets giants' vast operations, which include liquor, hardware, office supplies and gaming.Rivalry with existing competitors is an obvious threat to Woolworth's but identifying new entrants is also important because they can threaten