Oligopoly (continued) - 37

Consider the diagram to your left. Woolworths and Coles are initially selling tomatoes at $6 per kilogram. Woolworths decides to lower its price to $5 per kilogram. Sales increase from 20,000 kilograms per week to 30,000 kilograms per week (from point E to E1). The Demand curve for tomatoes is elastic at this stage; the percentage increase in sales volume (a 50% increase) is greater than the percentage decrease in sales price (a 17% decrease). Coles is unhappy losing so many sales to Woolworth's, and matches Woolworths price of $5 per kilogram.

Coles then decides to go further, reasoning ''When Woolworths decreased its price, it made less profit per kilogram, but it sold so many more kilograms of tomatoes, overall it made greater profits. If we do the same, we will end up making greater prodits, too.''

However, this is not the case. When Coles decreases the price of its tomatoes to $3 per kilogram (a 40% decrease), sales volume only increased from 30,000 kilograms per week to 35,000 kilograms per week (a 17% increase). This is shown as the movement from (from point E¹ to E²).