The dominance of Tesco as the leading retailer in the UK has been challenged. You may wonder why oligopolies stay stable without collapsing over time. Laws can prevent behaviors like collusion, price-fixing, output restrictions, and so forth. Why is Asda a oligopoly? The market share of the cigarette industry is shared amongst four top companies. A game occurs when there are two or more interacting decision-takers (players) and each decision or combination of decisions involves a particular outcome (pay-off.) It results in a high degree of market concentration. Dairy farmers are also recently speaking out; Friends of the Earth research in 2007 highlighted how dairy farmers are struggling to break even and are unable to invest in greener farming, despite increased consumer demand for more environmentally friendly produce. the characteristics of an oligopoly market structure the construction of a kinked demand curve price and non-price competition the existence of collusion and cartels how game theory impacts on the behaviours of oligopolistic firms Additional teacher guidance is available at the end of this online lesson. The existence of a monopoly means there is just one firm in a given industry, while a duopoly refers to a market structure with exactly two firms. The company has taken the lead in overcoming customer reluctance to purchasing own brands, which are generally considered to be more profitable for a supermarket as it retains a higher portion of the overall profit than it does for branded products. Then the big firms raise their prices up. Small independent stores and suppliers, and ultimately consumers, are paying a direct price in the face of unfair competition. Tesco has been investing in its stores pipeline since mid 1990s. 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. However, bigger firms cut prices so low that the smaller firms cant compete. A few took into account what the market price was but none was able to calculate marginal costs and revenues. The concentration ratio measures the market share of. By taking on this marketing strategy, ASDA have seemingly lost interest from upmarket customers, that Tesco benefit from, as well as the customers looking for good value. For example, the decisions that firms must take over pricing of products, and also how much money to invest in research and development spending. This can be seen in comparison to HMV selling the same CD for around 20(14.20). Oligopoly is the market structure where few large market firms compete with each other. The submission by the Association of Convenience Stores to the Competition Commission grocery market inquiry in 2006 found that such practices were continuing. However, in an article called The Benefits of Oligopolies, Sam Vaknin ignores the effect of price signalling, saying it is easier to effect when there's only a Coke and a Pepsi, a Boeing and an Airbus in the market. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". 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. A Natural Monopoly Market Structure is the result of natural advantages like a strategic location or an . The response by the Office of Fair Trading (OFT) was to introduce a voluntary code of practice, to be entered into by the large four supermarkets. Sprint (S), AT&T (T), and T-Mobile (TMUS). As large firms, they can mass produce at a lower average cost. This leads to competition in the oligopoly market. However, this is not just a question of personal choices, but of social circumstances, with low-income communities far more likely to suffer from diet-related illnesses, and an estimated four million people in the UK are unable to obtain access to a healthy diet. (see earlier for further analysis into independent convenience stores.). This strategy has been abandoned since losing its Number One spot to Tesco. As seen from Figure 1, monopoly only has one seller, and restricts entry to the market, because monopolies generally benefit from economies of scale, and use advertising to block out any companies from trying to enter the market. Market Structures The purpose of this paper is to provide of different types of market structures as well as pricing and non-pricing strategies used in the various market structures. There are four major types of competitive market structure, these include: Perfect competition, Monopolistic competition, Oligopoly and Monopoly. At 24 February 2007 Tesco operated 1,988 stores in the UK, and 1,275 outside the UK. Like any firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. 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. There are a number of ways to do this; for instance, they can mirror the actions of an agreed-upon price leader, raising prices when the price leader does so. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". We can characterize market structures based on the competition levels and the nature of these markets. 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. More relevant is that about a third of consumers have three superstores within relatively easy reach of them. The result of these practices is when suppliers raise prices for other buyers (including independent shops) as a knock-on effect. They offer best value for car-based bulk buying through offers such as two for one. Not only are these special offers mainly for processed food, but lower income groups without access to private transport, and in particularly elderly and less mobile people, are less able to advantage of them. Bigger firms force smaller firms out of business. 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. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the And that brings us to The Game Theory.. In an oligopoly, the relatively Earlier last year, it was the largest retailer in the United Kingdom, with a 29% share of the grocery market according to retail analysts, compared to the 16.8% share of Wal-Mart owned ASDA and 15.6% share of third-placed Sainsburys, which had been the market leader until 1995, when Tesco overtook. 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. For example, Tesco planed to extend its "Finest" to include a range of homecare. competitiors that are also flying on the routes they offer. As mentioned above, some of these markets require large economies of scale for firms to be viable. There are no barriers to entry whatsoever. 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. Motive comes from interdependent competition and opportunity arises from access to plentiful resources. Tesco, for example, will keep a small group of staff analysing Sainsburys activity in the grocery industry. This way, the two firms can set a monopoly price, produce monopolistic quantities, and allocate resources monopolistically. Oligopoly Characteristics Oligopoly is the main form of modern market structure. It is very difficult for new businesses to start up. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". In an article in The Financial Times Richard Hyman, chairman of Verdict Research, said intervening in the grocery sector could have a counterproductive effect if redrawing the competitive playing-field had a material effect on supermarkets' ability to deliver low prices. From the above sources, it is easy to show that a retail/grocery oligopoly such as Tesco does not raise prices but decreases prices. According David McCarthy, a retail analyst, Tesco have pulled off a trick that no other retailer has achieved; that is, of course, appealing to all segments of the market.In contrast, ASDAs marketing strategy is heavily focused on value for money, which can undermine its appeal to upmarket customers even though it sells a wide range of upmarket products. There are no barriers to entry whatsoever. Then, they must conceal their price-fixing activities from the general public. ), OLIGOPOLIES CHARACTERISTICS AND BEHAVIOUR, Oligopolistic businesses tend to be assorted and also tend to exhibit several behavioural tendencies. Economists have described it as Jekyll and Hyde Tesco. Using this phrase, we can ask whether the Competition Commission has seen the Jekyll Tesco or Hyde Tesco over the 17 month investigation of groceries markets which continued until 30thOctober 2007. This table illustrates how the 4 markets work in the real world. Tesco PLC is a multinational grocery and general merchandise retailer. social media platforms). corporations, have significantly less power within the industry. CONCLUSION ON HOW TESCO AFFECTS BOTH CONSUMERS AND PRODUCERS. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Comparing Oligopoly to Monopoly and Duopoly, The Role of Governments in the Existence of Oligopolies. Appealing to customers of all income ranges is also a main reason to the leap in growth. Price remains at P* and output Q*, even at MC Upper or MC Lower. Mikey HolderGCE A2 ECONOMICS UNIT EC4CTescos Oligopoly. However, if they are a few big firms with similar costs and rising demand, the agreement is likely to last. Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the social surplus or the total surplus. This is where a company increases its share in the market through internal growth and taking over other firms. Like many economists, he presents an ideal market that exists independent of politics and power. This report also found that some of the chains were engaging in price-flexing. small number of participating companies collaborate (outright or secretly) to On Tescos website they confidently write Every week we check over 10,000 prices in Asda, Sainsburys and Morrisons stores to guarantee you low prices every day.. For more information on this, please see the submission from the Federation of Wholesale Distributors to the Competition Commission, as well as the High Street Britain report and the Association of Convenience Stores submission to the Competition Commission. is it tolerable for a supermarket such as Tesco to sell as a loss for an extended period of time, just to attract customers? Again, the source of the data is The Office of Fair Trading, and is not subject to any suspicion of bias. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Monopolistic competition is a common market structure. It is more price elastic because of the assumption that at the higher price, firms will not follow but at the lower price, other firms will cut prices too. There is a lack of competition. While the concentration of wealth is not bad unto itself, such wealth can then be used to exert influence over the economy, which might not be beneficial for society as a whole. Further insight can be gained by examining the marginal revenue curve. The EPS, or earnings per share, are the earnings returned on the initial investment amount, and are also important when testing for financial performance. The closure of many small shops has left some neighbourhoods with limited access to healthy food. Oligopoly is one kind of market structure (Anderton. The company has a total market value of about 36,761.71m (April 2007) and is the largest private sector employer in the UK and second to the NHS overall. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. Their market share gives them a level of flexibility between store formats and over product pricing, and control of supply chains. There are concerns that the closure of small shops is a one-way street. 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. They may have differentiated products. People tend to think instantaneously that oligopolies are advantageous all round, but there are two obvious negative aspects that come along with an oligopolistic market structure; oligopolies tend to be inefficient in the allocation of resources and they cause a disturbed concentration of wealth and income. 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 is therefore tied into the above concept of consumer and producer surplus, because they are making a loss due to selling products for cheaper than the customer is willing to pay. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. Costly research projects represent a risk for any business, but if one firm invests in research and development, can another rival firm decide not to follow? This agreement can be formal or informal. THE INCREASE IN CONCENTRATION OF WEALTH AND INCOME INCURRED BY TESCO, AND ITS IMPACT ON CONVENIENCE STORES AND OTHER PEOPLE. Collusion in this context refers to two or more firms that secretly agree to control prices, production and other aspects of the market, such as advertising. From the gathered data, I feel that the features of the original hypothesis have been suitably proved; however, it still remains unclear whether the future looks good for consumers and suppliers that deal with Tesco. practice they often collude with one another to increase their collective Above, I mentioned that a common behavioural tendency that is exhibited by oligopolistic firms is interdependence. Tesco rolls out successful UK initiatives in other countries. In our example of the Prisoners Dilemma, the dominant strategy for each player is to confess since this is a course of action likely to minimise the average number of years they might expect to remain in prison. 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. It has also done rather well in non-food sales in Ireland. airlines like British Airways and Air France will have relatively few Also there are sunk costs and natural cost advantages, which may prove to be successful barriers. They are able to do this because of their market shares and integrated supply chains. Tesco is operating within an oligopoly market where the market is highly dominated by a very little number of big companies. In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. This point however, must be evaluated; Can Tesco endure a loss in the short run, hoping it will attract customers? Perfect competition is a market in which there are many sellers and many buyers. It has been innovative and energetic in finding ways to expand, such as making a large-scale move into the convenience-store sector, which the major supermarket chains have traditionally avoided.