Tesco is an oligopoly as it is one of the few dominant firms in the supermarket market. Firms operating in an oligopoly market with a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. 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. Specifically she thought there might be a demand curve with a kink in it. 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. Tesco themselves say that it is an oligopoly, this is because Tesco is not the only supermarket in the UK, Tesco is the dominant shareholder but cannot be called a monopoly as there are many other firms which are in competition with Tesco e.g. 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. For example, if Coca-Cola changes its price, Pepsi is also likely to do the same. Once this recognition has taken place, these businesses will have to come to a shared agreement to choose to cooperate. |. 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. An oligopoly is most likely to have a kinked demand curve. 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 . 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. Note that producer surplus flows through to the owners of the factors of production, unlike economic profit which is zero under perfect competition. Tescos land bank stood at 46% of the total market in 2000 and had reached 58% by 2005. This behavior leads to a kink in the demand curve. When executed correctly, collusion means that firms behave as if they are on firm-i.e. The reasons for Tescos success evidently revolve a lot around non-pricing competition. Overall, the success of Tesco is probably based mainly on getting the basics of retailing correct, and getting it right slightly more often than its competitors. particular kinds of situations. Oligopolistic firms dont like cutting prices because it leads to a price war, where firms are continuously cutting prices down. experienced outright collusion by an oligopoly when six book publishers engaged 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. 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. Both publications produced versions of a kinked demand curve. There are four types of market structure such as - perfect competition, monopoly, oligopoly and monopolistic competition. For prices to change, costs would need to rise above that part of the MR curve which is discontinuous, say to MCiii (Figure 6, right) If demand increased, this too might not lead to an increase in price unless the demand curve moved far enough to the right to make the MC curve cut MR above the discontinuity of MR. 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 multinational retailer employs more than 360 thousand people. Thousands of farmers and workers are forced to leave the industry each year because of the low prices they receive for their produce. They might lose the competitive edge in the market and suffer a long term decline in market share and profitability. That is the demand curve below price Pi is inelastic. suppliers known as the Big Six hold 78 percent of the electricity supply We can characterize market structures based on the competition levels and the nature of these markets. This is stated in The Office of Fair Trading website; Supermarkets, entry into the convenience store sector pushes prices down. Extent to which UK supermarket is oligopoly Tesco bought into the USA market through internet shopping when it obtained a 35% stake in GroceryWorks. This can be seen in comparison to HMV selling the same CD for around 20(14.20). In the field of air travel, large Diet-related ill health is costing the NHS increasing amounts through illnesses such as cancer, diabetes, obesity and coronary heart disease. See the Code of Practice page for more information on these issues. 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. Oligopoly is the market structure where few large market firms compete with each other. 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. publishers in 2012. profits, as consumers are forced to pay more. 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. Each seller intends to maximize its market power however, their actions are influenced by the actions of the other sellers. 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. In order for an oligopoly to arise and then remain in existence, firms in a given industry must be able to recognize the increased profits they will receive by colluding rather than competing with one another. October 2007. 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. The prisoners could do better by both denying, but once collusion kicks in, each prisoner has an incentive to cheat. practice they often collude with one another to increase their collective Like any firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. By diversifying into several regions or countries, the firm is likely to have more stable demand patterns. A few took into account what the market price was but none was able to calculate marginal costs and revenues. The All-Party Parliamentary Small Shops Group investigated the future of small shops in the UK. The music industry is an oligopoly New supermarket developments could result in the loss of even more independent shops. Average Revenue total revenue/quantity. Small shops are vital for people to access healthy food, in particular disadvantaged groups, and people without cars or with limited mobility. Oligopolies include positive and negative aspects. He also ignores the problem of excessive political power, as large corporations can threaten retailers, suppliers, and regulators far more effectively than little ones. HOW TO USE THIS ONLINE LESSON Price remains at P* and output Q*, even at MC Upper or MC Lower. A market is deemed oligopolistic or extremely concentrated when it is shared between a few common companies. According to a data regarding the market share of the US cigarettes in 2003, the top two firms are Philip Morris and R. J. Reynolds. As the biggest holder of land, Tesco is bound to be seen as the most at risk here. Legal barriers are a way that governments play in barriers to entry. An oligopoly is a market structure with a small number of firms, in which none can prevent other from having a significant influence in the industry. This data is also released from Tescos own website, so it may appear that the data is slightly biased. Tesco PLC is a multinational grocery and general merchandise retailer. For example, Tesco Financial Services and Tesco Express convenience stores both operate in several international markets. 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. From the viewpoint of the customer, there are some advantages of buying a product under oligopolistic 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. This is not necessarily negative, but it is definitely self-reinforcing and inhibits the pursuit of equity. NCH the Childrens Charity found that travel costs to go food shopping added 23% to the shopping budget of low income families. However, if they are a few big firms with similar costs and rising demand, the agreement is likely to last. 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. In all threemonopoly, duopoly, and oligopolyother firms will experience major barriers to entry. A Natural Monopoly Market Structure is the result of natural advantages like a strategic location or an . The entire data are for Tesco's financial years, which run for 52 or 53 week periods to late February. If the markets for factors are perfectly competitive as well, producer surplus ultimately ends up as economic rent to the owners of scarce inputs such as land. 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. In the upper part of the D, AR curve is more price elastic (sensitive to price changes) than the lower part. Is Lidl an oligopoly? 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. 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. a monopoly. Are supermarkets oligopoly or monopoly? Its important to relate the above graph to Tesco. Their market share gives them a level of flexibility between store formats and over product pricing, and control of supply chains. However, a supermarket must get approval every time it tries to incorporate a store from a competitor. They may have differentiated products. 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. These services are available to UK residential consumers and marketed via, 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 30. The dominant strategy is each prisoners unique best strategy regardless of the other players action. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? Oligopoly is one kind of market structure (Anderton. The changes will see Sharry Cramond take up a role as head of brand and . 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. 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. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". You may wonder why oligopolies stay stable without collapsing over time. Farmers have to bear the burden of unfair trading practices imposed by supermarkets, especially Tesco, which is a name that comes up time and time again, during farmers complaints. The games theory is a theory often used to analyse interdependence among oligopolistic firms. The prevailing strategy for both firms is probably to go ahead with research and development spending. Tesco is the third largest global retailer in the world which just behind Wal-Mart and Carrefour (Baidu, 2010). Marginal Revenue the revenue earned by selling one more unit. The main problem with the kinked demand curve model is that it fails to explain oligopolist behaviour consistently. Each of these factors reduces the long run average costs of production. Oligopolies exist worldwide and may, in fact, be increasing in prevalence over time. The Role of Governments in the When XYZ firm entered the market for good A two years back, it kept the price of its product low to attract . Because this assignment relates directly to oligopoly, I will now analyse the oligopoly market structure in more depth. Monopolistic competition is a common market structure. 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Above, I mentioned that a common behavioural tendency that is exhibited by oligopolistic firms is interdependence. in price fixing of electronic books. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a particular market. Oligopolistic firms are also able to take advantage of economics of scale that reduce production costs and prices. And will consumers fall into the trap, and then later on pay the price? It is quite possible then, that the information above is not fully truthful and precise. Despite their complain of providing affordable food, supermarkets play a large part in this problem. The figures in the chart include 52 weeks/12 months of turnover for both sides of the business as this provides the best comparative. Merging and colluding are two common ways in which firms cooperate. Should Oligopolies Compete or Collaborate? Using the profit maximization rule, Marginal Cost = Marginal Revenue, anywhere on the vertical MC curve works. 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. et al, 2008:298). This behavior can be seen in the diagram below; there is a stickiness in price as firms produce the same output when marginal cost is at Marginal Cost Upper or Marginal Cost Lower. . In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". 1. 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. In an oligopoly, the relatively This agreement can be formal or informal. 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. This process is illegal though, because firms are not allowed to set prices secretly, because it may cause unfairness to other competing markets. According to the 2000 Competition Commission Report the buying power of the major supermarkets actually means that 'the burden of cost increases in the supply chain has fallen disproportionately heavily on small suppliers such as farmers'. Like any large firm, Tesco are bound to invest money in research and development, and through this Tesco has made significant advances in technology, mainly through use of the internet. The most significant threat to the existing balance of an oligopoly is the fact that each business in such a structure is incentivized to sabotage the other businesses for their own financial benefit. 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. It might be a particular firm situated in an isolated area of town. EVALUATION OF TESCOS EFFECT ON THE CONSUMER. 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 implication here is that the prices in oligopoly tend to be more stable than in the other theories of the firm. The graph (right) illustrates this: consumer surplus is red, and producer surplus is blue. Many of the 12 original provisions recommended by the Competition Commission were weakened. In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. Smaller shops do not have this flexibility and control. The major market forms are: The simple characteristics of these market structures can be seen in Figure 1(right.) The term "oligopoly" is used to define a market in which there are few companies some of which control a large share of the market.In the oligopoly industry some major companies compete among themselves and the introduction of new firms on this market is complicated because of the presence of barriers to entry. The simple answer is because, as I mentioned above, colluding is illegal, because it would be unfair on other competing firms. Customer focus, to create value for customers to earn their lifetime loyalty. Let us study the four basic types of market structures. The submission by the Association of Convenience Stores to the Competition Commission grocery market inquiry in 2006 found that such practices were continuing. Overall, quantity demand increases as the demand curve slopes down, but the increase is less than proportionate. The degree of market concentration is very high. That said, Tesco will not be singled out for special treatment by the commission. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? There are no barriers to entry whatsoever. Please see the food poverty page and Sustain's Food Access Network for more information on this. 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. Guardian 2010 states Tesco sent out about 100m club card to customers, it encourages people to do more shopping in their . The value offered by supermarkets offers much less to the lowest income groups. 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. The term surplus is used in economics for several related quantities. Its report "High Street Britain: 2015", released in January 2006, predicted a bleak future for independent shops. 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. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. States is likewise dominated by Chrysler, Ford, and GMC. A monopoly is typified by a single competitor and widespread market control. 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. 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. Select the kinds of market structures in which sellers have some (including complete) control over price.-monopolistic competition-oligopoly-monopoly-perfect competition-monopolistic competition-oligopoly-monopoly. 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. Tesco has also moved into Internet Service Providing (ISP) and its own mobile phone and home phone sector. In an oligopoly market structure, there are just a few interdependent firms that collectively dominate the market. TESCOS UTILISATION OF TECHNOLOGY TO ATTRACT CONSUMERS. et al, 2008:298). Oligopoly is one kind of market structure (Anderton. 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. Market structure of the retail industry The chart below shows the changing market share for the major grocers over recent years. In geographical areas with no major competitors, they were selling products at higher than! Added 23 % to the shopping budget of low income families the term surplus is red, and tesco oligopoly market structure... Taken place, these businesses will have to come to a shared agreement choose... At P * and output Q *, even at MC Upper or MC Lower Effects Tescos... 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