They include perfect competition, oligopoly market, monopoly market, and monopolistic competition. 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. Their existence in a given industry can prevent new firms from entering the industry, while also inhibiting innovation and creativity. Their market share gives them a level of flexibility between store formats and over product pricing, and control of supply chains. 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. Extent to which UK supermarket is oligopoly The consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay. 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. Once small independent stores shut, there are often insurmountable barriers to getting back into the High Street. The equilibrium in the Prisoners Dilemma occurs when each player takes the best possible action for themselves given the action of the other player. The third point is simply, economies of scale. Oligopoly is defined as a concentrated market. And there are concerns that a tipping point could be reached. Marginal Revenue the revenue earned by selling one more unit. In fact, this situation can be explained by framing it as a form of prisoners dilemma. Oligopolies achieve stability when the costs/benefits are such that none of the firms are motivated to betray the rest of the group in their own interests because the ongoing collective benefits are too high or the potential punishment for cheating is too significant. In all threemonopoly, duopoly, and oligopolyother firms will experience major barriers to entry. There are no barriers to entry whatsoever. When XYZ firm entered the market for good A two years back, it kept the price of its product low to attract . The price and quantity dont change regardless of cost. Another important characteristic of an oligopoly is interdependence between firms. Tesco operates upon a robust four-pronged strategy: Core United Kingdom Business: Grocery retailing in its home market. During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely to experience while shopping at Tesco. The naive reaction to oligopolies is that they invariably stifle competition and artificially inflate prices. The report also highlights on the key success factors when operating in this retail industry. The value offered by supermarkets offers much less to the lowest income groups. Oligopolies tend to emerge in This table illustrates how the 4 markets work in the real world. 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. corporations, have significantly less power within the industry. Price remains at P* and output Q*, even at MC Upper or MC Lower. This is where a company increases its share in the market through internal growth and taking over other firms. Using the profit maximization rule, Marginal Cost = Marginal Revenue, anywhere on the vertical MC curve works. 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. 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. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. The market share of the cigarette industry is shared amongst four top companies. Looking back at Tescos success, there are 3 main points that can be evaluated upon: 2. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". 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. Perfect competition is a market in which there are many sellers and many buyers. However, the stronger the position of Tesco and other grocery retailers, could lead to the closure of suppliers, as The Times stated about vegetable and fruit growers going bankrupt, because of the aggressive behaviour of larger retailers. According to the Competition Commission's report on the grocery market from 2000, the big four chains were persistently selling products at below market price. In Figure 2, the current price is therefore determined by cost-plus pricing. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. The market is characterized by imperfect knowledge, where customers dont know the best price or availability. TESCOS UTILISATION OF TECHNOLOGY TO ATTRACT CONSUMERS. 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 submission by the Association of Convenience Stores to the Competition Commission grocery market inquiry in 2006 found that such practices were continuing. 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. Small shops are vital for people to access healthy food, in particular disadvantaged groups, and people without cars or with limited mobility. Similarly a price fall has the same effect on revenue. The implication here is that the prices in oligopoly tend to be more stable than in the other theories of the firm. The Role of Governments in the They instead compete by creating a brand, providing customer service, discounts and coupons, and product differentiation. Governments can use law and policy to inhibit or support the existence of oligopolies. However, a supermarket must get approval every time it tries to incorporate a store from a competitor. The inclusive offer, Tescos aspiration to appeal to upper, medium and low income customers in the same stores. 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. industries that frequently exhibit characteristics of oligopoly: Here are some more details on 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. For more information on this, please see the submission from the Federation of Wholesale Distributors to the Competition Commission, as well as the High Street Britain report and the Association of Convenience Stores submission to the Competition Commission. One of the characteristic features of an oligopoly market structure is interdependence among sellers. Lower choice is the outcome of these planning laws. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". (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. Many markets can be considered as monopolistically competitive, often including restaurants and book shops, in large cities. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Comparing Oligopoly to Monopoly and Duopoly, The Role of Governments in the Existence of Oligopolies. This means there is a few dominant firms in the market. 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. Tescos land bank stood at 46% of the total market in 2000 and had reached 58% by 2005. 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. 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. The kinked demand curve can be thought of as two demand curves. HOW TO USE THIS ONLINE LESSON Oligopoly is a type of imperfect competition which can be applied to U.K. supermarket industry. The prevailing strategy for both firms is probably to go ahead with research and development spending. a monopoly. It might be a particular firm situated in an isolated area of town. Tesco rolls out successful UK initiatives in other countries. Tesco has promised more brand marketing to help reverse declining sales. In 2000, the UK Competition Commission reported on many of the supermarkets' unfair practices which were considered anti-competitive. In 2000 the Department of Health actually recommended that local authorities should discourage the provision of new supermarkets over 1000 square metres outside existing town centres in recognition of the value of local shops to low income households. This graph can be seen below, Figure 9. In this market there are few numbers of Interdependent firms which dominate market. The degree of market concentration is very high. For example, Tesco planed to extend its "Finest" to include a range of homecare. The assumption is that when a rival firm increases its price, other companies will not follow, but if a competing business decreases its price, then others will follow. Like with the supermarket chain there is the oligopoly of Tesco, Asda, Somerfield and Sainsburys. in price fixing of electronic books. 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. Oligopoly Characteristics Oligopoly is the main form of modern market structure. 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. Oligopoly is therefore more complicated than our other models of monopoly or perfect competition and there are indeed several methods used to model oligopoly. Average Revenue total revenue/quantity. In a Monopoly Market Structure, there is only one firm prevailing in a particular industry. Tesco has also moved into Internet Service Providing (ISP) and its own mobile phone and home phone sector. THE INCREASE IN CONCENTRATION OF WEALTH AND INCOME INCURRED BY TESCO, AND ITS IMPACT ON CONVENIENCE STORES AND OTHER PEOPLE. Smaller shops do not have this flexibility and control. He also ignores the problem of excessive political power, as large corporations can threaten retailers, suppliers, and regulators far more effectively than little ones. airlines like British Airways and Air France will have relatively few . We can characterize market structures based on the competition levels and the nature of these markets. Its report "High Street Britain: 2015", released in January 2006, predicted a bleak future for independent shops. Is Lidl an oligopoly? The prisoners could do better by both denying, but once collusion kicks in, each prisoner has an incentive to cheat. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. ), OLIGOPOLIES CHARACTERISTICS AND BEHAVIOUR, Oligopolistic businesses tend to be assorted and also tend to exhibit several behavioural tendencies. That said, Tesco will not be singled out for special treatment by the commission. Market structure of Tesco and British Petroleum with reference UK Supermarket Sector. Tesco are abusing seller power, through practices such as price flexing and below-cost selling. In the music label side of things. "Own-label sales generate 38% of Sainsbury's total revenue, with its Taste The . Total Revenue Total Quantity x Price. 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. suppliers known as the Big Six hold 78 percent of the electricity supply Monopolistic competition is a common market structure. profits, as consumers are forced to pay more. 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. 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During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely experience...

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