particular kinds of situations. 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. (See Figure 3). 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. Oligopolies incessantly seek to balance competition and support. Retailing Services: Tesco has taken the lead in its sector in expanding into areas like personal finance, telecom, and utilities. HOW TO USE THIS ONLINE LESSON The data surely confirms that there is an increase in concentration of wealth as can be deduced from the taking over of stores and the increase in market share of store sales. Oligopoly is one kind of market structure (Anderton. 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. example of oligopolya staggering 90 percent of media outlets in the United Some consumers will see that as a blessing, but for proponents of competition, thats a sign of inadequate competitive tension in some parts of the country. Costly research projects represent a risk for any business, but if one firm invests in research and development, can another rival firm decide not to follow? TESCOS UTILISATION OF TECHNOLOGY TO ATTRACT CONSUMERS. Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the social surplus or the total surplus. And that brings us to The Game Theory.. et al, 2008:298). During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely to experience while shopping at Tesco. 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. Barriers to entry prevent competitors from entering the market. Like many economists, he presents an ideal market that exists independent of politics and power. NCH the Childrens Charity found that travel costs to go food shopping added 23% to the shopping budget of low income families. et al, 2008:298). Oligopolies exist worldwide and may, in fact, be increasing in prevalence over time. industries that frequently exhibit characteristics of oligopoly: Here are some more details on The only point farmers have to make is that if they are to have a future as farmers and sustainable agriculture then supermarket power, must be heavily controlled. profits, as consumers are forced to pay more. 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. Oligopoly is the market structure where few large market firms compete with each other. The Role of Governments in the Despite their complain of providing affordable food, supermarkets play a large part in this problem. Because this assignment relates directly to oligopoly, I will now analyse the oligopoly market structure in more depth. This point however, must be evaluated; Can Tesco endure a loss in the short run, hoping it will attract customers? 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. Three methods that an oligopolistic firm may employ as a form of competition are: Like any firm, an oligopolistic firm seeks to attract consumers and increase market share, while sustaining the price. publishers in 2012. Dr. Shweta Uppadhyay Follow Lecturer of Economics Advertisement Advertisement Recommended Oligopoly Sanket Bhatia 6.3k views 15 slides Me M7 Oligopoly infinity 1.8k views 19 slides Price determination under oligopoly The result of these higher prices for consumers is higher profit margins for the firms involved in the oligopoly. Collusion would therefore not be commonly exhibited publicly. Grocery Sales are available within delivery range of selected stores, goods being hand-picked within each branch. 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. Types of Market Structures 1. Why is Asda a oligopoly? 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. 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. By Sarah Vizard 10 Sep 2014. 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. This way, the firm will maximise their profits. 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? Sprint (S), AT&T (T), and T-Mobile (TMUS). Laws can prevent behaviors like collusion, price-fixing, output restrictions, and so forth. 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. (2013) that the tacit collusion of oligopoly market structure is present in the current market condition of British supermarkets. 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. The implication here is that the prices in oligopoly tend to be more stable than in the other theories of the firm. 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. It might be a particular firm situated in an isolated area of town. In May 2005 the IGD revealed the loss of 2,157 unaffiliated independent convenience retailers, compared to only 1,079 the year before. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. Save my name and email in this browser for the next time I comment. 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. 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 firms comprise an oligopolistic market, making it possible for already-existing smaller businesses to operate in a market dominated by a . In the upper part of the D, AR curve is more price elastic (sensitive to price changes) than the lower part. One of the characteristic features of an oligopoly market structure is interdependence among sellers. 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. 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. Another important characteristic of an oligopoly is interdependence between firms. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the The figures in the chart include 52 weeks/12 months of turnover for both sides of the business as this provides the best comparative. Oligopoly is defined as a concentrated market. Tesco has promised more brand marketing to help reverse declining sales. These services are available to UK residential consumers and marketed via and through Tesco stores. The All-Party Parliamentary Small Shops Group investigated the future of small shops in the UK. et al, 2008:298). 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. Oligopoly is a type of Market Structure. 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. Supermarket buying power means that a supermarket like Tesco can obtain more favourable terms than other buyers. There are a few barriers to entry and exit. Is Lidl an oligopoly? Firms within an oligopoly produce branded products, and there are also barriers to entry. I would also like to analyse other consequences of Tescos oligopoly position that seem to affect other aspects of the UK economy. Just earlier on, we analysed Tescos growth and noticed that Tesco appeals to customers of all income ranges. In the United Kingdom, energy Above, I mentioned that a common behavioural tendency that is exhibited by oligopolistic firms is interdependence. 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. This behavior leads to a kink in the demand curve. The price and quantity dont change regardless of cost. This is illustrated by the use of The Kinked Demand Curve. (See later.). A Natural Monopoly Market Structure is the result of natural advantages like a strategic location or an . The naive reaction to oligopolies is that they invariably stifle competition and artificially inflate prices. Thus independent record labels, which are not affiliated with these large Mikey HolderGCE A2 ECONOMICS UNIT EC4CTescos Oligopoly. In this market there are few numbers of Interdependent firms which dominate market. Should Oligopolies Compete or Collaborate? this massive market share). (Tutor2U, 2007)An oligopoly market is a market structure which shares a large percentage of the market by a few firms. Advantages of oligopoly market structure. The report predicted that independent convenience stores were unlikely to survive by 2015 and independent newsagents were very unlikely to survive. This is a barrier that a government enforces, in the way it may allow privileges to certain companies rather than others. This leads to competition in the oligopoly market. This can be seen in comparison to HMV selling the same CD for around 20(14.20). Natural cost advantages make one firm unique, and therefore will have more revenue. The submission by the Association of Convenience Stores to the Competition Commission grocery market inquiry in 2006 found that such practices were continuing. States are owned by just six massive corporations: NBC Universal, Viacom In addition barriers to entry increase concentration of wealth at the supermarket level. In 2000, the UK Competition Commission reported on many of the supermarkets' unfair practices which were considered anti-competitive. 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. In a Monopoly Market Structure, there is only one firm prevailing in a particular industry. An oligopoly is most likely to have a kinked demand curve. The market is characterized by imperfect knowledge, where customers dont know the best price or availability. 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. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". The. 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. a monopoly. They may have differentiated products. An example of a sunk cost is the cost of advertising. The larger chains can extract more favourable conditions from suppliers than other types of retailer can. 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. At the same time, research has shown that supermarkets are not always the cheapest sources of healthy food. 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. 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. At 24 February 2007 Tesco operated 1,988 stores in the UK, and 1,275 outside the UK. We can characterize market structures based on the competition levels and the nature of these markets. 1. 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. Total Revenue Total Quantity x Price. The diagram would be like the monopoly profit maximizer. (while there are more than 50 suppliers total, most of whom hold much less of The term surplus is used in economics for several related quantities. 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. In actual figure, the increase was from 1100m to 1366m, again a huge profit of 266 million. For prices to change, costs would need to rise above that part of the MR curve which is discontinuous, say to MCiii (Figure 6, right) If demand increased, this too might not lead to an increase in price unless the demand curve moved far enough to the right to make the MC curve cut MR above the discontinuity of MR. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". oligopolies include: Oligopolies have a number of significant downsides, particularly for consumers. The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. For example, if Coca-Cola changes its price, Pepsi is also likely to do the same. 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