Source 1. Macquarie Analysis: Woolworths Trails Coles on Grocery Prices (by Catie Low)

Woolworths is failing to close the gap on Coles when it comes to prices. A Macquarie Securities analysis reveals the cost of a selection of everyday groceries at Woolworths stores has fallen 1.9 per cent since early March. However, Coles did even better, posting a 3.1 per cent cost decline for the same period based on the same goods. Seasonal drops in the cost of fruit and vegetables underpinned grocery price falls for both major supermarket chains. The analysis suggests Woolworths needs to do more to revive its supermarket business, and quickly. "Woolworths is rapidly losing share as their strategy takes time to implement," the report said. Macquarie estimates Woolworths has lost 1.5 per cent of market share in the past year despite broader market growth of about 7 per cent.

Source: http://www.afr.com/business/retail/woolworths-trails-coles-on-grocery-prices-macquarie-analysis-shows20150708-gi7iyz#ixzz3jPN0wEzX

Source 2: Supermarkets Price War

Fruit and vegetables have just become the latest battleground in the discount war between supermarket giants Coles and Woolworths. Coles' bid to get a bigger share of Australia's grocery market kicked off today with a flurry of ads spruiking discounts on fresh produce. The latest round of cuts comes on top of Coles and Woolworths scrambling to undercut each other on items such as bread and milk. But while lower prices may be good news for consumers, farmers' groups are renewing warnings that the price war risks driving growers out of business. Not all growers are happy. They say the supermarket price wars are making it tough for them to stay in business. William Churchill, spokesman for peak body Ausveg, says dropping prices at Coles places pressure on the rest of the industry. "Ausveg's main concern is, are these discounts for Coles growers sustainable? And what's this going to do to the rest of the industry as growers and farmers who supply to independent retailers, Woolworths, or even just the markets, start to see their sales volumes through those outlets dry up as people start to shift to Coles for these prices," he said. "We're seeing some substantial heartache happening in the milk industry, we're seeing growers producing milk for less money and they're having to work more for that," he said.

Question 1: What type of market structure do Coles and Woolworths operate in? Justify your answer with reference to some limited research and the appropriate economic theories. Your answer should include a diagram.

Question 2: Based on your answer to Question 1, and with reference to the appropriate economic theories, discuss the effects of pricing in this market, especially in regards to revenues. Is it in the interests of Woolworths and Coles to have a price discount war? Why or why not?

Question 3: What type of market structure is the market for vegetables provided by farmers? Explain why with reference to Sources 2 and 3 and the appropriate economic theories.

Question 4: How would falling prices for vegetable products due to the price war affect the individual vegetable producer? Demonstrate your answer with reference to a diagram showing only an individual farmer's cost curves. Would small farmers be forced to leave the market in the long-run? Why or why not?

WOW is Woolworths Price investment targeted towards meat, seafood, bread and cereal categories TOTAL -1.9 Household goods 0.0 Non alcoholic drinks -0.2 Other foods 0.7 Dairy related 0.1 Meat and seafood 0.0 Fruits -1.5 Vegetables 0.2 Bread/cereal -0.6 Weighted pot change over June quarter coles Price investment targeted towards 'other foods' (eggs, spreads, snacks and confectionary) TOTAL -3.1 Household goods 0.0 Non-alcoholic drinks D.2 Other foods 1.6 Dairy related 0.1 Meat and seafood 0.7 Fruits -1.5 Vegetables -1.2 Bread/cereal D.4 Weighted pot change over June quarter "Excludes liquor and tobacco Source: Company data, Macquarie Research, July 2015