Effects Of Pricing And Market Structure On The Vegetable Market: An Economic Analysis

1. 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.

2. 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

3. 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? 

Effects of Pricing in the Market

Duopoly is the market structure that Coles and Woolworths operate which is an oligopoly with only two firms. According to kinked-demand curve theory, the market demand curve that a firm faces is determined by the price decisions of other firms in oligopoly market. Games theory states that decisions made by one firm are influenced and at the same time influence decisions of other firms in the market (Jones, 2005, p.53). With reference to the two theories and looking at the condition of the market as at now, it is evident that Woolworth’s market demand is affected by the discount decisions made by Coles. In this structure, the two supermarkets dominate the market. Source one says that a discount on commodity prices in Coles have great effects on Woolworths and the entire market. Source two shows Coles having 37% of the market share while Woolworths with 43%. 

Profit maximization by the firm is at Q1, P1 where MR=MC. Therefore incase MC changes, the market price is never affected (Cotterill, 2006, p. 17). There are various assumptions that demand curve makes i.e. First the firms are profit maximizers, secondly one firm increasing product prices won’t make others increase their products, thirdly one firm reducing prices makes other firms follow suit to protect their market share then finally what results is a kinked curve (Lewis, 2013, p. 34). 

One of the major effects is pricing. According to kinked-demand theory, the pricing decisions made by a firm determines its market share. Therefore in this case, Coles offering discounts on prices will make Woolworths lose market share this will result to fall in revenue (Focacci, 2005, p.550).

A business lowering its prices with other businesses doing the same, the relative price change is small therefore demand would be inelastic. Reducing prices when demand is inelastic results to little revenue accompanied by revenue fall.

When one business raises its price and others maintain their prices constant, automatically what we expect is loss of customers from the business that has raised its prices and increase in customers to one that maintained prices constant. This is according to Kinked- demand theory which says that business decision affects its market share. This makes the business lose market share and hence a fall in its revenue. 

Is it in the interests of Woolworths and Coles to have a price discount war? Why or why not?

No. Because the type of competition that exists between Coles and Woolworths is Oligopolistic. This implies that they are not interdependent. Therefore, the war of prices and discounts in existence is not as a result of their interests (Focacci, 2005, p.550). 

Monopolistic competition is the market structure for vegetables provided by farmers. According to theory of monopolistic competition which is the existence of imperfect competition in the market, the monopoly market structure results from the collaboration between the Coles and Woolworths thus pressing the farmer too hard. Putting aside high production costs by famers, vegetable farming is going down because of poor compensation by the two supermarkets (Alchian, 2016, p.212). The market of the other products is seen to be much lower than that of vegetables. This is stated in source two. 

Market Structure of the Vegetable Market

The farmer who is the primary source of vegetable products will be affected slowly. Thus, as the farmer continues with the production at some point he/she will lack funds to finance the production. The farmer lastly will leave the market because of lack of morale hence he will finally leave the production of vegetables.   

In 2013, Spain operated expansion phase of business cycle. This is because this period it is characterised by increased employment. As unemployment rate was decreasing in the graph from January to December, pressure on prices was high as seen in consumer spending graph where prices on commodities were high from Jan-April, and reduced a little from April-July then highly increased rapidly from July-Dec (Focacci, 2005, p.550). This is according to Keynes theory, which says during expansion cycle the economy is growing because of investments from investors, and the rate of employment increases to full. 

Price level

Aggregate supply 

Aggregate demand

Equilibrium output quantity of output 

Economic fluctuation analysis is achieved by the use of aggregate demand and aggregate supply. The level of prices is on vertical axis while on horizontal we have total output. The point of intersection is where the aggregate supply and demand adjusts. 

In 2014, Spain entered the peak cycle. This is because during the peak cycle, the business is at the highest point. The employment is at full as seen in the unemployment graph rate where unemployment is very low in 2014 (Filardo, 2014, p.300). Additionally at the peak cycle inflation is very high. This is visible in consumer spending graph where expenditure is very high on commodities. 

Unemployment rate = 24.47

Currently employed people = 17, 353, 000

Thus the rate of employed people = 100 – 24.47 = 75.53 

If 75.53 = 17, 353, 000

    24.47 =     ?

(24.47 * 17, 353, 000) / 75.53

=562197.6830

=562198 people

The Indian economy is operating at the expansion cycle (Dunning, 2000, p.167). This is because in the year 2016 inflation was 4.9% on product prices which was lower than that of the following year 2017 at 5.3 (Jones, 2005, P.53). The Gross Domestic Product growth in the year 2016 was 7.3% which was lower than that of the following year 2017 which was 7.5%. This shows that the business in 2016 had not reached the peak cycle because it was still growing; therefore the business phase in India was in the expansion cycle (Joshi & Little, 2014, p. 54). This is according to Keynes theory which says employment increases during the phase of expansion as well as investments in the country.  

Energy fall cost would reduce inflation

Energy prices fall comes as a boom in India, every reduction in energy cost like oil helps reduce retail inflation as well as wholesale inflation.

It would help reduce India’s current account balance

The imports value is driven down by the fall in energy prices. Thus, India’s account deficit in the foreign currency is narrowed down. 

The prices of currencies in the foreign exchange market are moved by interest rates. The most influential actors are the central banks specifically as institutions set their interest rates. Investments are controlled by interest rates (Pal & Mittal, 2011, p.87). In this case the Reserve Bank of India changing interest rates will lead to forex market suffering volatility and movement. Thus the accurate speculation of Reserve bank of India can enhance the trader’s chances of as successful trade.

Impact of Falling Prices on Individual Farmers

Economy stability is among the major goals that the government needs to achieve by manipulating fiscal and monetary policies. Reserve bank of India should check the Fiscal and monetary policy in order to stabilize economy.

The country’s economy is measured using GDP.  The GDP is a representation of value all goods produced annually in a country. The GDP is one of the indicators that the Reserve bank of India can control. In this scenario, Reserve bank of India can control interest rates imposed on loans to control GDP.

The other indicator of inflation is the Consumer Price Index. This is representation of product prices of the basic consumer. Inflation has greater effects to countries currency purchasing power and also its international market standing. In this case, Reserve bank of India can control the interest rates in order to create an attractive currency in the country.

The economy and health of a country is also reflected by the employment indicators. The knowledge of the jobs in existence and knowing the number of people working and how many people are claiming unemployment helps understand the economy (Focacci, 2005, p.550). Reserve bank of India should understand the unemployment rate to determine the level of inflation in the country..

The strength of a consumer expenditure as well as retail store success is important to those who do foreign exchange trade since it shows their strength. In every month, the retail sales indicator is released. This report shows the partial consumer spending patterns that adjust with varying in seasons (Pal and Mittal, 2011, p.84). The performance of some of lagging indicators can be predicted using retail sales. In addition to that, the immediate economy direction can also be assessed using retail sales.

The ratio between the payment going abroad and the payments coming from abroad is what is defined as the balance of payments. This includes the operations in foreign trade, the import & export balance, payment transfer, trade balance (Keith, 2012, p.50). The balance of payment is considered positive when the payment into the country exceeds the payment the country makes to other countries and other international organizations. Here the Reserve bank of India can control what the country imports and allow more exports to increase payments into the country. 

References

Alchian, A.A., 2016. Uncertainty, evolution, and economic theory. Journal of political economy, 58(3), pp.211-221.

Cotterill, R.W., 2006. Antitrust analysis of supermarkets: global concerns playing out in local markets. Australian Journal of Agricultural and Resource Economics, 50(1), pp.17-32.

Dunning, J.H., 2000. The eclectic paradigm as an envelope for economic and business theories of MNE activity. International business review, 9(2), pp.163-190.

Filardo, A.J., 2014. Business-cycle phases and their transitional dynamics. Journal of Business & Economic Statistics, 12(3), pp.299-308.

Focacci, A., 2005. Empirical analysis of the environmental and energy policies in some developing countries using widely employed macroeconomic indicators: the cases of Brazil, China and India. Energy Policy, 33(4), pp.543-554.

Joshi, V. and Little, I.M.D., 2014. India: Macroeconomics and political economy, 1964-1991. The World Bank.

Jones, E., 2005. Liquor retailing and the Woolworths/Coles juggernaut. Journal of Australian Political Economy, The, (55), p.23.

Keith, S., 2012. Coles, Woolworths and the local. Locale: The Australasian-Pacific Journal of Regional Food Studies, 2, pp.47-81.

Lewis, W.A., 2013. Theory of economic growth. Routledge.

Pal, K. and Mittal, R., 2011. Impact of macroeconomic indicators on Indian capital markets. The Journal of Risk Finance, 12(2), pp.84-97