Extent to which UK supermarket is oligopoly It has focused mainly on developing markets with weak incumbent retailers in Central Europe and the Far East, rather than on mature markets such as Western Europe and the United States. Many markets can be considered as monopolistically competitive, often including restaurants and book shops, in large cities. The diagram would be like the monopoly profit maximizer. This point however, must be evaluated; Can Tesco endure a loss in the short run, hoping it will attract customers? Even if there is no agreement, oligopolistic firms dont end up changing their output with changes in cost. The changes will see Sharry Cramond take up a role as head of brand and . The Office of Fair Trading found that real prices for food had fallen 7.3% between 2000 and 2005, as seen in the above source. However, in the past few years, the supermarket industry has seen competition grow even further and the big four are now facing competition from low-cost retailers, including Aldi and Lidl. In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. Although Tesco has been criticised for acquiring too much of the market, by forms of hostile behaviour, and causing companies to be forced to close, it is easy to clearly see the benefits that consumers are benefiting from Tescos oligopoly. As mentioned above, some of these markets require large economies of scale for firms to be viable. Mikey HolderGCE A2 ECONOMICS UNIT EC4CTescos Oligopoly. It is difficult to say whether there are still any real monopolies still in existence in the UK, but just as an example, Royal Mail would have held the monopoly in the postal industry in 2005, because if someone wanted to send a letter, it would haveto be sent by Royal Mail. |. On a standard supply and demand (S&D) diagram, consumer surplus (CS) is the triangular area above the price and below the demand curve, since intramarginal consumers are paying less for the item than the maximum that they would pay. Study with Quizlet and memorize flashcards containing terms like An oligopoly is a market structure, Three examples of oligopolies in the United States are industries that produce or sell, Without barriers to entry, and more. First the team explores the pure competition market structure through the analysis to Fiji Water Company. When executed correctly, collusion means that firms behave as if they are on firm-i.e. The implication here is that the prices in oligopoly tend to be more stable than in the other theories of the firm. After analysing Tesco and its financial status, I think it is important to analyse a negative aspect that I discussed earlier and incorporate with the ideas derived from information about Tesco. The entire data are for Tesco's financial years, which run for 52 or 53 week periods to late February. Tescos belief is that customers deserve the best value for money and that is why they work hard to find ways of keeping their prices down. 1. The recommendations will apply to all the big supermarket chains, but because of the way that Tesco has acquired very large market shares in many towns and districts, inevitably it will be most affected by proposed reforms. (See Figure 3). EVALUATION OF TESCOS EFFECT ON THE CONSUMER. A study by the National Consumer Council released in December 2006 showed that some supermarkets were undermining efforts to tackle health inequality, and that many economy lines were high in salt, fat and sugar. small number of participating companies collaborate (outright or secretly) to I have still deemed it sufficiently trustworthy to use, because of. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". As a result, demand is more predictable and the firm does not need to hold as much stock, which in turn, reduces stock holding costs. The prisoners could do better by both denying, but once collusion kicks in, each prisoner has an incentive to cheat. Hall and Hitch questioned the owners of 38 firms and found that rather than profit maximising by producing where marginal cost is equal to marginal revenue, the majority in fact used cost-plus pricing. Market structure of the retail industry Natural cost advantages make one firm unique, and therefore will have more revenue. In an informal agreement, the firms behave as a monopoly and choose the price that maximizes output. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the A decision that Sainsburys make will affect Tesco, and vice versa, so therefore, interdependence is always exhibited as a behavioural tendency, in the oligopolistic market. Price remains at P* and output Q*, even at MC Upper or MC Lower. In economics, market structure is a term that describes the state of a market, with respect to competition. Tesco definitely falls into this category as can be seen from figure 12 (left.) Above this price, an individual firm is afraid of putting up prices. Market structure of Tesco and British Petroleum with reference UK Supermarket Sector. It might be a particular firm situated in an isolated area of town. Tesco sells an expanding range of own-brand non-food products. The firms comprise an oligopolistic market, making it possible for already-existing smaller businesses to operate in a market dominated by a . Customer focus, to create value for customers to earn their lifetime loyalty. In this market there are few numbers of Interdependent firms which dominate market. Many of the 12 original provisions recommended by the Competition Commission were weakened. Interdependence is a term used to imply that businesses have to take into account likely reactions of rivals to any change in price and output. An oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. This table illustrates how the 4 markets work in the real world. Above, I mentioned that a common behavioural tendency that is exhibited by oligopolistic firms is interdependence. There are concerns that the closure of small shops is a one-way street. The UK's biggest supermarkets are grappling for ever greater market share. The result of these practices is when suppliers raise prices for other buyers (including independent shops) as a knock-on effect. The Office of Fair Trading also mentioned price cuts as a concern: aggressive pricing by supermarkets may be distorting competition.. By late 2004, it was widely regarded as a major competitive threat to traditional high street chains in many sectors, from clothing to consumer electronics to health and beauty to media products. This agreement can be formal or informal. The value offered by supermarkets offers much less to the lowest income groups. However, there are only a limited number of rights available to be won and if all of the leading firms in a market spend on research and development; this may ultimately bring a lower rate of return. This report also found that some of the chains were engaging in price-flexing. Its report "High Street Britain: 2015", released in January 2006, predicted a bleak future for independent shops. Mass media is a very significant The degree of market concentration is very high. There may be a large number of firms, but most are small and relatively unimportant, while a small number of large firms produce most of the outputs of the . industry, the providers that tend to dominate the industry are Verizon (VZ), Its important to relate the above graph to Tesco. Its market structure comprises few firms which dominate whole market which is in case of U.K. supermarkets where 'big Four' namely Tesco, Asda, Sainsbury and Morrison's are the dominate ones and indulged in oligopoly. The report argued that the social and economic benefits of diverse forms of retail should be protected. The market is characterized by imperfect knowledge, where customers dont know the best price or availability. An inclusive offer is a phrased used by Tesco to describe its aspiration to appeal to all customers of all income range, in the same stores. Firstly, many oligopolistic businesses tend to hold their prices at a constant level, preferring only to compete in ways that do not involve changing the price. An oligopoly is most likely to have a kinked demand curve. Likewise, a report by the New Economics Foundation (NEF) from 2005, Clone Town Britain, found that chain retailers are damaging to the local economy, social inclusion and local identity. Tesco is simplifying its marketing structure under three teams in a move that will result in some redundancies at senior level as it looks to up its focus on the customer. Collaborations are unlikely to last as firms have an incentive to cheat. There are four types of market structure such as - perfect competition, monopoly, oligopoly and monopolistic competition. Existence of Oligopolies, Special legal privileges (this is one of the ways that governments can support the existence of oligopolies)for instance, if firms have special permission to use land for infrastructure like railroads, Platforms that tend to increase in value as they gain more users (e.g. They might lose the competitive edge in the market and suffer a long term decline in market share and profitability. The result of these higher prices for consumers is higher profit margins for the firms involved in the oligopoly. According to the Competition Commission's report on the grocery market from 2000, the big four chains were persistently selling products at below market price. experienced outright collusion by an oligopoly when six book publishers engaged At the same time, research has shown that supermarkets are not always the cheapest sources of healthy food. The naive reaction to oligopolies is that they invariably stifle competition and artificially inflate prices. The main reason for sustaining prices at a constant level, is so that competitors can match price decreases, but not increases. A monopoly is typified by a single competitor and widespread market control. publishers in 2012. There may be a large number of firms, but most are small and relatively unimportant, while a small number of large firms produce most of the outputs of the industry (Anderton. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? this massive market share). specific industries and their oligopolies: There are a few interdependent firms that cannot act independently. practice they often collude with one another to increase their collective To state the obvious, when suppliers provide supermarkets with more items at a cheaper price, that is in theory good news for shoppers, and they are also offering good in-store service, and a comfortable shopping environment. Just earlier on, we analysed Tescos growth and noticed that Tesco appeals to customers of all income ranges. In contrary, producer surplus (PS) is the triangular area below the price and above the supply curve, since that is the minimum quantity a producer can produce. Tesco, for example, will keep a small group of staff analysing Sainsburys activity in the grocery industry. A negative effect of oligopolies in general, is the increase in the concentration of wealth and income. The biggest fours, Tesco (24%), Asda (13%), Sainsburys (13%) and Morrisons (12%) are holding the 62% of the whole UK grocery market jointly (Bailey, 2014). It said in the entry that new supermarkets may face barriers to entering the market because of the planning system. Planning laws make it difficult for new entrants to open stores. Also, we analysed that Tesco can drive prices down as a benefit of economies of scale. The commission believes that Tescos large national market share is not a particular problem, even if it does take one in every three pounds we spend in supermarkets. (VIAB), New Corporation (NWSA), Time Warner (TWX), and Walt Disney (DIS). The consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay. And particularly in mixed economies, governments may institute policies explicitly allowing oligopolies to exist, where they are regulated/supervised by government agencies. The Role of Governments in the However, if they are a few big firms with similar costs and rising demand, the agreement is likely to last. For example, De Beers is known to have a monopoly in the diamond industry. However, the stronger the position of Tesco and other grocery retailers, could lead to the closure of suppliers, as The Times stated about vegetable and fruit growers going bankrupt, because of the aggressive behaviour of larger retailers. If the government intervenes by implementing, for example, a tax or a subsidy, then the graph of supply and demand becomes more complicated and will also include an area that represents government surplus. particular kinds of situations. The answer is, it probably regards Jekyll Tesco as the dominant personality but that the preliminary findings (not yet released) will be seen as curbing some of Tescos allegedly noxious habits. Technically, there is not a maximum number of firms that can exist in an oligopoly, but as a rule there have to be so few powerful firms in an industry that anything one firm does has a major effect on the decisions of the other firms in that industry. This strategy has been abandoned since losing its Number One spot to Tesco. oligopolyoligopoly is a market structure with a small number of firms, in which none can prevent other from having a significant influence in the industry. The figures in the chart include 52 weeks/12 months of turnover for both sides of the business as this provides the best comparative. Firms often try to lower their price as much as possible to deter new entrants. By Sarah Vizard 10 Sep 2014. POSITIVES AND NEGATIVE ASPECTS OF OLIGOPOLY WITHIN THE RETAIL/GROCERY MARKET, Inefficiency was the first negative aspect regarding an oligopoly, with the main point focusing on the high prices. 3. If suppliers complain, supermarkets can simply move their business elsewhere, and their dominance of the food retail sector is such that there may simply be no one else for farmers to sell their produce to. Oligopoly is the market structure where few large market firms compete with each other. Advertising increases peoples awareness of the product, which leads to more profit, and also if a company wants to exit an industry and thinks of how much money in the form of sunk costs has been spent, it is always an incentive to stay in the market. These services are available to UK residential consumers and marketed via and through Tesco stores. For smartphone operating systems, The Times have even described this behaviour as bulling and said that the bankruptcy of fruit and vegetable growers can be blamed on the bullish behaviour of retailers. Non-food Business: Many United Kingdom supermarket chains have attempted to diversify in other areas, but Tesco has been exceptionally successful. The market share of the cigarette industry is shared amongst four top companies. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. in price fixing of electronic books. Since there are only a small amount of firms holding an oligopolistic position in the market, it is a big incentive for oligopolistic firms to merge. An example would be the intergovernmental organization known as the Organization of the Petroleum Exporting Countries (OPEC)no one government has the high-level power to prevent this group of states from colluding. oligopolies include: Oligopolies have a number of significant downsides, particularly for consumers. The third point is simply, economies of scale. In this diagram when costs rise, from an increase in sales taxes for example, the marginal cost curve MCi moves upward to MCii. Costs that may be un-recoverable are sunk costs, which mean that when money is spent on a sunk product or service, the money cannot be returned. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? During its long term dominance of the supermarket sector, Sainsburys retained an image as a high-priced middle class supermarket which considered itself to have such a wide lead on quality that it did not need to compete on price, and was indifferent to attracting lower-income customers. Bigger firms force smaller firms out of business. For example, the widespread comparative data on the .
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