The Australian supermarket industry is made up of 4 dominant players including Coles, Woolworths, Aldi and IGA. Back in January 2011, Coles started a price war with Woolworths by reducing the price of its own brand milk to $1 per litre. Woolworths immediately followed suit and this led to a 7 year price competition between the two supermarkets.

Why do you think Woolworths responded in the way it did to Coles reduction in milk prices? Use economic concepts such as the kinked demand curved to explain. Who benefits and who loses from such competition?

i.What market structure best describes the Australian supermarket industry?

ii.Identify the key features of the Australian supermarket industry that are characteristic of the market structure identified in i. above.

iii.What type of relationship exists between firms in the market structure identified in i. above?