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Coles and Woolworths have together long accounted for nearly 80% of the retail grocery sector in Australia, but these market shares have gradually eroded from 2001 onwards, with a new entrant, Aldi,

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Coles and Woolworths have together long accounted for nearly 80% of the retail grocery sector in Australia, but these market shares have gradually eroded from 2001 onwards, with a new entrant, Aldi, now commanding a market share of 11%, largely gained at the expense of Coles' and Woolworths'. This assignment asks you to apply microeconomic principles to analyse past and current trends in the market for groceries in Australia.

Use economic analysis to discuss the economic benefits and losses brought by changes in the market for groceries o...

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Question Preview:

Coles and Woolworths have together long accounted for nearly 80% of the retail grocery sector in Australia, but these market shares have gradually eroded from 2001 onwards, with a new entrant, Aldi, now commanding a market share of 11%, largely gained at the expense of Coles' and Woolworths'. This assignment asks you to apply microeconomic principles to analyse past and current trends in the market for groceries in Australia.

Use economic analysis to discuss the economic benefits and losses brought by changes in the market for groceries over the last 15 years in Australia. What future role do you see for market forces and for government intervention in this market? Justify your answer (max. 1500 words)

(feel free to use diagrams where appropriate, diagrams are not counted into the word limit). In structuring your essay, you may benefit from pondering the following sub questions:

- In economic terms, what type of market structure underpinned the retail grocery market in Australia before the entry of Aldi?

- What was the source of market power for Coles and Woolworth?

- What do you think was the main policy issue concerning government regulators such as the ACCC? 

- Do you think the grocery market is now more or less efficient? What measure of efficiency would you use to answer this question? 

- Who would be the winners and losers of this market evolution?  

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Solution preview

Coles and Woolworths have been dominating the groceries market over the last five to six decades till the beginning of 2001. This type of market structure is called as Duopoly and the firms in duopoly have market power in setting their prices at which the commodities are sold. However in this type of market structure, consumers are at the mercy of the two sellers, as they can be dominated by price increases due to the power of these suppliers. In this essay we would discuss the major highlights of the duopoly market and how far these two supermarkets have been dominating the groceries market in Australia till the entry of Aldi and how the entry of Aldi has changed the pricing and selling decisions of the two dominant players.

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