ECOM4000 Economics Report 3 Sample
Assessment Description
The assignment must be completed individually and submitted using Turnitin on the portal on or before the due date.
When doing your assignment, you might like to consider the following points.
• Answer each question directly and fully, using the minimum number of words. You do not need to write an essay. The overall word limit is 2500 words.
• Where necessary, make sure you explain your diagrams. You can insert diagrams by drawing them in programs like “paint” and pasting them into the document, or by drawing them by hand, scanning them and then pasting them as a picture into the document. Do not copy pictures or graphs from the internet - you must draw them yourself (it’s ok if they are a bit messy...).
• Reference your answers if you are using information from another source using in text referencing and include a reference list at the end of the assignment. You do not need to reference subject material given to you in ECOM4000.
Section A: Microeconomics
Question 1
Identify the market structure Coles and Woolworths operate in. Make sure you justify your choice of market structure using all of the market characteristics used to classify markets. Using your own independent research, provide some facts and brief comments on this market (for example, you may like to discuss metrics like the concentration ratio).
Question 2
Because of their market positions, Coles and Woolworths exhibit a great deal of price interdependence and actively advertise against each other. In recent times, both supermarkets have increased their pricing. Explain the reasons for this and the effect you think it has had on the market position and profitability of both Coles and Woolworths.
Question 3
Consider a “game” between Coles and Woolworths that the supermarkets may participate in. The rules of the game are:
• If both Coles and Woolworths keep prices low, then they will both make a profit of $5,000m.
• If both Coles and Woolworths keep prices high, then they will both make a profit of $8,000m.
• If one supermarket keeps prices low and the other keeps prices high, then the low price supermarket will make $9,000m profit and the high price supermarket will make $4,500m profit.
Using these rules, solve this game for the Nash equilibrium (make sure to include your diagram and the logic you followed to solve the game). Is your outcome the best one for both Coles and Woolworths? Explain your answer.
Section B: Macroeconomics
Question 1
Using your own independent research, summarise the effect the pandemic and associated lockdowns have had on the Australian macroeconomy. At a minimum, your answer should include commentary about the effect on Australian GDP, unemployment, inflation and other aspects of the Australian macroeconomy. Support your comments with appropriate economic data. (Make sure you use reputable economic sources and reference your sources.)
Question 2
Draw a diagram of the Australian macroeconomy using the aggregate demand and aggregate supply (AD/AS) model before, and then after the pandemic. Clearly show on your diagram(s) the before and after effects for the macroeconomic variables discussed in Question 1
Question 3
The Federal Australian Government was very aware of the effects of the pandemic on the Australian economy. Using your own independent research, explain the fiscal policy actions the Government undertook to combat the economic impact of the pandemic. (Make sure you use reputable economic sources and reference your sources.) Using your diagram from Question 2, show how the government action should have affected the Australian macroeconomy. Comment on how successful the government action has been, and identify any weaknesses associated with it.
Solution
Question 1: Identifying the Market Structure of Coles and Woolworths
Coles and Woolworths exist within an oligopoly market structure. This classification could be justified based on a number of key market characteristics:
1. Few Dominant Firms: The supermarket industry in Australia is covered by a few large firms; Coles and Woolworths together approximate a market share of 60-70% in the grocery market. High concentration ratio is an explicit indicator of oligopoly.
2. Barriers to entry: The degree of difficulty in market entry is high, largely because the prerequisites for high capital, established supply chains, and economies of scale have already been achieved by Coles and Woolworths. Smaller entrants thus find it hard to compete with such giants on price and product availability (Engelhardt 2021).
3. Product Differentiation: Even though Coles and Woolworths deal in the same products, there is non-price competition in terms of branding, loyalty programs, and availability of exclusive product offerings. Product differentiation, therefore, is more characteristic of oligopolistic markets, wherein firms build brand loyalty (Hang & Zeng 2023).
4. Price Interdependence: Firms in oligopoly are highly interdependent regarding pricing policy (Gama et al., 2020). Frequently, Coles and Woolworths change their prices responding to their rivals' moves. Further, price wars are not uncommon. This justifies further that the market classified is oligopolist.
5. Concentration Ratio: A high concentration ratio means that a few firms dominate the market (Engelhardt 2021). Taking into account Aldi and IGA, as well, the four-firm concentration ratio stands at about 80 % in the Australian grocery market, something which really brings out the oligopolistic tendencies of the market.
Question 2: Price Interdependence and Recent Price Increases
Coles and Woolworths exhibits strong price interdependence-characteristics of oligopolistic markets. Both the supermarkets have raised their prices consecutively for a number of years PIC. Some of the key factors are influencing this price behaviour:
1. Rising Costs: Supply chain distortion, inflation, and increased commodity costs have forced both retailers to increase prices. All these factors, including higher transport costs, energy, and raw materials, are uplifted to the consumer through the retail prices.
2. Price Interdependence: An oligopoly firm is aware of its competitors' actions (Han & Zang 2023). If one firm rises in price, the other follows suit because otherwise it will be losing out in the market. Coles and Woolworths are very responsive to each other with respect to their price strategies to ensure either firm cannot obtain a possible significant price advantage.
3. Profitability: Despite price increases, Coles and Woolworths have maintained solid profitability because of their market monopoly position. The fact that their price increases have not led to any significant reduction in the consumption quantity shows credibility for their pricing power for university assignment help.
4. Impact on Market Position: The price increases have not caused either of the supermarkets to diminish their leader positions. With the price hikes, though, have come increased opportunities for small competitors such as Aldi and IGA to capture price-sensitive customers. At the same time, strong brand loyalty and a wide product range have partly sheltered Coles and Woolworths from significant losses in market share.
Consequently, the recent price increases have been due to increasing operational costs and also because of the inherent price interdependence from Coles and Woolworths. While these price increases have not primarily altered their relative market positions, they still endure competitive pressures from other minor firms within the industry.
Question 3: Game Theory and Nash Equilibrium between Coles and Woolworths
In this perspective we can evaluate the strategic interactions between Coles and Woolworths by utilizing the game theory mainly a two player game with two possible strategies: keeping the prices low or keeping them high. The aim of both the supermarket is to maximize the profits however the result depends on the decision of other.
Payoff Matrix
Solving for Nash Equilibrium
The Nash equilibrium is said to be reached when, in a particular state, both players have adopted strategies from which no player will find it of any value to unilaterally change, assuming the other player does nothing (MacQueen 2023).
Step 1 : Coles' View
If Woolworths selects a low price, Coles has the following options:
Choose a low price and earn $5,000m, or
choose a high price and earn $4,500m.
• Here, it is better for Coles to go with a low price since $5 000 m >$4 500 m.
• If Woolworths selects the high price, Coles will then have the option to either:
Choose a low price and earn $9,000m, or
Choose a high price and receive $8,000m.
For this case Coles would prefer a low price since $9,000m > $8,000m.
From Coles perspective this means that choosing the low price is the best option regardless of Woolworths choice. Therefore, Coles has a dominant strategy to set low prices.
Step 2: Woolworths' Perspective
o When Coles has adopted a 'low' price, Woolworths can either:
Choose a low price and get $5,000m or
We can choose a high price and make $ 4,500m.
• Here, it is better to choose low price for Woolworths since $ 5,000 m > $ 4,500 m.
• IF Coles choose a high price, Woolworths has the following options:
Choose a low price and earn $9,000m, or
Choose a high price and earn $8,000m.
It is, therefore, better for Woolworths to select a low price because $9,000m > $8 000m.
Similarly, Woolworths also wants to set low prices.
Nash Equilibrium
Since both Coles and Woolworths have dominant strategies to keep prices low, the Nash equilibrium occurs when both firms choose to keep prices low. In this case, neither firm would have any incentive to act otherwise, as moving away from that strategy would lead to lower profits. Hence, the Nash equilibrium is:
Coles: Low Price
• Woolworths: Low Price
• Profit: $5,000m each.
Is This the Best Outcome?
From a cooperative point of view this Nash equilibrium is not the best outcome for the two firms. If Coles and Woolworths could both cut prices then they would make more than their Nash equilibrium payoffs: $8,000m rather than $5,000m.
However, in a price-interdependent oligopoly, the cooperation or collusion cannot be sustained because each firm would have the incentive to undercut the other for the sake of earning a higher market share. For example, if one firm defects from a high-price strategy and another does not, the former can earn a profit of $9,000m and, hence, will always have an incentive to break away from a high-price agreement.
This means that while the Nash equilibrium of both firms choosing low prices is not the best collective outcome, given temptation for each firm to maximize its own profit by lowering prices, it is the stable one. The prisoner's dilemma is a classic problem in game theory where individual self-interested rational choices lead to a suboptimal collective result.
Thus, the Nash equilibrium is a point when Coles and Woolworths choose low prices by taking in smaller collective profits than when moving together to high prices. The latter is stable but not best in terms of profitability for either firm.
Section B
Question 1: The Impact of the Pandemic and Lockdowns on the Australian Macroeconomy
This is due to the fact that the COVID-19 pandemic and its consequent lockdown have strongly hit the Australian macroeconomy, perturbing the key economic variables of GDP, unemployment, and inflation.
1. GDP In the June quarter of 2020, Australian GDP contracted minus 6.3 percent due to nation-wide lockdowns across the country, which made economic activities standstill, especially in the retail industries, tourism, and hospitality. This was the first recession experienced by Australia in almost three decades. Recovery efforts saw the rebound of GDP in 2021 with support from the government through stimulus packages, including JobKeeper and JobSeeker.
2. Unemployment: The pandemic considerably increased the rate of unemployment, which reached a high of 7.4 percent in July 2020. It was cushioned by the JobKeeper scheme hence preventing further redundancies especially in small businesses. In absence of these restrictions and opening of the economy, it started falling gradually and has now attained the pre-pandemic levels of around 4 percent in the closing months of 2021 (Gilfillan 2021)
3. Inflation: During the pandemic, the inflation was well subdued; the Consumer Price Index fell 1.9 percent in the June quarter of 2020 while the fuel price cuts and childcare subsidies fell (IBIS world. 2024) Thus when it started recovering the inflationary pressures started increasing in 2021 to 3 percent by mid of 2021 due to offers chain disruption as well as increased demand (Gilfillan 2021)
In all, while the pandemic badly stretched the Australian economy, strong fiscal and monetary responses-most notably, the stimulus payments and record-low interest rates-fostered its recovery. However, other long-lasting effects, such as rising inflation and labor market imbalances, are some of the key concerns that remain.
Question 2: AD/AS Model Before and After the Pandemic
The Aggregate Demand and Aggregate Supply model can be explained in the context of the COVID-19 pandemic effects on the Australian economy.
Before the Pandemic - Pre-2020
Before the pandemic, Australia's macroeconomy was operating at its full-employment level of output, shown as the equilibrium where AD and AS cross at the full-employment level of GDP denoted as Y1. This aggregate demand emanates from consumer expenditure, business investment, government spending, and net exports, while aggregate supply is indicative of the productive capacity of the economy.
Unemployment was low, inflation was around the target range of 2-3%, and GDP growth was stable, hovering around 2-3% annually (IBIS world.2024) In this case, the movement of equilibrium to point E1, price level P1, and output level Y1 reflect a healthy, balanced economy in the AD/AS diagram.
During the Pandemic (2020)
During the pandemic, it was the government-imposed lockdowns that resulted in the sharp contraction in aggregate demand due to falling consumer confidence, the closure of businesses, and disruptions in global trade affecting exports. Conversely, supply was affected because of disrupted supply chains, reduced mobility of labour, and closure of non-essential industries (Alnahhal et al., 2024).
It is possible to represent the fall in demand through a leftward shift in the AD curve in an AD/AS model. With that, the AD curve has shifted leftward from AD1 to
AD2. The new equilibrium at E2 will have a lower output level Y2 and a lower price level P2. Because Y2 is below the full-employment level of output, it follows that Y2 tantamount to recession, while the price level P2 indicates deflationary pressures. As discussed above, unemployment surged, and GDP contracted.
After the Pandemic: 2021-2022
With lockdowns easing and stimulus measures hitting, aggregate demand began recovering and pushed the AD curve back toward AD1. The recovery in demand was driven by increased government spending, reopening businesses, and pent-up consumer demand (Kim et al., 2023). However, on the supply side-perpetual trouble like disruption in supply chains and labor shortage-such factors prevented the complete return to the pre-pandemic supply curve AS1 (Lederer 2020).
In the AD/AS model, post-pandemic equilibrium is considered at point E3, with the partial shifting of the AD curve back to AD1 and the constrained AS at AS2. The price level, due to the inflationary pressures, has gone up to P3, while output has recovered to Y3 from the pre-pandemic level Y1. This is indicative of partial recovery, with inflation higher and unemployment somewhat lower than their pandemic peaks, but not full (Lederer 2020).
In other words, it is apparent from the AD/AS model that in the wake of the pandemic, both aggregate demand and aggregate supply contracted drastically; this resulted in recession conditions. Their recovery was slow-in incident to interventions by the government. However, such supply-side constraints have become a factor in dampening inflation expectations for the post-pandemic economy and thus make the complete return to pre-crises conditions yet unattainable (Lederer 2020).
Question 3: Australian Government’s Fiscal Policy Response to the Pandemic
Australian Government’s Fiscal Policy Response to the Pandemic
However, the government of Australia took some significant fiscal policy measures in the case of the COVID-19 pandemic, which was really needed to lessen the level of economic downturn. These measures were targeted towards aggregate demand stimulation to avoid unemployment and stabilize the economy.
Key Fiscal Policy Actions
1. Program JobKeeper: Subsidy scheme-the JobKeeper wage-was AUD 90 billion. Thus, the financial support will enable them to retain employees in their payroll, avoiding large-scale unemployment. In addition, one of the positive pandemics spill-over effects was household income support during the pandemic
2. JobSeeker Supplement: the JobSeeker program further provided them with unemployment benefits, allowing those whose jobs were lost to continue with the same consumption that they were doing while employed, in the process giving vital lifeblood into the economy
3. Grants for Business Support and Tax Relief: The government gave cash flow boosts to the small and medium-sized businesses. These also allowed tax deferrals. On the other hand, temporary full expensing enabled companies to write off asset costs. This provided an incentive to invest
4. Public Investment: AUD 110 billion of infrastructure projects were fast-tracked for job creation and economic growth in order to give further impetus to aggregate demand.
Impact on the Macroeconomy
These fiscal actions of the government were targeted at shifting the Aggregate Demand curve to the right in order to set off the leftwards shift of the curve during the pandemic. As can be viewed from the AD/AS model, the fiscal stimulus recuperated output, reduced joblessness, and inflated prices due to demand pressures. In the post-pandemic equilibrium, E3 output increased while prices moderately inflated.
Evaluation of Government Response
Successes:
• Job Retention: The JobKeeper program was able to keep unemployment from spiking as high as had been expected; it topped out at 7.4 percent.
• Economic Recovery: Australia's GDP rebounded, growing by 9.6% in the June 2021 quarter, buoyed in large part by government stimulus (IBIS world 2024)
• Business Survival: Grants and tax relief enabled small businesses to survive the recession without being knocked out by big competitors.
Weaknesses:
• Targeting Issues: Some large corporations benefitted from JobKeeper despite not experiencing revenue losses, raising concerns about fund allocation
• Inflation: Higher demand, constrained by supply chains that are disrupted, saw inflationary pressures rise by 2021 and reach 3% inflation (Mihaljek 2023).
• Debt: The fiscal interventions enormously expanded public debt-to-date, breaking more than AUD 1 trillion by 2022 and questioning its long-term sustainability (IBIS world 2024)
References
Alnahhal, M., Batin, L.A., Hazza, M.A., and Sakhrieh, A. (2024). Economic Order Quantity: A State-of-the-Art in the Era of Uncertain Supply Chains. Sustainability. DOI: https://doi.org/10.3390/su16145965.
Engelhardt, L.M. (2021). Keynesian Supply Shocks and Hayekian Secondary Deflations. Quarterly Journal of Austrian Economics. DOI: https://doi.org/10.35297/qjae.010108.
Gama, A., Rim, L., & Pereira, A. E. (2020). Entry and mergers in oligopoly with firm-specific network effects. Economic Theory, 70(4), 1139-1164. https://doi.org/10.1007/s00199-020-01316-7
Gilfillan, G. (2021). Impact of COVID-19 on the Australian labour market. Available at: Impact of COVID-19 on the Australian labour market – Parliament of Australia (aph.gov.au) [Accessed 17 September 2024]
Han, J., and Zeng, C. (2023). The Effects of Downstream Entry in a Vertical Mixed Oligopoly: The Role of Input Pricing. Journal of Economics. DOI: https://doi.org/10.1007/s00712-023-00831-0.
IBIS world (2024). Supermarkets and Grocery Stores in Australia - Market Size, Industry Analysis, Trends and Forecasts (2024-2029). https://www.ibisworld.com/au/industry/supermarkets-grocery-stores/1834/ [Accessed 17 September 2024]
Kim, J., Lee, E., Tang, X., and Zhang, J. (2023). Collusive versus Coercive Corporate Corruption: Evidence from Demand-Side Shocks and Supply-Side Disclosures. Review of Accounting Studies. DOI: https://doi.org/10.1007/s11142-022-09678-0.
Lederer, P.J. (2020). Location-Price Competition with Delivered Pricing and Elastic Demand. Networks and Spatial Economics. DOI: https://doi.org/10.1007/s11067-019-09484-3.
MacQueen, R. (2023). A proof that coarse correlated equilibrium implies Nash equilibrium in two-player zero-sum games. Ithaca. Retrieved from https://www.proquest.com/working-papers/proof-that-coarse-correlated-equilibrium-implies/docview/2802169591/se-2
Mihaljek, D. (2023). Inflation and Public Finances in the 2020s: Editor's Introduction to the Thematic Issue of Public Sector Economics. Public Sector Economics. DOI: https://doi.org/10.3326/pse.47.4.
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