Market Structures and Coles' Strategies

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PROGRAM NAME Bachelor of Tourism and Hospitality Management (BTHM)
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NAME Economics for Business COURSE / UNIT
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DETAILS (title) Assessment 3: Individual Written Assignment
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AAPoly Student Services Original version: 22/10/2012 Academies Australasia Polytechnic Pty Limited Current version:
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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”
(12 marks)
ANSWER to Q1
A market structure refers to the set of market conditions or rather characteristics
which define the mode of operation of a given market. Examples of such
characteristics include the number of firms, products’ homogeneity degree and ease
of entry into the market. Based on the named characteristics the market structures
are majorly categorised into four groups namely the perfect, monopoly, monopolistic
and oligopoly competition have been compared as follows.
Considering the market number of firms, both the perfect and monopolistic
competition market structures have a vast number of firms whereby each firm has a
relatively small market share. The oligopoly market structure has only a few firms
operating in the market which have a larger market share. Firms of small size can
also operate in a oligopoly market structure but the market is dominated and
controlled by the few large firms which have higher market share and this makes the
market highly concentrated. A monopoly market structure has only one firm or rather
a single seller operating in the market. The single firm controls the supply of the
commodity which it produces in the market.
Considering the degree of similarity of the products sold in various market structures,
a perfect competition market structure involves the selling of products which are
homogenous. Firms operating in the market offer or rather sell identical goods and
services and hence the commodities are indifferent to customers. In a monopolistic
market structure, firms sell products which are differentiated from those offered by
each other through various features such as branding among others. This feature
enables them to have some degree of price control as they can make the price for
their products which are differentiated. In an oligopoly market structure, firms sell
products which are either differentiated or homogenous. The firms are usually
independent and hence are very keen about any move taken by each firm. In a
monopoly market structure, the single seller offers products which are unique and
are not similar. The products are not close substitutes and hence the consumer has
no choice of considering close substitutes in case of any changes in the product
offered by a monopoly seller.
Based on the barriers to entry, a perfect competition market structure involves the
entry and exit freedom for firms as no barriers are involved and it is very easy for
firms to enter the market. In a monopolistic competition market structure, firms also
can freely enter or leave the market as no barriers to entry or exit but the degree of
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ease is not as higher as that involved in a perfect competition market. In an oligopoly
market structure, firms find it difficult considering their entry into the market as
barriers to entry exist. Some of the barriers include economies of scale and high
initial capital among others. In a monopoly market structure, it is very difficult for
firms to enter the market as high barriers to entry exist. some barriers which exist in
this market structure are initial capital investment among others.
Question 2
“Identify the market structure Coles operates in.
State your reason why.”
(3 marks)
ANSWER to Q2
Coles in Australia operates in an oligopolistic market structure. This is due to two
reasons as identified from the question. Many firms operate in the supermarket,
retail, and consumer services in Australia but the market is dominated by only three
bigger firms namely the Coles, Woolworths, and Aldi. This makes the market highly
concentrated. Also, the three big firms have dominated the highest market share in
the industry. They actually account for more than 60 percent of the total revenue
raised from the industry with the rest sharing the remaining 40 percent.
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.”
(3 marks)
ANSWER to Q3
Demand elasticity measures the reaction of the demand for goods and services
towards a change in their prices. Demand elasticity can be either perfectly elastic or
inelastic, elastic or inelastic.
Coles should consider the demand elasticity for its eggs to be perfectly elastic. When
the demand for a given good or service is perfectly elastic, then it means that its
price increase would lead to a zero quantity demanded.
The reason for the perfect elasticity of Coles eggs is because its competitors sell
similar products and prices have already been minimized to the lowest point possible.
This means that the products sold by Coles and its competitors such as eggs are
similar and hence are close substitutes. Therefore any attempt to increase the price
of eggs by Coles would make consumers shift to purchase eggs from other
competitors as eggs are homogenous. This will adversely affect the demand for Coles
eggs and might end up losing all its customers for eggs. The demand for perfect
elasticity is as shown in the below diagram.
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