a) How do oligopolies such as the "Coles" and "Woolies" form? b) Explain how "Coles" and "Woolies" are mutually interdependent using the Prisoner's Dilemma

a. Firms like Cole and Woolies form from having most of the sales in the industry. Cole and Woolworths are the two supermarkets in Australia with the most market share. The two firms focus on cutting operating costs, like reducing the prices they pay for commodities. Their strategic approach has made them outperform other emerging firms that focus on reducing prices and failing. They've managed to negotiate reductions in prices and use promotions to attract more customers.

b. Cole and Woolworth's decisions are interdependent. Since they're the dominating supermarkets in the region, any firm facing a decision to make has to consider what the other firm would do in the same position. For example, if either firm faces a situation where they're supposed to cut their prices, they must consider that the other firm may reduce its prices in retaliation. Any decision taken by either firm will alter the decision the other one will take. The Prisoner's Dilemma relates to this occurrence. Given that these two institutions are working on their self-interests, with a decision Cole makes, Woolworth would make a decision that would protect it at Cole's expense. The two are always faced with a paradoxical situation in analyzing their decision making, the same position in the prisoner's dilemma.

c. Oligopolies may decide to collude, wherein they join forces and keep the prices high. These oligopolies bring instability in the market as an efficient firm will have to reduce its prices to increase its market share. Consequently, these actions will have consumers paying higher prices for commodities than what they can pay for them.