The Role Of Pricing In An Oligopoly

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Oligopolistic markets are not unusual, they are present in every country. An oligopoly is a market with a small number of large firms that control the market, these firms holding a significant market share. The Australian supermarket industry is an oligopoly with Coles and Woolworths dominating the market share; this report investigates the pricing structures of an oligopoly and explores the factors involved.
The Theory of Pricing in an Oligopoly
Pricing in an Oligopoly is difficult, firms can choose to lower, raise or fix their prices. Raising and lowering prices is often seen as a way to compete in a market, however for an oligopoly it can have negative effects. Due to the few firms within the market, competition is high and gaining the
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The supermarket business fits within these criteria, two major supermarket chains dominate the Australian supermarket industry holding a combined 70-80% market share; these giants are Coles and Woolworths. The other 30% of the market is occupied by other smaller firms such as IGA, Aldi and state local supermarkets. This market share large and within economics it is classified as an oligopstic market, a small amount of firms which hold and control significant amounts of the …show more content…
Coles and Woolworths have an enormous market share, and with this comes increased revenue. Coles and Woolworths have shown that they can afford to lose revenue to gain market share, so from this behaviour its safe to assume that the industry makes abnormal profits. High barriers to entry is another sign that large profits are being made, Coles and Woolworths have gone to unprecedented lengths to stop new firms entering the market. Recently Woolworths purchased all the undeveloped land within the CBD and suburbs of Adelaide to stop its new competitors Aldi entering the market. These are the lengths the supermarkets will go to, but they will also use their power within the market to make it as hard as possible to enter the market. Other barriers are the extremely low prices that Coles and Woolworths can set due to the control they have over their suppliers, there revenue isn’t effected but new firms cannot compete.
Pricing, Interdependence and Price Rigidty in Supermarket Industry
As discussed in the above section pricing in an oplipgoly is complicated. Firms don’t want to lose revenue by lowering price but still want to increase market share. A firm or possibly a price leader could take a bold move of changing prices, the surrounding firms within the market will react accordingly. Another way prices are decided is through collusion. There are

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