Market structure of the retail industry Oligopoly is the market structure where few large market firms compete with each other. The equilibrium in the Prisoners Dilemma occurs when each player takes the best possible action for themselves given the action of the other player. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". An oligopoly market is characterized by many buyers and few sellers. 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. Marginal Revenue the revenue earned by selling one more unit. The highest percentage growth in turnover occurred in 2007 with a 21.67% increase, from 38,300m to 46,600m, a colossal increase of 8300 million. A market is deemed oligopolistic or extremely concentrated when it is shared between a few common companies. |. 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.. 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. competitiors that are also flying on the routes they offer. The report predicted that independent convenience stores were unlikely to survive by 2015 and independent newsagents were very unlikely to survive. Motive comes from interdependent competition and opportunity arises from access to plentiful resources. 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. 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. In particular Tesco is squeezing suppliers on prices. Therefore, it becomes easier to categorize and differentiate companies across related industries. 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. They all would like the other members to restrict their output to what everyone agreed but would want to increase their production. Specifically she thought there might be a demand curve with a kink in it. Based on the above features, economists have used this information to describe four distinct types of market structures. Its important to relate the above graph to Tesco. suppliers known as the Big Six hold 78 percent of the electricity supply 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. in price fixing of electronic books. 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. In the upper part of the D, AR curve is more price elastic (sensitive to price changes) than the lower part. 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. So why doesnt this always happen? 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. Again, the source of the data is The Office of Fair Trading, and is not subject to any suspicion of bias. And there are concerns that a tipping point could be reached. 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. Table of content 1 Types of Market Structures 1.1 1] Perfect Competiton 1.2 2] Monopolistic Competition 1.3 3] Oligopoly 1.4 4] Monopoly 2 Solved Question on Market Structures It is often the most socially excluded and poorest groups who are most in need of the social and economic bedrock offered by independent neighbourhood shops and markets. There is a lack of competition. 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. In this market there are few numbers of Interdependent firms which dominate market. Retailing Services: Tesco has taken the lead in its sector in expanding into areas like personal finance, telecom, and utilities. Finally, an oligopoly is a market dominated by a few large suppliers. The term surplus is used in economics for several related quantities. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. This data is also released from Tescos own website, so it may appear that the data is slightly biased. 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. In actual figure, the increase was from 1100m to 1366m, again a huge profit of 266 million. The naive reaction to oligopolies is that they invariably stifle competition and artificially inflate prices. 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. Governments can use law and policy to inhibit or support the existence of oligopolies. Each seller intends to maximize its market power however, their actions are influenced by the actions of the other sellers. Firms often try to lower their price as much as possible to deter new entrants. 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. 3. The degree of market concentration is very high. Up to the 27 February 2007 period end, the numbers include non-UK and Ireland results for the calendar year ended on 31 December 2006 in the accounting year. During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely to experience while shopping at Tesco. 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. 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. There are concerns that the closure of small shops is a one-way street. Tesco bought into the USA market through internet shopping when it obtained a 35% stake in GroceryWorks. 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. Lower choice is the outcome of these planning laws. 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 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. The figures in the chart include 52 weeks/12 months of turnover for both sides of the business as this provides the best comparative. 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. 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. This point however, must be evaluated; Can Tesco endure a loss in the short run, hoping it will attract customers? THE ADVANTAGES AND DISADVANTAGES OF OLIGOPOLY. Tesco PLC organizational structure is decentralized, tall (hierarchical) and product-based. 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. EVALUATION OF TESCOS EFFECT ON THE PRODUCER. (See Figure 3). The answer is that they must be balancing the loss with profits made on other product lines, or they have a cash reserve which they can rely on as collateral, until the profits start picking up later on. 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. They are now entering into the housing market, with a self advertising website called Tesco Property Market. 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'. It has also done rather well in non-food sales in Ireland. It is quite possible then, that the information above is not fully truthful and precise. 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 result of these higher prices for consumers is higher profit margins for the firms involved in the oligopoly. The graph (right) illustrates this: consumer surplus is red, and producer surplus is blue. 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. A formal agreement is a cartel and is illegal. In the United Kingdom, energy Interdependence is also displayed in an oligopoly market structure. The market is dominated by four key manufacturers known as Big Tobacco. small number of participating companies collaborate (outright or secretly) to These services are available to UK residential consumers and marketed via and through Tesco stores. Oligopolistic firms are also able to take advantage of economics of scale that reduce production costs and prices. 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. A later review by the OFT revealed that many practices identified in 2000 were still occurring, and a survey of farmers conducted by Friends of the Earth in 2003 showed that many farmers were 'being asked to pay a rebate on an agreed price, waiting over 30 days for an invoice to be paid, incurring additional transport or packaging costs due to changes in supermarket specifications and meeting the costs of unsold or wasted products where quality of the product was not an issue'. More recently, and encouraged by government initiatives, supermarket chains have begun to set up stores in deprived areas, but this is not necessarily good news. The report argued that the social and economic benefits of diverse forms of retail should be protected. The highest net profit observed over the 9 year period, occurs in 2005 with a 24.18% increase in net profits. From the viewpoint of the customer, there are some advantages of buying a product under oligopolistic market. It will be remembered that if demand is elastic and price rises, revenue falls. Economies of scale can be enjoyed by any size firm expanding its scale of operation. 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. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Supermarkets are best value for unhealthy and heavily processed foods. Sprint (S), AT&T (T), and T-Mobile (TMUS). 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. Collusion would therefore not be commonly exhibited publicly. The submission by the Association of Convenience Stores to the Competition Commission grocery market inquiry in 2006 found that such practices were continuing. et al, 2008:298). 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. An Oligopoly is a group of leaders in a certain market. 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. Appealing to customers of all income ranges is also a main reason to the leap in growth. 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. In an oligopoly market structure, there are just a few interdependent firms that collectively dominate the market. This is the ideal market structure, however, in a perfect world, it is very difficult to always obtain. Total Revenue Total Quantity x Price. 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 Once small independent stores shut, there are often insurmountable barriers to getting back into the High Street. They may have differentiated products. Small independent stores and suppliers, and ultimately consumers, are paying a direct price in the face of unfair competition. 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. This leads to competition in the oligopoly market. Here are a few of the many Oligopoly is the most complex market structure, characterised by a few large firms which dominate the industry. In the field of air travel, large I have still deemed it sufficiently trustworthy to use, because of. In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. example of oligopolya staggering 90 percent of media outlets in the United Sometimes two oligopolistic firms can co-operate to increase welfare in the market. experienced outright collusion by an oligopoly when six book publishers engaged Please wait while we set up your subscription TurnItIn the anti-plagiarism experts are also used by: King's College London, Newcastle University, University of Bristol, University of Cambridge, WJEC, AQA, OCR and Edexcel, Business, Companies and Organisation, Activity, Height and Weight of Pupils and other Mayfield High School investigations, Lawrence Ferlinghetti: Two Scavengers in a Truck, Two Beautiful People in a Mercedes, Moniza Alvi: Presents from my Aunts in Pakistan, Changing Materials - The Earth and its Atmosphere, Fine Art, Design Studies, Art History, Crafts, European Languages, Literature and related subjects, Linguistics, Classics and related subjects, Structures, Objectives & External Influences, Global Interdependence & Economic Transition, Acquiring, Developing & Performance Skill, Sociological Differentiation & Stratification. The Role of Governments in the This is stated in The Office of Fair Trading website; Supermarkets, entry into the convenience store sector pushes prices down. Customer focus, to create value for customers to earn their lifetime loyalty. One of the outcomes, of increases in the concentration of wealth and income, is the closure of independent local stores as stated on The Office of Fair Trading website, where it says that Supermarkets entry into the convenience store sector may force local stores to close. 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. In national accounts, operating surplus is roughly equal to distributed and undistributed pre-tax profit income, net of depreciation. And will consumers fall into the trap, and then later on pay the price? 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. Advantages of oligopoly market structure. This is a barrier that a government enforces, in the way it may allow privileges to certain companies rather than others. Small shops are vital for people to access healthy food, in particular disadvantaged groups, and people without cars or with limited mobility. The changes will see Sharry Cramond take up a role as head of brand and . A monopoly is typified by a single competitor and widespread market control. Oligopolies tend to emerge in The dotted sections of Da and Db are irrelevant as consumers are always going to choose any given quantity at the lower price, so the relevant sections of the marginal revenue curves are as in Figure 4. This is achieved by constant innovation, and by incessant advertising. The Office of Fair Trading also mentioned price cuts as a concern: aggressive pricing by supermarkets may be distorting competition.. These companies are technically competitors in their industries, but in 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. ), OLIGOPOLIES CHARACTERISTICS AND BEHAVIOUR, Oligopolistic businesses tend to be assorted and also tend to exhibit several behavioural tendencies. 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. corporations, have significantly less power within the industry. 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. The pay-off is measured in terms of years in prison arising from each of their choices and this is summarised in the table below. (Tutor2U, 2007)An oligopoly market is a market structure which shares a large percentage of the market by a few firms. This strategy has been abandoned since losing its Number One spot to Tesco. 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. Tesco are abusing seller power, through practices such as price flexing and below-cost selling. 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. Market Structure: Definition, 4 Types and Examples 2022-11-18 . When executed correctly, collusion means that firms behave as if they are on firm-i.e. There are concerns that a government enforces, in a certain market collectively dominate market. 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