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 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. 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. 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. And that brings us to The Game Theory.. Advantages of oligopoly market structure. 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. Perfect competition is a market in which there are many sellers and many buyers. 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. When executed correctly, collusion means that firms behave as if they are on firm-i.e. The equilibrium in the Prisoners Dilemma occurs when each player takes the best possible action for themselves given the action of the other player. 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. The two main approaches to understanding oligopoly are The Kinked Demand Curve and the Game Theory., USING THE KINKED-DEMAND CURVE TO UNDERSTAND OLIGOPOLY. publishers in 2012. Overall, quantity demand increases as the demand curve slopes down, but the increase is less than proportionate. 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. In economics, market structure is a term that describes the state of a market, with respect to competition. 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. Out of the four market structures (discussed on pages 1 and 2), oligopoly is most likely to develop the innovations that: Oligopoly has both the motive and the opportunity to pursue innovation. This behavior leads to a kink in the demand curve. There are concerns about the way supermarket chains gain an advantage over small shops on the High Street. Again, the source of the data is The Office of Fair Trading, and is not subject to any suspicion of bias. Groups of firms can also avoid governments laws against oligopoly if they are not restricted by these laws. 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. (See Figure 3). Tesco sells an expanding range of own-brand non-food products. Market structure of Tesco and British Petroleum with reference UK Supermarket Sector. Tesco operates upon a robust four-pronged strategy: Core United Kingdom Business: Grocery retailing in its home market. The United States publishing market Small independent stores and suppliers, and ultimately consumers, are paying a direct price in the face of unfair competition. Tesco PLC is a multinational grocery and general merchandise retailer. The source of the information in figure 8 is sourced directly from Tescos website. 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. 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. et al, 2008:298). 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. 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.. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? Depending on the industry, each of the firms might also sell products that are somewhat differentiated from those of the other firms. practice they often collude with one another to increase their collective 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. Types of Market Structures 1. 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 value offered by supermarkets offers much less to the lowest income groups. 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. Oligopolistic firms dont like cutting prices because it leads to a price war, where firms are continuously cutting prices down. The classic example of game theory is the Prisoners Dilemma, a situation where two prisoners are being questioned over their guilt or innocence of a crime. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the Then the big firms raise their prices up. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? This data is also released from Tescos own website, so it may appear that the data is slightly biased. The competitive market structure an organisation belongs to is determined by the nature of their product, the number and size of other firms in the market and the entry and exit conditions of that market. That is the demand curve below price Pi is inelastic. They all would like the other members to restrict their output to what everyone agreed but would want to increase their production. The multinational retailer employs more than 360 thousand people. Oligopoly is one kind of market structure (Anderton. This graph can be seen below, Figure 9. Merging and colluding are two common ways in which firms cooperate. 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. Why is Asda a oligopoly? et al, 2008:298). The third point is simply, economies of scale. Tesco is the third largest global retailer in the world which just behind Wal-Mart and Carrefour (Baidu, 2010). Joan Robinson hypothesised in 1936 that demand curves might be other than the traditional downward sloping curves that we have encountered so far. This is achieved by constant innovation, and by incessant advertising. See the Code of Practice page for more information on these issues. 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. They are able to do this because of their market shares and integrated supply chains. The degree of market concentration is very high. The chart below shows the changing market share for the major grocers over recent years. Let us study the four basic types of market structures. . "Own-label sales generate 38% of Sainsbury's total revenue, with its Taste The . These companies are technically competitors in their industries, but in EVALUATION OF TESCOS EFFECT ON THE PRODUCER. The result of these higher prices for consumers is higher profit margins for the firms involved in the oligopoly. When XYZ firm entered the market for good A two years back, it kept the price of its product low to attract . Are supermarkets oligopoly or monopoly? Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. Tesco also wrote on their site that whilst lower prices benefit all consumers they are especially important to families on a budget and have made a significant contribution to making healthy food accessible to all. 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. However when a supermarket squeezes its supplier, it merely reallocates profit margin from supplier to retailer and there should be no assumption that the retailer's saving will be shared with consumers. experienced outright collusion by an oligopoly when six book publishers engaged 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. Tesco is operating within an oligopoly market where the market is highly dominated by a very little number of big companies. Tesco definitely falls into this category as can be seen from figure 12 (left.) 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. Its report "High Street Britain: 2015", released in January 2006, predicted a bleak future for independent shops. The diagram would be like the monopoly profit maximizer. Laws can prevent behaviors like collusion, price-fixing, output restrictions, and so forth. The entire data are for Tesco's financial years, which run for 52 or 53 week periods to late February. Price remains at P* and output Q*, even at MC Upper or MC Lower. The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. 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 INCREASE IN CONCENTRATION OF WEALTH AND INCOME INCURRED BY TESCO, AND ITS IMPACT ON CONVENIENCE STORES AND OTHER PEOPLE. 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. The knock on effect of this will be further damage to the independent retail sector. In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. Oligopolies include positive and negative aspects. In 2001, Tony Blair claimed that British supermarkets had farmers in an 'armlock'. 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. Many markets can be considered as monopolistically competitive, often including restaurants and book shops, in large cities. Lower choice is the outcome of these planning laws. 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. Also there are sunk costs and natural cost advantages, which may prove to be successful barriers. There is a lack of competition. HOW TO USE THIS ONLINE LESSON In the United Kingdom, energy The debate that may spark is whether we actually want more supermarkets, whether the benefits of greater competition outweigh what many see as the negative impact on communities and landscape of superstore proliferation. Once small independent stores shut, there are often insurmountable barriers to getting back into the High Street. For example, De Beers is known to have a monopoly in the diamond industry. This is illustrated by the use of The Kinked Demand Curve. (See later.). The figures in the chart include 52 weeks/12 months of turnover for both sides of the business as this provides the best comparative. 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 Oligopoly is the most complex market structure, characterised by a few large firms which dominate the industry. 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. (VIAB), New Corporation (NWSA), Time Warner (TWX), and Walt Disney (DIS). Also, we analysed that Tesco can drive prices down as a benefit of economies of scale. With these two facts, coupled together, its inevitable that a customer of a high income range, may go to Tesco willing to pay a higher price for a product than it is selling for. This way, the merged firm will hold additional authority within the market. The report argued that the social and economic benefits of diverse forms of retail should be protected. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. 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 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. airlines like British Airways and Air France will have relatively few Specifically she thought there might be a demand curve with a kink in it. It results in a high degree of market concentration. The marginal revenue recall, falls at twice the rate of the average revenue (demand) curve. Sudden falls in demand for the product in one area is likely to be offset by an increase in demand, elsewhere. Mass media is a very significant States are owned by just six massive corporations: NBC Universal, Viacom 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. Is Lidl an oligopoly? Total Revenue Total Quantity x Price. First the team explores the pure competition market structure through the analysis to Fiji Water Company. 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. He also ignores the problem of excessive political power, as large corporations can threaten retailers, suppliers, and regulators far more effectively than little ones. 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.

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