However, if they are a few big firms with similar costs and rising demand, the agreement is likely to last. a monopoly. An oligopoly is a term used to explain the structure of a specific market, industry, or company. States is likewise dominated by Chrysler, Ford, and GMC. 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. This could damage independents and smaller chains, and in turn damage consumers. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. Mikey HolderGCE A2 ECONOMICS UNIT EC4CTescos Oligopoly. It results in a high degree of market concentration. This time the firm imagines that dropping its own price leads to others dropping theirs. Oligopoly Characteristics Oligopoly is the main form of modern market structure. The current land bank of 319 sites across the big four retailers-Tesco, ASDA, Sainsburys, and Morrisons, could obstruct new competition and perhaps harm consumers. Just earlier on, we analysed Tescos growth and noticed that Tesco appeals to customers of all income ranges. Groups of firms can also avoid governments laws against oligopoly if they are not restricted by these laws. Tesco is operating within an oligopoly market where the market is highly dominated by a very little number of big companies. Oligopoly is defined as a concentrated market. It is very difficult for new businesses to start up. Others regard it as a threat with excessive market share, which takes over entire towns and convenience stores. Natural cost advantages make one firm unique, and therefore will have more revenue. 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. It was founded by Jack Cohen in the East End of London in 1919. airlines like British Airways and Air France will have relatively few It is arguable that oligopolies do not allocate resources efficiently. Supermarkets control nearly 80% of the British grocery market and as the most powerful players along most food supply chains are able to dictate terms, conditions and prices to suppliers. Customer focus, to create value for customers to earn their lifetime loyalty. NCH the Childrens Charity found that travel costs to go food shopping added 23% to the shopping budget of low income families. A survey by Sustain in 2005 showed that a basket of fruit and vegetables at a supermarket in Walthamstow cost 2.50 more than the equivalent at a market. There are concerns that the closure of small shops is a one-way street. Let us study the four basic types of market structures. At current, a supermarket can develop a site it already owns without approval from the competition authorities. 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 marginal revenue recall, falls at twice the rate of the average revenue (demand) curve. Again, the source of the data is The Office of Fair Trading, and is not subject to any suspicion of bias. Retailing Services: Tesco has taken the lead in its sector in expanding into areas like personal finance, telecom, and utilities. small number of participating companies collaborate (outright or secretly) to The result of these practices is when suppliers raise prices for other buyers (including independent shops) as a knock-on effect. that is controlled by EMI Group, Warner, BMG, Sony, and Universal Music Group. 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. Motive comes from interdependent competition and opportunity arises from access to plentiful resources. Research by the New Economics Foundation for the London Development Agency in 2006 showed that fresh produce in street markets was on average 30% cheaper than at supermarkets. Merging and colluding are two common ways in which firms cooperate. The third point is simply, economies of scale. In 2001, Tony Blair claimed that British supermarkets had farmers in an 'armlock'. 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 dominant strategy is each prisoners unique best strategy regardless of the other players action. It will be remembered that if demand is elastic and price rises, revenue falls. October 2007. experienced outright collusion by an oligopoly when six book publishers engaged Similarly a price fall has the same effect on revenue. et al, 2008:298). This is achieved by constant innovation, and by incessant advertising. 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. The data surely confirms that there is an increase in concentration of wealth as can be deduced from the taking over of stores and the increase in market share of store sales. The marginal revenue curve MRa is related to demand curve Da and MRb is related to demand curve Db. This leads to competition in the oligopoly market. Sometimes two oligopolistic firms can co-operate to increase welfare in the market. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. Like any firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. 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. Overall, quantity demand increases as the demand curve slopes down, but the increase is less than proportionate. Prices for consumers are higher than they would otherwise be, because competition and the usual laws of supply and demand are not operating as normal. A monopoly is typified by a single competitor and widespread market control. The music industry is an oligopoly 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 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. 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". A barrier to entry method is probably the behaviour that is exhibited most widely, not only by oligopolies but also by monopolies. Market structure of Tesco and British Petroleum with reference UK Supermarket Sector. industries that frequently exhibit characteristics of oligopoly: Here are some more details on Tescos growth over the last two or three decades has involved a transformation of its strategy and image. Tesco are abusing seller power, through practices such as price flexing and below-cost selling. publishers in 2012. This is not necessarily negative, but it is definitely self-reinforcing and inhibits the pursuit of equity. Tesco now controls just over 30% of the grocery market in the UK, approximate to the combined market share of its closest rivals, Asda, Sainsbury's, Morrisons and other grocery markets. Independently, a firm will have minimal gain from altering prices. The development of superstores on outskirts of town centres and out-of-town sites, and the closure of many local independent shops as a result, has created food deserts areas where it is almost impossible to buy affordable healthy food, especially fresh fruit and vegetables, without private transport. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. A formal agreement is a cartel and is illegal. 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. Monopolistic competition is typified by a large number of relatively small competitors, each with a humble degree of market control. Tesco believe that they do more by running promotions on fresh fruit and vegetables; they now sell 95 fresh fruit and vegetable Value lines and are also working with the Pre-School Learning Alliance to help parents and children in some of the UKs most deprived areas to make healthier choices. Larger firms are also able to borrow money at cheaper rates, because they have more assets and so it is less risky to lend to them, and feel more secure to lend to them. ), OLIGOPOLIES CHARACTERISTICS AND BEHAVIOUR, Oligopolistic businesses tend to be assorted and also tend to exhibit several behavioural tendencies. You may wonder why oligopolies stay stable without collapsing over time. Price remains at P* and output Q*, even at MC Upper or MC Lower. I would also like to analyse other consequences of Tescos oligopoly position that seem to affect other aspects of the UK economy. There are four types of market structure such as - perfect competition, monopoly, oligopoly and monopolistic 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. There are three reasons why this may have happened: Tescos use of its own-brand products, including the upmarket Finest and low price value ranges. 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.. 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. 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. Collaborations are unlikely to last as firms have an incentive to cheat. 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. Business Studies. The report argued that the social and economic benefits of diverse forms of retail should be protected. Total Revenue Total Quantity x Price. No communication is permitted between the two suspects in other words, each must make an independent decision, but clearly they will take into account the likely behaviour of the other when under interrogation. Perfect competition is a market in which there are many sellers and many buyers. CONCLUSION ON HOW TESCO AFFECTS BOTH CONSUMERS AND PRODUCERS. In this market there are few numbers of Interdependent firms which dominate market. Diet-related ill health is costing the NHS increasing amounts through illnesses such as cancer, diabetes, obesity and coronary heart disease. There are a few barriers to entry and exit. For example, the decisions that firms must take over pricing of products, and also how much money to invest in research and development spending. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. First the team explores the pure competition market structure through the analysis to Fiji Water Company. This is where a company increases its share in the market through internal growth and taking over other firms. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. Supermarkets are best value for unhealthy and heavily processed foods. The entrepreneurs added up their costs of production and then added what they thought was a fair profit margin. 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. They are now entering into the housing market, with a self advertising website called Tesco Property Market. Oligopoly is one kind of market structure (Anderton. 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. When XYZ firm entered the market for good A two years back, it kept the price of its product low to attract . 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. The two main approaches to understanding oligopoly are The Kinked Demand Curve and the Game Theory., USING THE KINKED-DEMAND CURVE TO UNDERSTAND OLIGOPOLY. Andrew Simms, an economist working for The New Economist Foundation, an independent firm, agrees with this concern: The paradox is that if the government hand supermarkets freedom to deliver lower prices to consumers, what do they do if they kill the competition and create a position of long term price increase? David Rae, head of convenience stores, said that Supermarkets sold lines at a loss to attract customers. This appears to convey that lower prices are really just a disguise and prices are bound to rise in the long run, once enough customers have been attracted. The report predicted that independent convenience stores were unlikely to survive by 2015 and independent newsagents were very unlikely to survive. As mentioned above, some of these markets require large economies of scale for firms to be viable. In the five years to 2002, 50 specialist stores including butchers, bakers, fishmongers and newsagents closed every week. Some consumers will see that as a blessing, but for proponents of competition, thats a sign of inadequate competitive tension in some parts of the country. Many of the 12 original provisions recommended by the Competition Commission were weakened. The game theory is mainly concerned with predicting the outcome of games of strategy in which the participants (for example two or more businesses competing in a market) have incomplete information about the others' intentions. October 2003 meant the launch of a UK telecom division, comprising of mobile phone and home phone services, to complement its existing internet service providing which was launch in August 2004. There are four major types of competitive market structure, these include: Perfect competition, Monopolistic competition, Oligopoly and Monopoly. The chart below shows the changing market share for the major grocers over recent years. Finally, an oligopoly is a market dominated by a few large suppliers. 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. Governments can use law and policy to inhibit or support the existence of oligopolies. Oligopoly is the market structure where few large market firms compete with each other. They include perfect competition, oligopoly market, monopoly market, and monopolistic competition. Monopolistic competition is a common market structure. 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. A negative effect of oligopolies in general, is the increase in the concentration of wealth and income. This can be seen in comparison to HMV selling the same CD for around 20(14.20). In an oligopoly market structure, there are just a few interdependent firms that collectively dominate the market. Susan Grant & Chris Vidler & Charles Smith, Less than half the price of our monthly plan. In 2000 the Department of Health actually recommended that local authorities should discourage the provision of new supermarkets over 1000 square metres outside existing town centres in recognition of the value of local shops to low income households. For example, Tesco Financial Services and Tesco Express convenience stores both operate in several international markets. Game theory analysis in the real world has direct relevance to our study of the behaviour of businesses in oligopolistic markets, such as Tesco. 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. Here are a few of the many (while there are more than 50 suppliers total, most of whom hold much less of 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. Tesco has operated on the internet in the United Kingdom since 1994 and was the first retailer in the entire world to offer a robust home shopping service in 1996. However, this thought can be quickly dismissed as Tesco are unlikely to release false data due to the fact that they are being monitored by the London Stock Exchange. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the Bigger firms force smaller firms out of business. METRO was only just behind and might move ahead again if the euro strengthens against the pound, but METRO's sales include many billions of wholesale turnover, and its retail turnover is much less than Tesco's. In the upper part of the D, AR curve is more price elastic (sensitive to price changes) than the lower part. Thousands of farmers and workers are forced to leave the industry each year because of the low prices they receive for their produce. Market structure of the retail industry 3. And particularly in mixed economies, governments may institute policies explicitly allowing oligopolies to exist, where they are regulated/supervised by government agencies. The producer surplus is the amount that producers benefit by selling at a market price that is higher than they would be willing to sell for. By diversifying into several regions or countries, the firm is likely to have more stable demand patterns. 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. 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 market is dominated by four key manufacturers known as Big Tobacco. HOW TO USE THIS ONLINE LESSON 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. Capital costs can prevent competitors from entering an industry because, depending on the industry, the costs may be very high. That said, Tesco will not be singled out for special treatment by the commission. In a Monopoly Market Structure, there is only one firm prevailing in a particular industry. 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 . Above, I mentioned that a common behavioural tendency that is exhibited by oligopolistic firms is interdependence. The. They also heavily advertise and often employ loyalty programs. social media platforms). As seen from figure 10, in 1998 the earnings per share were 8.12 pence and have risen steadily to a share price of 22.36 pence, making a 64% increase in share prices over the 9 year period. 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. While individually powerful, each of these firms also cannot prevent other competing firms from holding sway over the market. As large firms, they can mass produce at a lower average cost. Their market share gives them a level of flexibility between store formats and over product pricing, and control of supply chains. Mass media is a very significant More relevant is that about a third of consumers have three superstores within relatively easy reach of them. Both publications produced versions of a kinked demand curve. So why doesnt this always happen? The All-Party Parliamentary Small Shops Group investigated the future of small shops in the UK. . Many regard Tesco as a great British success story built on a fearsome determination to win in a competitive market, to the great benefit of consumers. But because the MC curves cut MR where it is discontinuous and vertical the output remains at Qi, and hence the price Pi remains constant too. Though there are many companies operating chain retail shop. Economies of scale can be enjoyed by any size firm expanding its scale of operation. The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. Tesco has been investing in its stores pipeline since mid 1990s. Oligopolies include positive and negative aspects. Because this assignment relates directly to oligopoly, I will now analyse the oligopoly market structure in more depth. suppliers known as the Big Six hold 78 percent of the electricity supply The closure of many small shops has left some neighbourhoods with limited access to healthy food. In fact, this situation can be explained by framing it as a form of prisoners dilemma. Oligopolies achieve stability when the costs/benefits are such that none of the firms are motivated to betray the rest of the group in their own interests because the ongoing collective benefits are too high or the potential punishment for cheating is too significant. An oligopoly is most likely to have a kinked demand curve. In all threemonopoly, duopoly, and oligopolyother firms will experience major barriers to entry. In an oligopoly, the relatively This is stated in The Office of Fair Trading website; Supermarkets, entry into the convenience store sector pushes prices down. For example, the widespread comparative data on the . Laws can prevent behaviors like collusion, price-fixing, output restrictions, and so forth. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. Oligopoly is a type of imperfect competition which can be applied to U.K. supermarket industry. (VIAB), New Corporation (NWSA), Time Warner (TWX), and Walt Disney (DIS). New supermarket developments could result in the loss of even more independent shops. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the In part this comes from the rapid growth of deep discounters such as Aldi and Lidl who in November 2014 had accumulated an 8.4% market share, up from 6.95 in the autumn of 2013. The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. 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