Market Structures, Business Cycles and Macroeconomic Indicators

Running Head: Market Structures and Business Cycles
Market Structures, Business Cycles and Macroeconomic Indicators
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Market Structures and Business Cycles 2
Market Structures, Business Cycles and Macroeconomic Indicators
Part A
Question 1
The market structure under which the operation of Coles and Woolworths takes place is
oligopoly market structure (Andrew, 2014). This is because the supermarkets in Australia are
several, but there are some giant supermarkets (McTaggart, Findlay and Parkin, 2012). The giant
supermarkets controls the biggest market share (Richards and Devin, 2016).
Fig: Oligopolistic Market structure
Price D
d
F
P* e MC1
MC2
G d’
H D’
I
Q* Quantity
Where MC is Marginal Cost. Oligopolies produce at MC = MR (Marginal Revenue).
They sell quantity Q* at price P*. The demand curve for oligopoly firms is dD’ and has a kink.
The reason for the kink is because the firms only follow a price cut but ignores a price rise. The
path followed by a price raising oligopoly firm is ed’ because other fails to follow and thus a loss
of market share (Abourizk, 2017). The path followed by price cutting oligopoly firm is eD’
because all others follow. The gap GH is a region where changes in MC has no impact on
quantity change; only price changes (Gottheil, 2013).
Question 2
In this market, players have market power. Competition is either through price or
quantity (Strong, 2016). However, players are limited from raising prices to increase revenues.
This is because, if one of the competing firms raise its price level, other players will ignore the

Market Structures and Business Cycles 3
move, this makers the initial customers for the price raising firm to shift their demand to other
firms that never raised the price. The one firm ends up with reduced revenues. For price cuts, the
revenues are also reduced because all other firms follow and thus the market share remains the
same but sold at a lower price. It is on the interest of Coles to have price wars with Woolworths.
This is because, Coles trying to kick Woolworth out of the market, it’s making it less profitable
to stay in business. Cole is stealing a large market share from Woolworths; thus Woolworth is
losing from the price wars.
Question 3
Vegetables in Australia fall under competitive market structure. This is confirmed by
source two and three. On the 2nd source, vegetable growers are noted to be impacted by the price
discounts (Low, 2015). The farmers are price takers as they can only sell at the price offered by
the supermarket players (Besanko, Braeutigam and Gibbs, 2011). On the 3rd source, 13% of the
136,800 firms (17,784 firms) sell directly to supermarkets. In perfect competitive markets,
players are many, products are the same, and players can only increase revenues by raising the
quantity of sales; they don’t have power over prices.
Question 4
The price offered from price wars does not take into consideration the cost for producing the
products. Thus, individual farmers may be selling at a loss or at a profit that is insignificant.
Graph: Short run Perfect competition
Price
MC
ATC
ATC Loss
P P=D=AR=MR
Q Quantity