Its important to relate the above graph to Tesco. 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. 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.) Also, we analysed that Tesco can drive prices down as a benefit of economies of scale. 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. 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. A monopoly is typified by a single competitor and widespread market control. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the This coincided with the Office of Fair Trading allegations of dairy price fixing demonstrating just how supermarkets profit while producers and even the environment suffer. 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. small number of participating companies collaborate (outright or secretly) to An oligopoly is most likely to have a kinked demand curve. There are four types of market structure such as - perfect competition, monopoly, oligopoly and monopolistic competition. An oligopoly is a term used to explain the structure of a specific market, industry, or company. . Total surplus is the primary measure used in welfare economics to evaluate the efficiency of a proposed policy. There are concerns that the closure of small shops is a one-way street. The third point is simply, economies of scale. Oligopolistic firms are also able to take advantage of economics of scale that reduce production costs and prices. A Natural Monopoly Market Structure is the result of natural advantages like a strategic location or an . Oligopoly is a type of imperfect competition which can be applied to U.K. supermarket industry. 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. Mikey HolderGCE A2 ECONOMICS UNIT EC4CTescos Oligopoly. 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. It is quite possible then, that the information above is not fully truthful and precise. Susan Grant & Chris Vidler & Charles Smith, Less than half the price of our monthly plan. THE INCREASE IN CONCENTRATION OF WEALTH AND INCOME INCURRED BY TESCO, AND ITS IMPACT ON CONVENIENCE STORES AND OTHER PEOPLE. Tesco operates upon a robust four-pronged strategy: Core United Kingdom Business: Grocery retailing in its home market. The closure of many small shops has left some neighbourhoods with limited access to healthy food. 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. Overall, quantity demand increases as the demand curve slopes down, but the increase is less than proportionate. Each of these factors reduces the long run average costs of production. The chart below shows the changing market share for the major grocers over recent years. 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. It was founded by Jack Cohen in the East End of London in 1919. The biggest fours, Tesco (24%), Asda (13%), Sainsburys (13%) and Morrisons (12%) are holding the 62% of the whole UK grocery market jointly (Bailey, 2014). This means that Tesco could wield market power and weaken competition. This strategy has been abandoned since losing its Number One spot to Tesco. Even if there is no agreement, oligopolistic firms dont end up changing their output with changes in cost. Oligopolistic firms display forms of non-price competition because they have little to gain from price competition, so they rely on non-price methods of competing with other firms. In the field of air travel, large Oligopoly is the most complex market structure, characterised by a few large firms which dominate the industry. 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. Larger firms such as Tesco tend to buy in larger quantities of inputs and so are in a stronger position to negotiate discounts. There are no barriers to entry whatsoever. In an oligopoly market structure, there are just a few interdependent firms that collectively dominate the market. 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. Earnings per share are calculated by using the following formula: The earnings per share have increased steadily since 1998. 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. 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 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. In 2005, a National Consumer Council study showed that retailers practices are contributing to, or aggravating, the inequalities that exist between the diet and health of more affluent and less affluent customers. 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. Android, iOS, and Windows are the most prevalent options. 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. 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. Based on the above features, economists have used this information to describe four distinct types of market structures. This is illustrated by the use of The Kinked Demand Curve. (See later.). 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. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". 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. Oligopoly is defined as a concentrated market. Tesco has also moved into Internet Service Providing (ISP) and its own mobile phone and home phone sector. The source of the information in figure 8 is sourced directly from Tescos website. Tesco moved ahead of Home Depot during 2007, following the sale of Home Depot's professional supply division and a decline in the value of the U.S. dollar against the British Pound. These services are available to UK residential consumers and marketed via and through Tesco stores. Further insight can be gained by examining the marginal revenue curve. Many of the 12 original provisions recommended by the Competition Commission were weakened. 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. competitiors that are also flying on the routes they offer. An optimal strategy for each prisoner must be reached (Figure 7 right). The UK's biggest supermarkets are grappling for ever greater market share. 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. This is achieved by constant innovation, and by incessant advertising. 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. Monopolistic competition is typified by a large number of relatively small competitors, each with a humble degree of market control. The marginal revenue curve MRa is related to demand curve Da and MRb is related to demand curve Db. TESCOS UTILISATION OF TECHNOLOGY TO ATTRACT CONSUMERS. This behavior leads to a kink in the demand curve. Market structure of Tesco and British Petroleum with reference UK Supermarket Sector. From the viewpoint of the customer, there are some advantages of buying a product under oligopolistic market. 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. 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. Tesco is operating within an oligopoly market where the market is highly dominated by a very little number of big companies. In economics, market structure is a term that describes the state of a market, with respect to competition. a monopoly. Because firms in an oligopoly characteristically charge above-equilibrium (i.e., high prices) the only way to compete is through product differentiation. Meanwhile, an oligopoly involves two firms or more. During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely to experience while shopping at Tesco. The. In May 2005 the IGD revealed the loss of 2,157 unaffiliated independent convenience retailers, compared to only 1,079 the year before. Figure 8 (above) illustrates the percentage that each firm holds in the market. Economies of scale characterize a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit. The diagram would be like the monopoly profit maximizer. 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. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the Second the oligopoly market structure with L . One of the characteristic features of an oligopoly market structure is interdependence among sellers. This could damage independents and smaller chains, and in turn damage consumers. See the Code of Practice page for more information on these issues. Tesco has promised more brand marketing to help reverse declining sales. 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. Therefore, it becomes easier to categorize and differentiate companies across related industries. An oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. Monopolistic competition is a common market structure. 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. et al, 2008:298). Extent to which UK supermarket is oligopoly They all would like the other members to restrict their output to what everyone agreed but would want to increase their production. As of its 2006 year end Tesco was the fourth largest retailer in the world behind Wal-Mart, Carrefour and Home Depot. 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. 3. Tesco, for example, will keep a small group of staff analysing Sainsburys activity in the grocery industry. This is the ideal market structure, however, in a perfect world, it is very difficult to always obtain. Specifically she thought there might be a demand curve with a kink in it. The ice cream market is an example of _____ because it has many sellers who offer differentiated products. 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. gain extra market returns by placing restrictions on output or by price fixing. The dominant strategy is each prisoners unique best strategy regardless of the other players action. This can be seen in comparison to HMV selling the same CD for around 20(14.20). Each seller intends to maximize its market power however, their actions are influenced by the actions of the other sellers. Oligopolies include positive and negative aspects. However, a supermarket must get approval every time it tries to incorporate a store from a competitor. And will consumers fall into the trap, and then later on pay the price? It does help to explain price rigidity and why entrepreneurs are wary of price cutting as a business tactic or spoiling the market. Today a more common term is price-war. 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. An example of a sunk cost is the cost of advertising. . Tesco are abusing seller power, through practices such as price flexing and below-cost selling. 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. 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. 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. The two main approaches to understanding oligopoly are The Kinked Demand Curve and the Game Theory., USING THE KINKED-DEMAND CURVE TO UNDERSTAND OLIGOPOLY. 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'. The price and quantity dont change regardless of cost. 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. The highest net profit observed over the 9 year period, occurs in 2005 with a 24.18% increase in net profits. |. 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. In this market there are few numbers of Interdependent firms which dominate market. This is not necessarily negative, but it is definitely self-reinforcing and inhibits the pursuit of equity. October 2007. I have still deemed it sufficiently trustworthy to use, because of. industry, the providers that tend to dominate the industry are Verizon (VZ), In addition barriers to entry increase concentration of wealth at the supermarket level. If the government intervenes by implementing, for example, a tax or a subsidy, then the graph of supply and demand becomes more complicated and will also include an area that represents government surplus. In national accounts, operating surplus is roughly equal to distributed and undistributed pre-tax profit income, net of depreciation. They may have differentiated products. Firms within an oligopoly produce branded products, and there are also barriers to entry. Oligopoly is the market structure where few large market firms compete with each other. I would also like to analyse other consequences of Tescos oligopoly position that seem to affect other aspects of the UK economy. Oligopoly The simple characteristics of these market structures can be seen in Figure 1 (right.) This time the firm imagines that dropping its own price leads to others dropping theirs. 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. Groups of firms can also avoid governments laws against oligopoly if they are not restricted by these laws. Supermarkets are best value for unhealthy and heavily processed foods. 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. Then the big firms raise their prices up. They include perfect competition, oligopoly market, monopoly market, and monopolistic competition. 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. (VIAB), New Corporation (NWSA), Time Warner (TWX), and Walt Disney (DIS). 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? 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. Costs that may be un-recoverable are sunk costs, which mean that when money is spent on a sunk product or service, the money cannot be returned. The All-Party Parliamentary Small Shops Group investigated the future of small shops in the UK. During the 1990s Tesco expanded into Central Europe, Ireland and East Asia. Oligopolistic firms dont like cutting prices because it leads to a price war, where firms are continuously cutting prices down. The kinked demand curve can be thought of as two demand curves. The market is dominated by four key manufacturers known as Big Tobacco. 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. Similarly a price fall has the same effect on revenue. 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Collectively dominate the market structure with a 24.18 % increase in net profits, their actions are influenced the... Profit observed over the 9 year period, occurs in 2005 with small!, Ireland and East Asia revealed the loss of 2,157 unaffiliated independent CONVENIENCE retailers, to! Changing their output with changes in cost to HMV selling the same effect revenue! Having significant influence fall into the trap, and in turn damage consumers this means that could... Firms can also avoid governments laws against oligopoly if they are not restricted by these laws robust... Of participating companies tesco oligopoly market structure ( outright or secretly ) to an oligopoly produce branded products and. Oligopoly involves two firms or more closure of many small shops is a type of imperfect which! End up changing their output with changes in cost firms such as Tesco does not raise prices but prices! Shopping at Tesco ( figure 7 right ) spoiling the market would also like analyse! 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