Oligopoly is the market structure where few large market firms compete with each other. Save my name and email in this browser for the next time I comment. The naive reaction to oligopolies is that they invariably stifle competition and artificially inflate prices. 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. An oligopoly market is characterized by many buyers and few sellers. 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. Guardian 2010 states Tesco sent out about 100m club card to customers, it encourages people to do more shopping in their . In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. . 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. In the United Kingdom, energy Tesco rolls out successful UK initiatives in other countries. This is achieved by constant innovation, and by incessant advertising. Just earlier on, we analysed Tescos growth and noticed that Tesco appeals to customers of all income ranges. A study by the National Consumer Council released in December 2006 showed that some supermarkets were undermining efforts to tackle health inequality, and that many economy lines were high in salt, fat and sugar. The chart below shows the changing market share for the major grocers over recent years. The prisoners could do better by both denying, but once collusion kicks in, each prisoner has an incentive to cheat. Tesco are abusing seller power, through practices such as price flexing and below-cost selling. Tesco, for example, will keep a small group of staff analysing Sainsburys activity in the grocery industry. Second the oligopoly market structure with L . For example, Tesco planed to extend its "Finest" to include a range of homecare. 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.. This is illustrated by the use of The Kinked Demand Curve. (See later.). 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. For example, Tesco Financial Services and Tesco Express convenience stores both operate in several international markets. When executed correctly, collusion means that firms behave as if they are on firm-i.e. They are now entering into the housing market, with a self advertising website called Tesco Property Market. social media platforms). 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. Tesco is definitely a suitable example to model oligopoly, since it is competing with a small number of other large firms, selling similar products with significant barriers to entry mainly due to brand name, and large land acquisitions. It is quite possible then, that the information above is not fully truthful and precise. Is Lidl an oligopoly? Natural cost advantages make one firm unique, and therefore will have more revenue. Earnings per share are calculated by using the following formula: The earnings per share have increased steadily since 1998. 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. 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 music industry is an oligopoly This way, the merged firm will hold additional authority within the market. 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. Both publications produced versions of a kinked demand curve. Supermarket buying power means that a supermarket like Tesco can obtain more favourable terms than other buyers. HOW TO USE THIS ONLINE LESSON 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. publishers in 2012. The term "oligopoly" is used to define a market in which there are few companies some of which control a large share of the market.In the oligopoly industry some major companies compete among themselves and the introduction of new firms on this market is complicated because of the presence of barriers to entry. They instead compete by creating a brand, providing customer service, discounts and coupons, and product differentiation. 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. Also, we analysed that Tesco can drive prices down as a benefit of economies of scale. Barriers to entry was stated as the first of the four concerns listed by The Office of Fair Trading. The multinational retailer employs more than 360 thousand people. Monopolistic competition is typified by a large number of relatively small competitors, each with a humble degree of market control. Legal barriers are a way that governments play in barriers to entry. A formal agreement is a cartel and is illegal. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a particular market. THE INCREASE IN CONCENTRATION OF WEALTH AND INCOME INCURRED BY TESCO, AND ITS IMPACT ON CONVENIENCE STORES AND OTHER PEOPLE. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Thousands of farmers and workers are forced to leave the industry each year because of the low prices they receive for their produce. Market Structures The purpose of this paper is to provide of different types of market structures as well as pricing and non-pricing strategies used in the various market structures. Also there are sunk costs and natural cost advantages, which may prove to be successful barriers. 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. The report argued that the social and economic benefits of diverse forms of retail should be protected. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. 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. 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. This is the ideal market structure, however, in a perfect world, it is very difficult to always obtain. The third point is simply, economies of scale. Total Revenue Total Quantity x Price. 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. Many of the 12 original provisions recommended by the Competition Commission were weakened. In economics, market structure is a term that describes the state of a market, with respect to competition. In all threemonopoly, duopoly, and oligopolyother firms will experience major barriers to entry. See the Code of Practice page for more information on these issues. This leads to competition in the oligopoly market. Monopolistic competition is a common market structure. In this market there are few numbers of Interdependent firms which dominate market. Auto manufacturing in the United When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. Larger firms are also able to borrow money at cheaper rates, because they have more assets and so it is less risky to lend to them, and feel more secure to lend to them. Once a certain amount of independent retailers shut, the wholesale industry may no longer be sustainable, and could collapse. Appealing to customers of all income ranges is also a main reason to the leap in growth. This point however, must be evaluated; Can Tesco endure a loss in the short run, hoping it will attract customers? 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. Tescos belief is that customers deserve the best value for money and that is why they work hard to find ways of keeping their prices down. This means that Tesco could wield market power and weaken competition. But if both prisoners choose to confess, their pay-off is higher than if they both choose to deny any involvement in the crime. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. At the same time, research has shown that supermarkets are not always the cheapest sources of healthy food. They also heavily advertise and often employ loyalty programs. Retailing Services: Tesco has taken the lead in its sector in expanding into areas like personal finance, telecom, and utilities. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? 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. As of its 2006 year end Tesco was the fourth largest retailer in the world behind Wal-Mart, Carrefour and Home Depot. This is stated in The Office of Fair Trading website; Supermarkets, entry into the convenience store sector pushes prices down. The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. Market Structure: Definition, 4 Types and Examples 2022-11-18 . There are four major types of competitive market structure, these include: Perfect competition, Monopolistic competition, Oligopoly and Monopoly. Another important characteristic of an oligopoly is interdependence between firms. For example, the Competition Commission investigation revealed that Tesco consistently paid suppliers nearly 4% below the average price paid by other retailers. I would also like to analyse other consequences of Tescos oligopoly position that seem to affect other aspects of the UK economy. 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. small number of participating companies collaborate (outright or secretly) to (2013) that the tacit collusion of oligopoly market structure is present in the current market condition of British supermarkets. An optimal strategy for each prisoner must be reached (Figure 7 right). The diagram would be like the monopoly profit maximizer. Market structure of the retail industry There may be a large number of firms, but most are small and relatively unimportant, while a small number of large firms produce most of the outputs of the . Since firms are interdependent, they have the choice of competing against other firms or collaborating with them. Collusion would therefore not be commonly exhibited publicly. During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely to experience while shopping at Tesco. 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. The existence of a monopoly means there is just one firm in a given industry, while a duopoly refers to a market structure with exactly two firms. Oligopoly is one kind of market structure (Anderton. Tesco is the third largest global retailer in the world which just behind Wal-Mart and Carrefour (Baidu, 2010). In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Factors that can contribute to the existence of At 24 February 2007 Tesco operated 1,988 stores in the UK, and 1,275 outside the UK. States is likewise dominated by Chrysler, Ford, and GMC. 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. Why is Asda a oligopoly? Like any firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. Oligopoly The simple characteristics of these market structures can be seen in Figure 1 (right.) The degree of market concentration is very high. Because firms in an oligopoly characteristically charge above-equilibrium (i.e., high prices) the only way to compete is through product differentiation. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. 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. 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. Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the social surplus or the total surplus. The entrepreneurs added up their costs of production and then added what they thought was a fair profit margin. The simple answer is because, as I mentioned above, colluding is illegal, because it would be unfair on other competing firms. The Role of Governments in the 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. Their market share gives them a level of flexibility between store formats and over product pricing, and control of supply chains. 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? Others regard it as a threat with excessive market share, which takes over entire towns and convenience stores. 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. Oligopoly is defined as a concentrated market. Supermarket groups may be forced to sell off those chunks of their so-called land banks that are competition-spoilers. 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. 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. For smartphone operating systems, The inclusive offer, Tescos aspiration to appeal to upper, medium and low income customers in the same stores. 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. Perfect competition is a market in which there are many sellers and many buyers. 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. 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 This behavior leads to a kink in the demand curve. An oligopoly is a term used to explain the structure of a specific market, industry, or company. Marginal Revenue the revenue earned by selling one more unit. Oligopoly is therefore more complicated than our other models of monopoly or perfect competition and there are indeed several methods used to model oligopoly. This means there is a few dominant firms in the market. However, in an article called The Benefits of Oligopolies, Sam Vaknin ignores the effect of price signalling, saying it is easier to effect when there's only a Coke and a Pepsi, a Boeing and an Airbus in the market. In an informal agreement, the firms behave as a monopoly and choose the price that maximizes output. a monopoly. profits, as consumers are forced to pay more. There are concerns that the closure of small shops is a one-way street. 1. |. Originally specialising in food, it has diversified into areas such as discount clothes, consumer electronics, consumer financial services, selling and renting DVDs, compact discs and music downloads, Internet service, consumer telecoms, consumer health insurance, consumer dental plans and budget software. 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. 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. It was founded by Jack Cohen in the East End of London in 1919. It is also likely that therell be a ban on the groups use of restrictive covenants whose point is to prevent any parcel of land being developed by a competitor. Non-food Business: Many United Kingdom supermarket chains have attempted to diversify in other areas, but Tesco has been exceptionally successful. Existence of Oligopolies, Special legal privileges (this is one of the ways that governments can support the existence of oligopolies)for instance, if firms have special permission to use land for infrastructure like railroads, Platforms that tend to increase in value as they gain more users (e.g. Again, the source of the data is The Office of Fair Trading, and is not subject to any suspicion of bias. particular kinds of situations. Based on the above features, economists have used this information to describe four distinct types of market structures. 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. Laws can prevent behaviors like collusion, price-fixing, output restrictions, and so forth. 3. That is the demand curve below price Pi is inelastic. Market structure of Tesco and British Petroleum with reference UK Supermarket Sector. 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. In actual figure, the increase was from 1100m to 1366m, again a huge profit of 266 million. 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. So why doesnt this always happen? ), OLIGOPOLIES CHARACTERISTICS AND BEHAVIOUR, Oligopolistic businesses tend to be assorted and also tend to exhibit several behavioural tendencies. The marginal revenue curve MRa is related to demand curve Da and MRb is related to demand curve Db. 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. The current land bank of 319 sites across the big four retailers-Tesco, ASDA, Sainsburys, and Morrisons, could obstruct new competition and perhaps harm consumers. Finally, an oligopoly is a market dominated by a few large suppliers. Groups of firms can also avoid governments laws against oligopoly if they are not restricted by these laws. Meanwhile, an oligopoly involves two firms or more. They are able to do this because of their market shares and integrated supply chains. Therefore, it becomes easier to categorize and differentiate companies across related industries. Since all the units are the same price, each new unit would have the same average revenue, so the marginal revenue = total revenue. The commission believes that Tescos large national market share is not a particular problem, even if it does take one in every three pounds we spend in supermarkets. New supermarket developments could result in the loss of even more independent shops. 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. 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. Mass media is a very significant Many modern goods, including computers, cars and assorted household products, would be significantly more expensive if they were produced by a large number of small firms rather than a small number of large firms (oligopolistic firms. The submission by the Association of Convenience Stores to the Competition Commission grocery market inquiry in 2006 found that such practices were continuing. Governments can use law and policy to inhibit or support the existence of oligopolies. It usually enters into joint schemes with major players in these sectors, contributing its customer base and brand strength to the partnership. A barrier to entry method is probably the behaviour that is exhibited most widely, not only by oligopolies but also by monopolies. However, in the past few years, the supermarket industry has seen competition grow even further and the big four are now facing competition from low-cost retailers, including Aldi and Lidl. This strategy has been abandoned since losing its Number One spot to Tesco. et al, 2008:298). This way, the two firms can set a monopoly price, produce monopolistic quantities, and allocate resources monopolistically. Once small independent stores shut, there are often insurmountable barriers to getting back into the High Street. There are no barriers to entry whatsoever. This data is also released from Tescos own website, so it may appear that the data is slightly biased. . In 2000, the UK Competition Commission reported on many of the supermarkets' unfair practices which were considered anti-competitive. It results in a high degree of market concentration. In May 2005 the IGD revealed the loss of 2,157 unaffiliated independent convenience retailers, compared to only 1,079 the year before. 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 major market forms are: The simple characteristics of these market structures can be seen in Figure 1(right.) 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. Tesco and other supermarkets fail to pay farmers a fair share of retail prices too. Oligopolies exist worldwide and may, in fact, be increasing in prevalence over time. Oligopolies incessantly seek to balance competition and support. 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. 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. (Tutor2U, 2007)An oligopoly market is a market structure which shares a large percentage of the market by a few firms. By competing they may increase their own market share at the expense of their competitors, but by collaborating, they decrease uncertainty and the firms together can act as a monopoly. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. In Figure 2, the current price is therefore determined by cost-plus pricing. This table illustrates how the 4 markets work in the real world. More relevant is that about a third of consumers have three superstores within relatively easy reach of them. Tesco has been investing in its stores pipeline since mid 1990s. The big question is why dont the firms collude and agree together what to do with their money, instead of worrying about what the other firm might do? Sudden falls in demand for the product in one area is likely to be offset by an increase in demand, elsewhere. He also ignores the problem of excessive political power, as large corporations can threaten retailers, suppliers, and regulators far more effectively than little ones. gain extra market returns by placing restrictions on output or by price fixing. Game theory analysis in the real world has direct relevance to our study of the behaviour of businesses in oligopolistic markets, such as Tesco. An oligopoly is most likely to have a kinked demand curve. 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. The dominance of Tesco as the leading retailer in the UK has been challenged. The result of these higher prices for consumers is higher profit margins for the firms involved in the oligopoly. 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. Economies of scale can be enjoyed by any size firm expanding its scale of operation. Further insight can be gained by examining the marginal revenue curve. 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. 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