You, The Consumer, Pay The Price For A Conversation That Never Took Place

Have you ever noticed that Coles and Woolworths seem to charge the same price for the same thing?
Coles and Woolworths, two competitors, have “limited incentive to compete vigorously with each other on price.” (ACCC, 2025) They have never sat in a room and agreed to raise prices together. (ACCC, 2024) They don’t need to. Instead, they act interdependently, but through tacit coordination. This is called a non-cooperative oligopoly.

Rather than a cooperative oligopoly, where firms collude (which is illegal), tacit coordination is legal and is functional. If prices are cut, it will be matched. If prices rise, it will likely be matched and customers will be lost (with some nuance). So neither moves (also with some nuance).

By Liam Scotchmer
References below.

Without an agreement, without a phone call, without a contract; each firm independently decides to change prices knowing the other will likely do the same. Legal. Invisible. Effective. This is a tacit agreement, whereby Coles and Woolworths are agreeing to something without actually saying so.

What Is A Tacit Agreement?

However the kinked demand curve explains why neither firm moves on price.

The kinked demand curve occurs when the demand curve is not a straight line but instead has a kink in it; rival firms will behave differently to price cuts and price increases, called different elasticities for higher and lower prices. (Pettinger, 2020)

If Coles increases its price for milk it will not be matched by Woolworths. The kinked demand curve explains this; demand for milk is price elastic when Coles increases its prices compared to a rival. If demand is elastic and prices rise, then revenue will fall for Coles.

If Coles decreases its price for milk it will be matched by Woolworths.
The net effect of Coles cutting its price for milk and Woolworths matching it is Coles will only see a small increase in demand as demand for milk from Coles is price inelastic during a “price cutting war.” If demand is inelastic and price falls, then revenue will fall for Coles.

What is the equilibrium? So cut prices equals a price match; no gain. Raise prices; not matched and lose customers. The equilibrium is neither moves. (Pettinger, 2020) Compete instead through product differentiation; loyalty programs, private labels, and convenience. (ACCC, 2025)

The Kinked Demand Curve

But wait; we said raising prices won’t be matched. Is this entirely true? Well, per the ACCC, grocery prices have actually risen; Coles and Woolworths have raised prices during inflationary periods and have, at the same time, expanded their product margins. (ACCC, 2025)
Repeated games in game theory explains why they can raise prices. Per Principles of Microeconomics (Gans et al., 2021), if we model this scenario every week, indefinitely; raising prices (cooperation) or not changing prices (cheating), the punishment of not changing prices makes raising prices possible (the punishment for cheating is the cooperating firm retaliates by dropping back to not changing prices; both firms lose the future gains from cooperation permanently). Therefore, the two firms don’t cheat because the future costs outweigh the one time gain. That’s how tacit coordination produces price rises without a single conversation. And this is not collusion; this is legal per the Competition and Consumer Act 2010 which prohibits explicit agreements (cartels, price fixing, market sharing) between competitors. Tacit coordination is legal because there’s no agreement made, each firm is independently deciding to raise prices, knowing the other will likely do the same.

Repeated Games

The most effective agreements are the ones never made. Explicit agreements result in legality issues with the ACCC. A tacit agreement on the other hand essentially never happened. You, the consumer, pay the price for a conversation that never took place.

So, Who Pays?

References

ACCC. (2024, September 23). ACCC takes Woolworths and Coles to court over alleged misleading “prices dropped” and “Down Down” claims. Australian Competition and Consumer Commission. https://www.accc.gov.au/media-release/accc-takes-woolworths-and-coles-to-court-over-alleged-misleading-prices-dropped-and-down-down-claims

ACCC. (2025). Supermarkets Inquiry Final Report. https://www.accc.gov.au/system/files/supermarkets-inquiry_1.pdf

Collins Dictionary. (2026, April 7). Definition of tacit understanding. Collinsdictionary.com; HarperCollins Publishers Ltd. https://www.collinsdictionary.com/dictionary/english/tacit-understanding

Gans, J., King, S., Byford, M. C., & N Gregory Mankiw. (2021). Principles of microeconomics. Cengage Learning Australia.

Pettinger, T. (2020). Kinked demand curve - Economics Help. Economicshelp.org. https://www.economicshelp.org/blog/glossary/kinked-demand-curve/