The dominance of Tesco as the leading retailer in the UK has been challenged. There are a few barriers to entry and exit. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a particular market. Why is Asda a oligopoly? 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. HOW TO USE THIS ONLINE LESSON 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. At the same time, research has shown that supermarkets are not always the cheapest sources of healthy food. 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. The firm can keep their price stable by reducing the overall level of profit earned, and if they can sustain this stability in the long run it implies that a measure of abnormal profit was being earned before the cost increases. Oligopolistic firms dont like cutting prices because it leads to a price war, where firms are continuously cutting prices down. The value offered by supermarkets offers much less to the lowest income groups. Should Oligopolies Compete or Collaborate? Another important characteristic of an oligopoly is interdependence between firms. 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. The third point is simply, economies of scale. Once this recognition has taken place, these businesses will have to come to a shared agreement to choose to cooperate. The result of these practices is when suppliers raise prices for other buyers (including independent shops) as a knock-on effect. Overall, quantity demand increases as the demand curve slopes down, but the increase is less than proportionate. Oligopoly is a type of imperfect competition which can be applied to U.K. supermarket industry. The fate (or the pay-off) of a player in a game depends not only on the actions of that player but also on the other players. For example, if Coca-Cola changes its price, Pepsi is also likely to do the same. The multinational retailer employs more than 360 thousand people. This table illustrates how the 4 markets work in the real world. There are concerns that the closure of small shops is a one-way street. Originally specialising in food, it has diversified into areas such as discount clothes, consumer electronics, consumer financial services, selling and renting DVDs, compact discs and music downloads, Internet service, consumer telecoms, consumer health insurance, consumer dental plans and budget software. 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. The games theory is a theory often used to analyse interdependence among oligopolistic firms. Monopolistic competition is typified by a large number of relatively small competitors, each with a humble degree of market control. Tesco PLC organizational structure is decentralized, tall (hierarchical) and product-based. ECONOMIC SURPLUS; PRODUCER AND CONSUMER SURPLUS. Factors that can contribute to the existence of 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.. ), OLIGOPOLIES CHARACTERISTICS AND BEHAVIOUR, Oligopolistic businesses tend to be assorted and also tend to exhibit several behavioural tendencies. 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. Once a certain amount of independent retailers shut, the wholesale industry may no longer be sustainable, and could collapse. Motive comes from interdependent competition and opportunity arises from access to plentiful resources. In the field of air travel, large Tesco has also moved into Internet Service Providing (ISP) and its own mobile phone and home phone sector. The highest net profit observed over the 9 year period, occurs in 2005 with a 24.18% increase in net profits. particular kinds of situations. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. In fact, Oligopoly tends to be the worst efficiency offender in the real world, because: Oligopolies tend to increase the concentration of wealth and income too. The costs of setting up a business in different industries varies depending on which industry you want to focus your company on, for example building newsagents is a lot cheaper than to buy a factory because it costs less to build or buy the site of newsagents than the factory. Their existence in a given industry can prevent new firms from entering the industry, while also inhibiting innovation and creativity. Like many economists, he presents an ideal market that exists independent of politics and power. The retail food prices is a source obtained from The Office of Fair Trading website, and therefore there is no suspect to bias on this source, since The Office of Fair Trading have no reason to alter figures to support Tesco. Are supermarkets oligopoly or monopoly? The medium term aim is to have half of group sales outside the United Kingdom. That is the demand curve below price Pi is inelastic. Some technical proposals from the commission that could have far-reaching consequences, are expected to rectify this problem, and it is likely that supermarket groups will be prohibited from buying land near to an existing store and then sitting on the land with intent of preventing a competitor from muscling in. This can be seen in comparison to HMV selling the same CD for around 20(14.20). The concentration ratio measures the market share of. For smartphone operating systems, Tescos financial performance can be analysed using a lines-on-two-axes graph, which is a classic combination chart, used frequently to analyse two related entities. Second the oligopoly market structure with L . 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. Groups of firms can also avoid governments laws against oligopoly if they are not restricted by these laws. An oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. These services are available to UK residential consumers and marketed via and through Tesco stores. Extent to which UK supermarket is oligopoly 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. It also appears the Tesco are abusing buyer power and the planning system. As mentioned above, some of these markets require large economies of scale for firms to be viable. Will Tesco start taking advantage of their power in the market, to drive other competitors out, and start forming the Tesco monopoly, at which point it will drive prices up, and consumers will have no power to change anything? Tesco is operating within an oligopoly market where the market is highly dominated by a very little number of big companies. The only point farmers have to make is that if they are to have a future as farmers and sustainable agriculture then supermarket power, must be heavily controlled. If they do not and the other firm does, then their profits fall and they will lose market share. Oligopoly is the market structure where few large market firms compete with each other. Because firms in an oligopoly characteristically charge above-equilibrium (i.e., high prices) the only way to compete is through product differentiation. Capital costs can prevent competitors from entering an industry because, depending on the industry, the costs may be very high. Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the social surplus or the total surplus. The knock on effect of this will be further damage to the independent retail sector. EVALUATION OF TESCOS EFFECT ON THE CONSUMER. In this market there are few numbers of Interdependent firms which dominate market. An Oligopoly is a group of leaders in a certain market. 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. 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.. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. Tesco has also upgraded its software through Business Systems UK Ltd. Whilst the upgrades were being performed, The Times made investigations and wrote in the paper: Tesco, the UKs largest supermarket retail organisation, has chosen Nice university quality management software and the NiceLog digital voice recording and screen capture platform which automates and optimises its approach to customer service and employee development through consultancy and implementation of a recording and quality management solution all promoting a more advanced Tesco.. It has also done rather well in non-food sales in Ireland. The closure of many small shops has left some neighbourhoods with limited access to healthy food. 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. Including 60 weeks of non-UK and Ireland sales the figures to 24 February 2007 were: As seen from figure 9, Tescos turnover and net profit have been increasing steadily since 1998, without exception. For example, Tesco planed to extend its "Finest" to include a range of homecare. Average Revenue total revenue/quantity. Other supermarkets in the United Kingdom have done some of the same things, but Tesco has generally implemented them more effectively, and as a result, have made most profit. During the 1990s Tesco expanded into Central Europe, Ireland and East Asia. 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. It results in a high degree of market concentration. Supermarkets are best value for unhealthy and heavily processed foods. Sprint (S), AT&T (T), and T-Mobile (TMUS). 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. Price remains at P* and output Q*, even at MC Upper or MC Lower. When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. Looking back at Tescos success, there are 3 main points that can be evaluated upon: 2. Natural cost advantages make one firm unique, and therefore will have more revenue. Once small independent stores shut, there are often insurmountable barriers to getting back into the High Street. 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. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Oligopolies tend to emerge in Paul M Sweezy suggested It is pretty well agreed among economists that the ordinary concept of a demand curve is inapplicable to oligopoly. In particular Sweezy said, the assumption, that everything else would remain unchanged if the oligopolist changed his price, was unrealistic. The prevailing strategy for both firms is probably to go ahead with research and development spending. It is quite possible then, that the information above is not fully truthful and precise. The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. The main problem with the kinked demand curve model is that it fails to explain oligopolist behaviour consistently. It is also likely that therell be a ban on the groups use of restrictive covenants whose point is to prevent any parcel of land being developed by a competitor. 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. The classic example of game theory is the Prisoners Dilemma, a situation where two prisoners are being questioned over their guilt or innocence of a crime. Since all the units are the same price, each new unit would have the same average revenue, so the marginal revenue = total revenue. 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. However, a supermarket must get approval every time it tries to incorporate a store from a competitor. The competitive market structure an organisation belongs to is determined by the nature of their product, the number and size of other firms in the market and the entry and exit conditions of that market. 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. Many of the 12 original provisions recommended by the Competition Commission were weakened. corporations, have significantly less power within the industry. Save my name and email in this browser for the next time I comment. (VIAB), New Corporation (NWSA), Time Warner (TWX), and Walt Disney (DIS). CONCLUSION ON HOW TESCO AFFECTS BOTH CONSUMERS AND PRODUCERS. et al, 2008:298). The debate that may spark is whether we actually want more supermarkets, whether the benefits of greater competition outweigh what many see as the negative impact on communities and landscape of superstore proliferation. 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. When XYZ firm entered the market for good A two years back, it kept the price of its product low to attract . 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. 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. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Susan Grant & Chris Vidler & Charles Smith, Less than half the price of our monthly plan. It is a go ahead of being equally responsible to and sharing a common set of principles with other firms. in price fixing of electronic books. Finally, an oligopoly is a market dominated by a few large suppliers. 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. 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. Total Revenue Total Quantity x Price. You may wonder why oligopolies stay stable without collapsing over time. Dr. Shweta Uppadhyay Follow Lecturer of Economics Advertisement Advertisement Recommended Oligopoly Sanket Bhatia 6.3k views 15 slides Me M7 Oligopoly infinity 1.8k views 19 slides Price determination under oligopoly 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. A price increase would, he assumes, not be matched by his competitors, hence the demand curve above Pi is elastic. Monopolistic competition is a common market structure. This could damage independents and smaller chains, and in turn damage consumers. This data is also released from Tescos own website, so it may appear that the data is slightly biased. The United States publishing market Their market share gives them a level of flexibility between store formats and over product pricing, and control of supply chains. (Tutor2U, 2007)An oligopoly market is a market structure which shares a large percentage of the market by a few firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. Similarly a price fall has the same effect on revenue. It will be remembered that if demand is elastic and price rises, revenue falls. In oligopoly market structure, since there are only a few large vendors of a commodity, each one has an effect on others, and there is a correlation between producers, because the amount of sales . Therefore, it becomes easier to categorize and differentiate companies across related industries. publishers in 2012. View Extent to which UK supermarket is oligopoly and extent to which it can support price fixing.docx from BSBHRM 405 at Australian Institute of Business. They are able to do this because of their market shares and integrated supply chains.