The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. 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.. 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. Earnings per share are calculated by using the following formula: The earnings per share have increased steadily since 1998. In a Monopoly Market Structure, there is only one firm prevailing in a particular industry. 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. One of the characteristic features of an oligopoly market structure is interdependence among sellers. 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. Oligopolies include positive and negative aspects. 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. The Role of Governments in the 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. suppliers known as the Big Six hold 78 percent of the electricity supply There are a few barriers to entry and exit. 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Price remains at P* and output Q*, even at MC Upper or MC Lower. The naive reaction to oligopolies is that they invariably stifle competition and artificially inflate prices. It results in a high degree of market concentration. Tesco rolls out successful UK initiatives in other countries. Diet-related ill health is costing the NHS increasing amounts through illnesses such as cancer, diabetes, obesity and coronary heart disease. There are no barriers to entry whatsoever. Since all the units are the same price, each new unit would have the same average revenue, so the marginal revenue = total revenue. There are four major types of competitive market structure, these include: Perfect competition, Monopolistic competition, Oligopoly and Monopoly. For example, the widespread comparative data on the . It also appears the Tesco are abusing buyer power and the planning system. See the Code of Practice page for more information on these issues. The report argued that the social and economic benefits of diverse forms of retail should be protected. 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. 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. This creates uncertainty in such markets, and economists seek to model through the use of game theory (see page 5) Examples of some oligopolistic firms are Tesco, Asda, Sainsbury's and Morrisons. In contrary, producer surplus (PS) is the triangular area below the price and above the supply curve, since that is the minimum quantity a producer can produce. 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. The highest net profit observed over the 9 year period, occurs in 2005 with a 24.18% increase in net profits. Oligopoly is the most complex market structure, characterised by a few large firms which dominate the industry. Firms within an oligopoly produce branded products, and there are also barriers to entry. October 2007. Total Revenue Total Quantity x Price. This is achieved by constant innovation, and by incessant advertising. 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. Interdependence is a term used to imply that businesses have to take into account likely reactions of rivals to any change in price and output. 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. particular kinds of situations. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. Let us study the four basic types of market structures. Their interdependence means that they are also likely to change their prices according to their competitors. Therefore, it becomes easier to categorize and differentiate companies across related industries. 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. A monopoly is typified by a single competitor and widespread market control. 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. 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. The concentration ratio measures the market share of. International Expansion: Tesco began to expand internationally in 1994, and in the year ending February 2005, its international operations accounted for just over 20% of sales (about 7 billion.) These services are available to UK residential consumers and marketed via and through Tesco stores. 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. Extent to which UK supermarket is oligopoly The report predicted that independent convenience stores were unlikely to survive by 2015 and independent newsagents were very unlikely to survive. Each of these factors reduces the long run average costs of production. Tesco has the holding share of the market with just over 30%, while Morrisons has the lowest with only 11%. 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. The most significant change during the analysed period occurs in 2005 and 2007. They are now entering into the housing market, with a self advertising website called Tesco Property Market. This can be seen in comparison to HMV selling the same CD for around 20(14.20). This process is illegal though, because firms are not allowed to set prices secretly, because it may cause unfairness to other competing markets. 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. They have a simple choice, either to confess to the crime (thereby implicating their partner in crime) and accept the consequences, or to deny all involvement and hope that their partner does likewise. Oligopoly is one kind of market structure (Anderton. 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.. Again, the source of the data is The Office of Fair Trading, and is not subject to any suspicion of bias. 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. The marginal revenue curve MRa is related to demand curve Da and MRb is related to demand curve Db. 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. Looking back at Tescos success, there are 3 main points that can be evaluated upon: 2. 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. The tobacco industry in the US is a tight oligopoly. Oligopolistic firms are also able to take advantage of economics of scale that reduce production costs and prices. But if both prisoners choose to confess, their pay-off is higher than if they both choose to deny any involvement in the crime. Market structure of Tesco and British Petroleum with reference UK Supermarket Sector. In 2000, the UK Competition Commission reported on many of the supermarkets' unfair practices which were considered anti-competitive. this massive market share). Oligopoly is defined as a concentrated market. Monopolistic competition is typified by a large number of relatively small competitors, each with a humble degree of market control. THE ADVANTAGES AND DISADVANTAGES OF OLIGOPOLY. This table illustrates how the 4 markets work in the real world. experienced outright collusion by an oligopoly when six book publishers engaged 1. Tesco is an oligopoly as it is one of the few dominant firms in the supermarket market. It said in the entry that new supermarkets may face barriers to entering the market because of the planning system. Planning laws make it difficult for new entrants to open stores. Many of the 12 original provisions recommended by the Competition Commission were weakened. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. Figure 13 below, illustrates the percentage point change in market share of store sales (2005-2007,) and it can be seen that convenience specialists and independent stores sales have decreased 6 points, while Grocery multiple sales have increased 7 points. 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. Economies of scale can be enjoyed by any size firm expanding its scale of operation. In 2001, Tony Blair claimed that British supermarkets had farmers in an 'armlock'. It will be remembered that if demand is elastic and price rises, revenue falls. Tesco is the third largest global retailer in the world which just behind Wal-Mart and Carrefour (Baidu, 2010). Auto manufacturing in the United 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. Small independent stores and suppliers, and ultimately consumers, are paying a direct price in the face of unfair competition. Are supermarkets oligopoly or monopoly? The inclusive offer, Tescos aspiration to appeal to upper, medium and low income customers in the same stores. In May 2005 the IGD revealed the loss of 2,157 unaffiliated independent convenience retailers, compared to only 1,079 the year before. 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? It is arguable that oligopolies do not allocate resources efficiently. (VIAB), New Corporation (NWSA), Time Warner (TWX), and Walt Disney (DIS). What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? In addition barriers to entry increase concentration of wealth at the supermarket level. 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. in price fixing of electronic books. 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, Monopolistic competition inefficiency is slight. ECONOMIC SURPLUS; PRODUCER AND CONSUMER SURPLUS. In national accounts, operating surplus is roughly equal to distributed and undistributed pre-tax profit income, net of depreciation. 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. In figure 5, the two parts of the marginal revenue curve are joined with a vertical section to help show where the MC and MR curves intersect. This agreement can be formal or informal. The common ones are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), and marketing (spreading the cost of advertising over a greater range of output in media markets). 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. Similarly a price fall has the same effect on revenue. Oligopoly Characteristics Oligopoly is the main form of modern market structure. 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. 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. Depending on the industry, each of the firms might also sell products that are somewhat differentiated from those of the other firms. At current, a supermarket can develop a site it already owns without approval from the competition authorities. Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the social surplus or the total surplus. Sometimes two oligopolistic firms can co-operate to increase welfare in the market. Firms often try to lower their price as much as possible to deter new entrants. Perfect competition is a market in which there are many sellers and many buyers. 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 30thOctober 2007. The submission by the Association of Convenience Stores to the Competition Commission grocery market inquiry in 2006 found that such practices were continuing. Tesco, for example, will keep a small group of staff analysing Sainsburys activity in the grocery industry. The recommendations will apply to all the big supermarket chains, but because of the way that Tesco has acquired very large market shares in many towns and districts, inevitably it will be most affected by proposed reforms. 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. You may wonder why oligopolies stay stable without collapsing over time. Lower choice is the outcome of these planning laws. 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 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. Barriers to entry was stated as the first of the four concerns listed by The Office of Fair Trading. This data is also released from Tescos own website, so it may appear that the data is slightly biased. 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'. Susan Grant & Chris Vidler & Charles Smith, Less than half the price of our monthly plan. oligopolies include: Oligopolies have a number of significant downsides, particularly for consumers. . (Tutor2U, 2007)An oligopoly market is a market structure which shares a large percentage of the market by a few firms. They all would like the other members to restrict their output to what everyone agreed but would want to increase their production. 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. A formal agreement is a cartel and is illegal. is it tolerable for a supermarket such as Tesco to sell as a loss for an extended period of time, just to attract customers? Is Lidl an oligopoly? A negative effect of oligopolies in general, is the increase in the concentration of wealth and income. In particular Tesco is squeezing suppliers on prices. "Own-label sales generate 38% of Sainsbury's total revenue, with its Taste The . They include perfect competition, oligopoly market, monopoly market, and monopolistic competition. More relevant is that about a third of consumers have three superstores within relatively easy reach of them. In an oligopoly market structure, there are just a few interdependent firms that collectively dominate the market. The entrepreneurs added up their costs of production and then added what they thought was a fair profit margin. competitiors that are also flying on the routes they offer. There are four types of market structure such as - perfect competition, monopoly, oligopoly and monopolistic competition. 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. Appealing to customers of all income ranges is also a main reason to the leap in growth. Oligopoly is a type of imperfect competition which can be applied to U.K. supermarket industry. Game theory analysis in the real world has direct relevance to our study of the behaviour of businesses in oligopolistic markets, such as Tesco. In the upper part of the D, AR curve is more price elastic (sensitive to price changes) than the lower part. Motive comes from interdependent competition and opportunity arises from access to plentiful resources. 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. This behavior leads to a kink in the demand curve. This is where a company increases its share in the market through internal growth and taking over other firms. The ice cream market is an example of _____ because it has many sellers who offer differentiated products. For smartphone operating systems, Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. 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. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. The closure of many small shops has left some neighbourhoods with limited access to healthy food. Why is Asda a oligopoly? I would like to begin by pointing out the major types of market structure, and then focus on the oligopoly market structure, and its behaviour. 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. A basic technique of bargaining for both parties is to pretend that their surplus is less than it really is: sellers may argue that the price they ask hardly leaves them any profit, while customers may play down how eager they are to have the article. Oligopolistic firms dont like cutting prices because it leads to a price war, where firms are continuously cutting prices down. It is quite possible then, that the information above is not fully truthful and precise. Oligopoly The simple characteristics of these market structures can be seen in Figure 1 (right.) For example, the Competition Commission investigation revealed that Tesco consistently paid suppliers nearly 4% below the average price paid by other retailers. Oligopoly is the market structure where few large market firms compete with each other. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". The profit maximising oligopolist still equates MC with MR in order to determine the level of output. The prisoners could do better by both denying, but once collusion kicks in, each prisoner has an incentive to cheat. 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. It found 52 kinds of abusive trading practices. In an oligopoly market structure, there are just a few interdependent firms that collectively dominate the market. One way to increase support is by combining two separate firms, into one large firm. Average Revenue total revenue/quantity. Collusion in this context refers to two or more firms that secretly agree to control prices, production and other aspects of the market, such as advertising. This time the firm imagines that dropping its own price leads to others dropping theirs. 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 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. The. industries that frequently exhibit characteristics of oligopoly: Here are some more details on Once this recognition has taken place, these businesses will have to come to a shared agreement to choose to cooperate. For instance, if all of the businesses have come to a shared agreement to maintain artificially high prices and artificially low supply, one of them could decide to lower their own prices or increase the amount of goods/services offered on the market, thereby making huge profits. 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. They might lose the competitive edge in the market and suffer a long term decline in market share and profitability. small number of participating companies collaborate (outright or secretly) to The market is characterized by imperfect knowledge, where customers dont know the best price or availability. 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. Tesco operates upon a robust four-pronged strategy: Core United Kingdom Business: Grocery retailing in its home market. . profits, as consumers are forced to pay more. 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. If they do not and the other firm does, then their profits fall and they will lose market share. 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