MGE1108 Market Structures, Academies Australasia Polytechnic, Australia

Economics for Business

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Question 1: Compare the market structures of Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly under the following headings (About 150 words).

i. number of firms in the market

ii. similarity of the products sold

iii. barriers to entry

Answer: 

Question 2: Identify the market structure Coles operates in. State your reason why.

Answer: Coles appears to be an Oligopolistoc firm - dominating the super market retail chain outlets in Australia with two other key players - Woolworths and Aldi. Key products being sold by the companies are milk, ice cream, fruits, vegetables, nuts, eggs, frozen meat and similar range of other products that cannot be highly differentiated. Owing to the fact that Coles controls a fairly large share of the market given that it has multiple chains and over 100,000 employees, the firm appears to have the capacity to influence price output policy. Other firms competing with Coles have interdependencies.

Question 3: Discuss how Coles would consider demand for its eggs in terms of elasticity - perfectly elastic; elastic; inelastic or perfectly inelastic? Draw its demand curve to illustrate this. Explain your choice. 

Answer: Price elasticity is defined as measure that shows the price responsiveness of a product or change in quanity demanded with regard to a change in price, ceteris paribus. For identical products that are sold by many firms, price elasticity is very high.
Eggs is a product that cannot be hugely differentiated - product has homogenous characteristics. So for a homogenous product in a oligopolistic market, demand for eggs would be elastic - that is variations in price would hugely effect the quatities of eggs demanded. Price increases would effect demand negatively and price decreases would have the reverse effect.

Question 4: What is the term used to describe the new strategy that Coles is adopting to increase market share? Describe how it works.

Answer: Coles had been resorting to annoying price down down strategies to attract new customers. However such strategies have increasingly become non conducive for business and therefore not sufficiently addressing profit margins. 

As a major player in the market and substantial market shares, Coles has shifted its new marketing strategy to branding by cultivating a new image for business just as Woolworths. Branding effort involves promotion of a company by means of a distinctive idea, design or advertisements to create a memorible impression on consumers. Branding involves campaigns that helps consumers emotionally connect to product features. It involves building a trust base with customers with slogans and eventually gets recognition and earns business value. The strategy could involve ways to differentiate products (not by price or features) with a slogan or by building value with environment friendly features and good will. (Salvatore, 2008)

Question 5: From the same reading above, identify any two (2) methods used by Coles to compete without reducing price.

Answer: Coles strategy to brand its company involves developing a new slogan with "Good things are happening at Coles." It protrays a positive image to customers that Coles is engaging in many best practices as a company and not just sell products. This includes charitable donations Redkite amd Secondbite and supporting movements as that of "phasing out of single use plastic bags".

Coles has also been empahsiizing on purchasing high quality local farm production that has the potential to generate revenue for local farmers. Coles has been advertising with the statement that "96 per cent of Coles' fruit and vegetables are grown in Australia" - a very encouraging thought for localities who believe in supporting the growth of their own community.

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Question 6: Use the Demand Supply model to illustrate the likely effect on the price of vegetables as a result of the weather, ceteris paribus (a diagram is expected here).

Answer: The vegetables market is highly vulnerable to weather changes. Weather has the potential to impact cost of vegetables to a large extent. So with variations in the weather patterns, cost changes but in oligopolistic markets, product output doesnot change with changes in cost. This creates a kink in the demand curve - the norm is when prices rise, other firms donot follow but wih the reverse, fall in prices, all competitors follow. 

Under profit maximization, MR = MC determines the quantity produced. But if MC changes and is higher, the quantity produced (q*) is not altered along with price (p*) (Vives, 2001).

Question 7: Briefly discuss any two differences in the market structure that Coles belongs to with the market structure Monopolistic Competition.

Answer: